Why 2018 prospects for real estate look bright

Why 2018 prospects for real estate look bright
The making of a real estate giant.

Zachary Ochuodho @zachuodho

The real estate sector is expected to rebound this year after experiencing a slowdown in 2017 due to political uncertainty triggered by a prolonged electioneering which kept buyers off the property market.

According to a report by Cytonn Investments released yesterday, increased demand for houses, improved infrastructure and expanding middle class will be the main drivers powering real estate boom this year.

Also expected to shore up fortunes are government incentives to spur affordable housing development; growing businesses creating demand for office and retail space.

“Investors, however, have to conduct research to identify the niches in the market given the increased focus by institutional developers, which, while clearly an indication of growth, will result in stiff competition as clients and investors demand quality developments,” read the report.

Last year, credit constraints and an oversupply of commercial office properties greatly contributed to a slowdown of the sector from a five-year Compound Annual Growth Rate of 14.4 to 2.4 per cent as at October last year.

The value of building approvals reduced by Sh33.7 billion between January and July 2017 to Sh149.5 billion from Sh183.2 billion in 2016,” the report revealed. Cytonn Investments Chief Investment Officer Elizabeth Nkukuu said the slowdown was occasioned by a steep decline in capital appreciation brought about by stagnated land and property prices.

“Political uncertainty brought by the extended electioneering made investors postpone making purchase decisions,” she said. Nkukuu said last year the sector recorded rental yields of 9.6 per cent in retail segment, 9.2 per cent in office property and 5.2 per cent in the residential sub-sector, resulting in an average rental yield of eight per cent, compared to 7.8 per cent in 2016.

“The capital appreciation in Nairobi and its metropolis averaged at 6.5 per cent in 2017 from 18 per cent in 2016 thus the real estate sector recorded a total return of 14.5 per cent in 2017 compared to returns of 25.8 per cent in 2016, showing a slow-down in real estate operators’ performance,” she said.

The total returns to investors declined by 2.6 per cent points to 10.3 per cent from last year’s average of 12.9 per cent, attributable to slow price appreciation rates last year as a result of buyers’ wariness which resulted in slower demand.

“Developer returns, however, remain high at an average of more than 25 per cent given that real estate is a long-term investment, with a capital appreciation of 17.4 per cent over the last six years,” said Nkukuu.

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