Region’s new options for foreign investors
Individuals unable to access credit but the increase in mall space is luring institutional clients
Retail space driving property growth as multinationals flock in
Increasing demand for houses and an increasing number of multinationals looking for retail space have put East Africa’s property market on the global radar for investment.
But even as the region’s real estate sector offers attractive returns to investors, the high cost of credit and soaring cost of construction have slowed down investments in the sector, according to a survey by Cytonn Investment Ltd.
The survey, whose report was released last week, shows that although each of the EAC member states has distinct challenges to the growth of the real estate sector, construction costs and cost of credit stand out across Kenya, Uganda, Tanzania and Rwanda.
In Rwanda, for instance, construction cost is about 20 per cent higher than Kenya since the country imports most of its construction materials. Inadequate funding has resulted in excessive debt financing, with debt interest rate ranging from 17 per cent to 19 per cent per annum.
“Financing for development is not only expensive, but also difficult to access,” says the report.
In Kenya the real estate sector slowed down in the first seven months (January-july) of (2017, largely due to the enforcement of the interest rates cap, which prompted banks to reduce lending to the private sector in favour of the government.
However the demand for retail space, particularly in Nairobi has been increasing gradually as shopping malls become popular.
However, in Kenya real estate has consistently outperformed other investment options such as stocks and bonds in the last five years, generating returns of 25 per cent per annum compared with an average of 12.4 per annum in traditional asset classes.
Residential units generate an average rental yield of 5.6 per cent, while commercial and retail sectors generate an average yield of 9.2 per cent and 9.6 per cent, respectively in Nairobi
The attraction of international retailers to the market and improving quality of retail stock has enabled landlords to quote substantially higher rents.
According to property consulting firm Knight Frank, the retail property segment continues to be a major focus for development ac- tivity, causing the shopping mall concept to take root in many subsaharan cities.
Dilemma facing banks
Nairobi has been a retail development hotspot over the past two years, which saw the opening of the Two Rivers Mall, Garden City Mall and The Hub Karen.
The real estate sector, which was previously dominated by individual developers, has seen entry of more institutional developers such as Saccos, private equity firms and foreign institutions.
The introduction of Real Estate Investment Trusts (Reits) — a financial instrument that provides units of ownership in housing — as a way to raise funding and exit real estate development, is expected to attract more institutional investors.
Uganda’s capital markets regulator has been pushing for more people to take up Reits to speed up sale of new buildings and widen investment choices for fund managers.
“There are about 25 real es- tate properties available locally, worth $10 million per unit and we need one of them to list before the Reits segment takes off,” Capital Markets Authority chief executive Keith Kalyegira told The Eastafrican earlier in March.
A huge housing deficit and low supply of office space created demand for the residential and commercial office units in Kampala, leading to attractive returns of 6.8 per cent and 10.6 per cent, respectively.
Uganda has an estimated housing deficit of 1.6 million with Kampala reporting an annual deficit of 100,000 houses.
Uganda is currently experiencing a high interest rate environment with banks lending at between 22 per cent and 28 per cent, making it expensive to borrow to construct or buy a house.
High costs of construction inputs, high costs of transportation from ports and high land costs in some suburbs, such as Nakasero and Kololo, also raise development costs, reducing the attractiveness and affordability of the housing market.
In Tanzania access to credit is a major problem.
Access to credit fell from 24.8 per cent in 2015 to 7.2 per cent in 2016 and to 0.3 per cent in 2017 attributable to a rise in non-performing loans. These pushed banks to lend to the government.
Some government policies have also hindered investment in property. These include austerity measures like the surplus income cuts for government employees, which restricts their property purchasing capabilities, as well as a strict tax regime since 2015 resulting in reduced spending.
It has also resulted in closure of firms and scaling back of multinational firms.
Tanzania imposed 18 per cent Value Added Tax on all property purchases, increasing the cost of buying property.
In Kenya, VAT is only imposed on commercial real estate purchases
Housing demand is estimated to grow by 200,000 units annually with the cumulative deficit currently at three million units.
Its formal retail activity is centered around Dar es Salaam in premium spaces such as Mlimani City Mall, in Mwenge, Aura Mall in Upanga, and Mkuki Mall in Kisutu.
2016 and 2017 have seen an economic decline but property as an investment has acted as a buffer.” Ben Woodhams, Knight Frank’s managing director
A new commercial building in Nakasero, Kampala.