Real estate developers are moving out of Nairobi to smaller towns, aiming to tap rising demand for residential houses that the high cost of land in the Kenyan capital has left unmet and adding a new dimension to property market growth.
Latest market data indicates that there has been a marked upsurge in construction of new housing units in Naivasha, Kisumu, Mombasa, and Nakuru – a trend that is expected to ease demand pressure on Nairobi and help tame price inflation.
Last week property firm Translakes Limited entered the Kisumu market with a Sh1 billion investment into a 190 housing units project to be completed by May 2012.
The firm plans to roll out similar projects in Nakuru, Eldoret and Mombasa.
“We are targeting the ever growing rank of middle income earners in regional outposts such as Kisumu, Mombasa and Nakuru who are also competing against Kenyans abroad,” said Daniel Ojijo, the executive chairman of Mentor Holdings and project managers of Translakes Estate.
Naivasha, the Rift Valley town that is located about 90 kilometres west of Nairobi has also attracted a Sh1.2 billion real estate investment for 342 three bed-roomed bungalows complete with a golf course.
Movement of the real estate market outside Nairobi is also being driven by the newly rich class of professionals and top civil servants who are looking for quiet peri-urban homes but cannot afford the rocketing prices of similar property in the capital.
In the past couple of years, high pricing of homes in the top end of the market has benefited outposts such as the Mt. Longonot area that is located 70 kilometres from Nairobi where more than 2,400 acres have been earmarked for construction of gated homes.
Its developers are promising the buyers the quiet, neatly manicured and secure environment that Naivasha’s exclusive Green Park and Vipingo Ridge estates offer.
The Longonot Gate, holiday leisure and golf resort city comes with an 18 hole Golf Course, hotels and theme parks, retirement cottages, a conference facilities and a heritage museum.
Real estate market analysts however say Nairobi remains the best bet for property investors looking for high returns from resale or rental income while the peri-urban developments and outposts are suitable for those looking for holiday or retirement homes.
“Any investor acquiring property for purposes of reselling or collecting rent looks at the possible profit margins that sets Nairobi far apart from other locations,” said Muthoni Wangenga, Legal Advisor Mentor Holdings.
Ms Wangenga said Nairobi also remains the preferred option for such investors due to the rapid rise in property value and rents with the steady rise in demand.
“Acquisition of property in municipalities like Kisumu is however faster because the Lands offices are not as congested as in Nairobi,” she said.
Poor infrastructure, lack of basic amenities such as water and electricity coupled with insecurity have put off most buyers slowing down the growth of real estate market in most towns, developers said.
“Recent investments in infrastructure are opening up outlying areas, cutting the costs to developers and raising the value of property in fairly remote places,” said Njeri Cerere, the chief executive of Kenya Property Developers Association (KPDA).
Technology has also helped the expansion because one does not need to close to the capital in order to transact business.
In Kisumu for instance, the government plans to construct a dual carriageway into the CBD, and to back it up with ring-roads and bypasses to the refurbished airport.
The lakeside town has recently become a haven for property hunters looking to take advantage of its strategic location as the largest town after Kampala in the greater Lake Victoria basin.
More recently, it has also benefited from the influx of banks and institutions of higher learning and the on-going upgrade of its airport to international status.
Some real estate market observers however reckon that the changing fortunes of investors in Kenya’s small towns is the product of high population growth, cheaper land and faster approvals by authorities compared to Nairobi.
“Investors are following population trends across the nation and a number of towns have reported significant growth,” said Ms Cerere.
Kenya is adding one million people annually to its 38.6 million population 22 per cent of who are aged between 15-24 years.
It is estimated that 32.2 per cent of Kenyans or 12.4 million live in towns, up from 23.6 per cent or 5.6 million in 1990 — assuring property developers of steady demand that has seen the prices of apartments in Nairobi’s middle-income areas more than double in the five years.
Kisumu’s population is estimated to grow at the rate of 2.8 per cent annually with a density of 828 persons per square kilometre.
Nakuru boasts a population of about 1.6 million and is estimated to be growing at the rate of 16 per cent annually.
Mr Ojijo says that the high cost of land remains the top most obstacle to real estate development in Nairobi besides the thick layer of bureaucracy investors must go through to acquire it.
The latest market data indicates that land prices in prime sections of Nairobi and surrounding districts nearly doubled in the past 14 months.
The standard eighth of an acre piece of land in Mlolongo along Mombasa Road is now priced at Sh1.6 million up from Sh900,000 14 months ago while in Kahawa West on Thika Road, prices have risen to an average of Sh1.5 million from Sh900,000.
It is this pricing that is forcing developers to look outside Nairobi with towns such as Nakuru, Naivasha and Kisumu as the key beneficiaries.
Besides relocation of industries and the accompanying attraction of the workforce, swelling incomes and large numbers of young people moving to urban centres and starting families, are seen as the other key driver of demand across all asset classes.
Property as an asset class has outperformed the Nairobi Stock Exchange (NSE) over the past decade, according to a survey by CFC Stanbic.
Housing prices have risen 3.5 times in the past decade compared to share prices that appreciated 2.42 times during the same period.
The NSE has been the premier investment destination for foreign investors but the property market is fast catching up.
Increased activity in the property market is reflecting in the bankers’ home loans books where growth outpaced that of credit to businesses and households in the year to September last year.
Data from Central Bank of Kenya (CBK) indicates that net lending to real estate grew by Sh36.6 billion to Sh93 billion in the year to September.
This comes at a time when the concept of pre-construction sale of housing units is already popular in key towns such as Nairobi and Mombasa and is gaining momentum in other urban areas.
Under this financing model, potential buyers place deposits on houses planned for construction and clear the balance payment upon completion.
This helps those implementing the project to raise start-up capital for the work besides guaranteeing them a market for the finished units.
Kakamega and Kisii towns have also attracted such projects mainly led by mortgage company Housing Finance.
Demand for houses is estimated at 150,000 units annually. With a combined output of 30,000 units per year the short fall has created a mismatch resulting in escalating prices.