Special Reports

Investors stay away from ‘dull’ high-end city estates

apartment

Apartment blocks. FILE PHOTO | NMG

Real estate developers are shifting to high-density housing areas where consumers are chasing space and lifestyle following low purchases of apartments in ‘dull’ upmarket areas.

Areas like Kileleshwa, Kilimani and Hurlingham are still carrying a tail of unsold and unoccupied apartments, while areas like Donholm, Thika Road and as far as Athi River are full.

A squeeze on profit margins amid soaring land prices and construction costs has seen developers seek faster returns, abandoning plans to build middle-market town houses and smaller stand-alone houses, and turn to the construction of apartments in Nairobi’s outer areas.

But real estate experts warn against the rush to invest in the outskirts of Nairobi.

“The real danger is that instead of building what consumers will buy, developers are going to repeat the mistake of constructing what they believe will deliver the highest returns, leaving our cities ringed with a dead stock of unused housing,” said Farhana Hassanali, property development director at Hass Consult while recently releasing the 2011 first quarter Property Index results.

Moreover, the pricing gap between outer-city and similar inner-city apartments or maisonettes has been narrowing rapidly, deterring potential buyers of the new outer-city apartments, who would rather live further in-town than additionally suffer higher transport costs and the delays of daily traffic jams and commuting.

Already, the quarterly report has identified numerous developments along prime areas like Mombasa Road and Thika Road which have not found buyers or are selling slowly and may therefore need a downward price adjustment to increase sales.

Yet as developers weigh the market trends before them, the land prices, alongside other rising costs, have set up an almost impossible equation.

Land prices along these outer spurs have risen four fold in the last four years.

In the last year alone, land prices in many areas within Nairobi and its surrounds have doubled.

For example, an eighth of an acre in Kiambu town which cost Sh550,000 just 12 months ago now costs an average of Sh1.2 million.

A similar plot of land in inner-city Donholm now costs upwards of Sh2.5 million, or around Sh20 million for an acre, says Kavit Shah of Greenspan Housing.

That pricing is very similar to the cost of an acre in Karen. But the selling prices of properties in Donholm are much lower than in Karen.

As things stand, for an acre of land in Donholm, now costing some Sh20 million, developers can put up 100 two-bedroom apartments, which go for Sh4.8 million each, bringing a total of Sh480 million.

For the same size of land, developers can build eight 3-bedroom maisonettes in upmarkets each selling at Sh8.5 million each, realising Sh68 million at the close.

But with almost one-third of that return absorbed by the land cost alone, the cost of construction has also risen.

According to the London Metal Exchange, copper prices have risen 14 per cent since December followed by zinc at 30 per cent and aluminium at 10 per cent.

This has seen majority of cabling companies increase the prices of copper by at least 8 per cent.

The price of basic steel has risen 33 per cent in tandem with an increase in iron ore and coal prices.

Construction costs

As a direct result, the local cost of a 1.5mm squared roll of iron has risen by some 10 per cent in recent months, now going for Sh2,095 from Sh1927 late last year.

The prices of a 3m gauge 28 steel sheet have risen to Sh1,200 up from Sh1,000 in January.

A bag of cement now goes for Sh701 per 50kg bag from Sh650 in November last year.

Paint manufacturers have also increased prices by at least 10 per cent due to rising cost of raw materials since last year.

Oil and titanium, which account for about 60 per cent of the paint manufacturers’ production costs, have risen by 31 per cent and 10 per cent respectively since last year.

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