Re­gion’s new op­tions for for­eign in­vestors

In­di­vid­u­als un­able to ac­cess credit but the in­crease in mall space is lur­ing in­sti­tu­tional clients

The East African - - FRONT PAGE - By JAMES ANYANZWA The Eastafrican

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.

Aus­ter­ity mea­sures

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

Pic­ture: Mor­gan Mbabazi

A new com­mer­cial build­ing in Nakasero, Kam­pala.

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