If you are a real estate investor seeking to reap maximum returns, look outside Nairobi’s upmarket neighbourhoods. According to the latest price index report by real estate firm Hass Consult, it is more rewarding to invest in satellite towns just outside Nairobi than in the city’s suburbs.
The report says relatively lower land prices have seen most developers move to the outlying towns, pushing up housing prices and rental rates, and ultimately offering investors better returns.
“Areas that were considered remote like Kitengela, Kiserian and Athi River are now giving better returns to investors compared to Karen, Ridgeways, Muthaiga, Lavington and Runda,” Sakina Hassanali, Hass Consult’s head of research and marketing, said on Monday as she released the Hass Property Index for the fourth quarter of 2015 in Nairobi.
The report revealed that house prices in Nairobi’s satellite towns rose by 11.9 per cent in 2015 while rents rose by an average of nine per cent as landlords cashed in on increased demand.
Hassanali said asking rent prices have risen more than two-fold in Kiserian, Juja, Kiambu and Mlolongo as rental prices in Nairobi’s suburbs get out of reach for a majority of tenants.
Developers are being driven out of the city by prohibitive land prices to satellite towns where land is still affordable.
The report, however, says rapid development of apartments around the city has generally slowed down the growth of rental returns on residences in the fourth quarter of last year.
And satellite towns seem to have everything going for them, at least for the time being. Most of the infrastructure developments, including bypasses, have had a positive impact on the city’s outskirts.
Land prices in these towns have risen more than sixfold, and are expected to continue to appreciate as infrastructural developments like the Standard Gauge Railway, which passes through or near some of the satellite towns like Kitengela, nears completion.
“The increased appetite for land in Nairobi’s satellite towns comes in favour of lower average prices per acre at Sh15.6 million even as the price more than quadrupled in the last eight years,” said Hassanali.
Francis Kihanya of Manyatta Investments International, a real estate firm that also handles diaspora investments, says the drive to satellite towns is unstoppable as long as land prices in the city continues to skyrocket.
He says the counties are also sweetening the deal for prospective investors by improving infrastructure. He says there are few investment vehicles that can guarantee positive returns as land, especially outside the city where more people can afford..
“Recently, we have seen over 60 per cent of diaspora investments in real estate going to satellite towns.
Most of these people are investing in land for the future and not necessarily for current construction needs,” says Kihanya, noting that the current move in Kenya is in line with international trends where a huge segment of the city’s workforce lives far from the city and commutes daily.
“These are the trends in developed countries. Closer home in South Africa, people travel for an hour or more to get to cities such as Johannesburg owing to smart public transport system. We can do the same here,” says Kihanya.
According to Hassanali, an investor in Kenya is better off banking on land as opposed to the stocks, bonds or treasury bills. All other assets except land have continued to trade sluggishly for the better part of last year.
Take the case of an investor who bought an acre of land for Sh1 million in 2007 in what Hass Consult refers to as Nairobi Satellite-14 areas such as Kiserian and Mlolongo. By the end of last year, his piece of land would be worth Sh6.4 million.
Had he invested the money in some piece of property in Nyari, Kitisuru or Spring Valley, it would be worth Sh5.74 million. The same amount would have earned him less than a million through the bond market in the same period. Worse still, if he had put the money in a savings account, he would have earned a paltry Sh140,000 in eight years.
Collins Kowour, a former chairman of the Institution of Surveyors of Kenya (ISK) and a land expert, says exorbitant land prices is a major reason people moving out of the city. But he says that despite high land prices, developers will still hang around town owing to capital appreciation on their property.
“It is true that there may be lower rental yields but developers will always look at the envisaged capital gains on their property,” he says.
However, Kowuor says the city may also have to sort out its traffic mess to reel in more investors: “Apart from land prices, traffic chaos in Nairobi has had an impact on people’s day to day lives. Some opt to live further away from the city where rents may be cheaper and spend a little extra on transport.”
Alex Muema, the director of Ndatani Enterprises, says that the appeal of Nairobi outskirts as a real estate destination has just gained momentum.
“There are very few Nairobians with the ability to buy land and construct a home in the city where an acre is close to Sh200 million. However, financiers are in a better position to fund purchase of a property in the satellite towns,” he says.
David Wachira, a sales manager with Makuyu Ridge Development, says land outside the city is still affordable, giving the example of their serviced plots that sell for Sh5 million for a quarter acre.
“Considering that we are looking for investors who want to put up high-end holiday or retirement homes, you are better off saving or borrowing to buy land a bit further from the city,” he says.