Columnists

Nairobi still offers good prices for commercial space

It’s become fashionable to lament that Nairobi’s real estate is over-priced.

One politician proposed price caps supposedly to stem an exodus of investors migrating to other cities in the region.

Another suggested that home-builders absorb the inflation in construction costs (now over 40 per cent higher than a year ago) to keep prices the same as before.

But the data suggests that both the premises and the solutions presented are misguided.

Nairobi is competitive with the strength of its market being diversity – a wide variety of space in different asset classes at a good price.

Take office space.

Recently, a study found that in Kampala, A-class space costs between US$14 -$17 per square meter per month and between US$15 and $18 in Dar-es-Salaam against a friendly US$10-12 in Nairobi.

In Kigali, rental prices for commercial space increased up to 200 percent between 2003 and 2005, reflecting the robust growth of the economy.

Prominent buildings like City Plaza rent for $US16 per square meter, with prices still on the increase. Prices for retail space in Kigali, a feature of both high construction costs and inadequate supply, top out at $20 per square metre per month for neighbourhood shopping centres.

At this level, these prices compare well with Westgate and Yaya Centre, Kenya’s most expensive malls, and the posh garden City in Kampala at between $US 25 and $27 per square meter before taxes.

Construction costs
Prices across the region are affected by several factors. Some of this is driven by the cost of inputs.

Serviced urban land is harder to come by in some neighbouring countries which drives costs up. An acre of land in Kigali’s up-and-coming Gaculiro (akin to Runda) goes for $US500,000.

In Kampala, an acre in upscale Lubowa goes for between $US 150,000 and $US200,000.

Another reason is construction costs. Before the rally in construction costs last year, Nairobi buildings were going up at an average price of US$US400 a square meter compared with $520 in Tanzania and $640 in Uganda. Because inland countries import building materials, they must pay a transport premium.

So in making business decisions, fact should be separated from fantasy.

One common assumption is that builders and landlords pick their prices from thin air. Volatile transport costs, construction costs, utilities and taxes translate directly into escalating building costs.

These in turn drive up rents and sale prices which cannot be insulated from their economic context.

A second error is tunnel vision. While Nairobi’s property prices may seem hefty, they are less so when assessed against regional and global trends.

Dr Macharia is principal of Scion Real.