Global players in the real estate sector continue to hold a positive outlook on the local market despite dipping returns.
Participants at last week’s East Africa Property Investment summit were confident of a rebound even as some reports cast a dark shadow over the sector’s performance.
A report released at the forum by Knight Frank stated that less than Sh200 billion worth of deals in Africa were publicised in 2018, majority involving assets in South Africa. The African Horizons report stated that 13 markets in Africa had recorded a decline.
Speakers at the forum said returns in the sector will now be pegged on individual project’s unique features. Returns will also depend on how well developers create spaces that resonate with the current working class, now composed of the young generation.
For example, installing a noisy gym in a quiet neighbourhood may affect how prospective users react to the property. On the other hand, investors will also need to work with multiple players in mind.
“Rather than put up a structure and hope businesses will just snap it up, developers must adopt an occupier-led office space. We have millennials who want a life-work balance. To this group, a smart work space is more important than a salary,” said Ben Woodhams, Knight Frank Kenya’s managing director.
Reeling in the end-user will also depend on how players view investments in real estate. For example, there would be more funds directed to real estate if the society viewed housing the same way as other social needs such as healthcare.
“Why is housing not seen as a social emergency such as healthcare? If we were to change the mindset on housing, then investors would rush in to fund housing,” said Robyn Emerson, urban planner and president of Women in Real Estate.
Even in sectors that appear saturated, there can be considerable returns if products are tailored to suit a specific clientele.
One such segment is the hospitality industry that has recently seen the entry of major global brands. Hilton, Radisson Group, Kempinski, Accor, Dusit, Sheraton and Marriot are all angling for a piece of the Kenyan pie.
Of these, Radisson Group seems to be on a roll to open as many hotels on the continent as possible. Within Africa, the group has opened 46 hotels with another 50 in the pipeline. In Kenya, the group has already opened two – Radisson Blu in Upper Hill and Park Inn by Radisson in Westlands. A third hotel, Radisson Blu Residence is set to open in September near Nairobi Arboretum.
“This requires that we work with hotel developers who understand our model and the local business environment. Once a developer has had some success in one development, he will want to fund another hotel in the group. That is good for business continuity,” said Andrew McLachlan, Radisson Group’s vice-president for development in sub-Saharan Africa.
McLachlan said developers of hotels in particular need to have a long-term view of their units in contrast to those looking for quick gains that end up frustrating all within the development chain.
Interestingly, McLachlan said that if we were to build more hotels, then banks would get interested in funding the projects.
“Currently, banks do not have enough information on how the hotel construction model works. With more hotels coming up, these financiers will certainly warm up to the sector,” he said.
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The next frontier where the real estate battle will be fought concerns projects’ sustainable features. Research has shown that individuals and corporates are increasingly demanding for green spaces that help in water and energy conservation, good air quality and smart working stations.
A number of participants at the forum said that green features are no longer options for developers who want to reap from the sector.
Rusmir Music, the operations officer for IFC EDGE, the green building certification tool used in 140 countries, said global corporates looking for sustainability would only do business with developers who have the ability to build green.
He said debate on sustainability should now move from installation costs to long-term benefits, both to the developer and the end-user.
The EDGE system aims to save up to 20 per cent on utilities.
“Contrary to the misconceptions, going green can cost no more than one per cent of the total costs, not 30 per cent as some think. Currently, there are six million square metres of EDGE-certified space around the world. Any serious corporate that wants to set up in these countries will no doubt go for such space,” said Music.
Music said many developers were losing out on investments by not designing green structures that resonate with the current global way of doing business. However, he said the problem could be lack of awareness on some of the tools used to certify designs.
“Some of the certification systems were for the higher-end of the market. There is a need for a simple and credible way of going green, one that gives a developer both the incremental costs and the payback period. Otherwise, developers will always think that building green is out of their reach,” he said.
According to IFC, developers are reluctant to absorb the additional costs of green design, choosing to focus on “immediate affordability over uncertain utility savings or long-term appreciation”. On the other hand, added IFC, bankers fail to provide additional financing to cover extra capital costs, for fear of increasing non-performing loans.