Low credit availability and oversupply of commercial space have slowed down Nairobi’s land price inflation from the double-digit levels of the past decade, a newly released real estate sector report says.
The report shows that the average land price growth in the Nairobi metropolitan area stood at 3.7 per cent last year, compared to an annual compound growth rate of 17 per cent in the previous six years.
Investment firm Cytonn says in the report that the prolonged 2017 election season forced many prospective buyers to adopt a wait-and-see attitude towards investments, causing a negative impact on the sector.
Investors also found credit hard to come by as banks tightened lending conditions following the coming into force of the interest rate capping law which they say has made it hard to properly price risk when lending to customers.
The situation forced many investors to buy land in the suburbs where they could put up high-capacity residential buildings — resulting in an above average price growth in areas such as Kahawa, Kasarani, Kileleshwa and Dagoretti.
“Commercial zones such as Westlands and Kilimani recorded annual appreciation rates of 3.4 per cent year on year, down from a six-year compounded annual growth rate of 20.4 per cent.
The slowdown in growth is attributed to the increase in supply of commercial developments with offices having an oversupply of 4.7 million square feet in 2017, and therefore a decline in demand for land for commercial developments,” Cytonn says in a report released yesterday.
“High rise residential areas recorded the highest annual capital appreciation rates in 2017 of 4.8 per cent, attributable to the high returns in these areas given that they allow for densification and increased demand for housing from the growing middle-income population.”
Land is traditionally seen as a safe haven investment whenever there is heightened political activity, making it one of the few investment classes whose value rose in such times.
The increased development of some satellite towns such as Nairobi’s Ruiru and Ruaka where land prices are reaching maturity is also pushing speculators further away and opening up new areas of price growth, Cytonn said.
This has benefited outlying areas such as Juja and Thika, which have recorded price growths of 8.7 per cent and 9.7 per cent respectively.
Speculators have in the past bought land cheaply in the outlying areas and held on to it, waiting for the development of infrastructure and other amenities such as schools before selling on at higher prices.
Satellite towns have therefore continued to outpace suburbs — save for places where investors can put up high rise developments — in price growth with availability of land also a factor.
This trend that took root last year has continued to be seen in the first quarter of this year.
Realtors Hass Consult, in their first quarter 2018 land price index, said satellite towns such as Athi River, Kiambu, Juja and Kitengela recorded a 2.4 per cent average increase in asking prices in the three months while suburbs closer to the city posted a growth of 0.2 per cent.
The proposed review of the interest rate capping law, which many expect could go through by the end of the year, is likely to reinvigorate the property sector, which is heavily dependent on credit to meet the high capital requirements. A stable political environment is also expected to start reflecting on prices, developers said.
“The swing in prices following stabilisation of the macroeconomic and political environment shows there are possibilities for unlocking value in the satellite towns,” said Hass Consult head of development and research Sakina Hassanali when releasing the index report last month.
Banks have traditionally looked favourably at the sector when lending, a view that is partly informed by the high demand for housing and near constant growth in land and house prices.
Central Bank of Kenya data shows that growth in credit to the real estate sector stood at 8.4 per cent at the end of January, against the overall average of 1.8 per cent — performing better in access to credit than other sectors such as agriculture, trade, private household and finance.
This growth rate, however, still represents a contraction compared to a year earlier, when it stood at 10.3 per cent.