Cytonn Investments, have released their H1’2019 real estate market review, highlighting the current state of the real estate sector in terms of uptake, rental yields, capital appreciation, and hence, total investor returns.

According to the report, in H1’2019, the real estate sector recorded subdued performance in H1’2019, with the office and retail sector recording a decline in average yields by 0.3% and 0.8% points to 7.8% and 8.2% in H1’2019 from 8.1% and 9.0%, respectively, in FY’2018, while the residential sector recorded a marginal 0.2% points appreciation in average yields to 4.9% in H1’2019 from 4.7% in FY’2018.

Performance was constrained by oversupply in commercial office and retail sectors with a surplus of 5.2mn SQFT and 2.0mn SQFT respectively as at 2018, and inaccessibility of financing by both developers and off-takers.

Residential sector was the only sector to record an increase in yields, with Ruaka topping the rank in terms of yields at 8% while Langata and Kitengela apartments also came close at 6.8% and 6.6% respectively.

Detached units at Juja and Josslyn had the lowest yields with 0.7% and 1.7% respectively

Apartments performed better in H1’2019 recording an annual price appreciation and uptake of 0.7% and 22.4%, respectively. Upper mid-end, lower mid-end and satellite towns achieved average total returns of 5.5%, 5.5%, and 6.3%.

The sector presents an opportunity in affordable housing in satellite towns such as in Ruaka and Thindigua with average returns of 8.0% and 6.1%, respectively, owing to incentives by the National Government and increased national budget allocation to affordable housing by 61.5% to Kshs 10.5 bn in FY 2019/2020, from Kshs 6.5 bn in 2018/2019.

Land markets recorded a 0.5% y/y decline in the asking prices, attributed to an overall slowdown in real estate investment activities. The investment opportunity is in satellite towns such as Ruiru and Limuru, which registered a 4.1% annual capital appreciation on average, attributed to the relatively high demand for land in these areas, fuelled by the affordable housing initiative in addition to satellite towns acting as Nairobi’s dormitory with majority of the population moving away from the Central Business District.

The commercial office sector performance declined, recording 0.3% and 2.3% points decline in average rental yields and occupancy rates, to 7.8% and 81.0% in H1’2019, from 8.1% and 83.3%, respectively in FY’2018. Asking rents decreased by 5.3% to an average of Kshs 96.6 per SQFT in H1’2019, from Kshs 102 per SQFT in FY’2018.

“We retain a neutral outlook for the real estate sector mainly constrained by increased supply in the market and limited access to financing for both developers and off-takers. The real estate sector, however, has pockets of value in themes such as housing for lower-middle to low-income earners in the residential sector and in differentiated concepts such as serviced offices and offices in mixed-use developments (MUDs) that attract average rental yields of upto 13.4% and 8.2%, respectively,” said Juster Kendi, Research Analyst at Cytonn.

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