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To get the best out of real estate, buy off-plan, at right time

In the last seven years, the property index has risen fivefold, attracting many investors into the sector. And there is money to be made from brick and mortar, especially if you invest in the right places at the right time.

In Summary

  • Most property transactions in the country are cash-based, which explains why, despite the boom, the country had a paltry 20,000 mortgage accounts at the end of 2012.
  • On the rental side, Nasir Ali of Lido Beach Apartments in Mombasa says that, with an eight per cent annual return in rental income, buying off-plan also gives one higher margins.
  • Kenya’s property market has potential for higher rates of return compared to other jurisdictions. It is also relatively easy for foreign investors to enter the market.

Kenya’s real estate sector continues to baffle many analysts, with frequent predictions of a bubble burst always coming a cropper.

In the last seven years, the property index has risen fivefold, attracting many investors into the sector.
And there is money to be made from brick and mortar, especially if you invest in the right places at the right time.
Currently, the return on investment in the sector ranges from 20 to 30 per cent on for-sale developments, and six to eight per cent on rentals, per annum.

“Real estate is now a solid investment sector that promises impressive margins,” says Isaac Mukhwana of Landex Group Ltd. “Because this is a growing market, all one needs to do is understand the value of the property and time the purchase well.”
Previously, the market was dominated by individual developers, but of late institutional investors have started pumping billions into real estate projects. Foreign investors and Kenyans in the diaspora are also investing in real estate, showing how lucrative the industry has become.

“The reason for all this interest in the sector is that, in the traditional investment model, the stocks exchange offered a solid investment opportunity while real estate was seen as a bit flaccid,” says Mukhwana.

HANDSOME RETURNS

“However, with the growing demand and prices, institutions have seen this as a good place to put their money, hence private equity firms, Saccos, and other institutional investors have become key players in the real estate sector.“With the development of Real Estate Investment Trusts (Reits), the industry is looking forward to a lot more institutional investors. Real estate is capital-intensive and we think Reits will bridge that gap.”

Kenya’s property market has potential for higher rates of return compared to other jurisdictions. It is also relatively easy for foreign investors to enter the market.

Most property transactions in the country are cash-based, which explains why, despite the boom, the country had a paltry 20,000 mortgage accounts at the end of 2012.

Mukhwana, the Managing Director of Landex Group Ltd, a premier Real Estate company, says that, with property, the trick is always to get on board when the project is commencing so that one can reap the benefits of off-plan purchases, which are always far much cheaper than completed projects.

“For example, the four-bedroom, all-ensuite Syokimau Villas that we are putting up are selling for Sh13 million. With an expected construction period of 18 months, the final selling price per unit will be adjusted by close to 40 per cent (calculated at an average annual adjustment rate of 20 per cent) to sell at Sh17 million in 2017,” Mukhwana explains. “This means that anyone who bought it off-plan can comfortably earn Sh4 million in two years.”

On the rental side, Mukhwana says that, with an eight per cent annual return in rental income, buying off-plan also gives one higher margins.

With a starting price of Sh17 million for a two-bedroom, all-ensuite house, a rental yield of Sh30,000 per day from vacationers could earn someone a handsome return on investment. Assuming that the property is occupied for 200 days in a year, this means an annual income of Sh6 million.

SPECULATIVE PURPOSES

Mukhwana says that given that vacation apartments have become popular with local tourists in Kenya, investors can make a tidy sum if they scour the market for the right location and the right price.

Assuming you invest in a three-bedroom all-ensuite house in Kileleshwa — where the Kileleshwa Socian Apartmentson Tinderet road is retailing at Sh18 million for the same particulars — add stamp duty, capital gains tax and legal fees, your total buying costs comes to about Sh20 million.

For rental return, you will be looking at Sh120,000 per month, with an annual rental income of Sh1.44 million. If you divide that by the cost of the house, your rental yield comes to 13.88 per cent. This is better than most investments, given that it also carries capital appreciation.

Buying off-plan has been touted as an easy way into reaping on the gain. However, this form of investment needs a buyer who understands what he or she wants and how the plan purchase works.

Lucy Ringera, the developer of Socian Apartments in Kileleshwa, says “we all like to save money”, so when developers first offer their new products to the market, “they usually start with lower prices to encourage a faster sales rate”.
“When construction commences and the developer has met their construction finance requirements, prices usually rise, hence capital gains. Those locked in on the project for speculative purpose are then able to sell off, especially when the developer has sold out his or her units. It’s just like the stock market, where one is able to enjoy the benefit of any capital growth that occurs on the property.”

On the other hand, this form of investment could turn risky if not done with due diligence, or if one is dealing with a rogue developer. Delays in completion of the property, which means that it might not fit into your plans — especially if you wanted to offload it back into the market — could become a major financial headache for investors.

Recent Landex Group Ltd and Stanlib Property indices show that, for investors buying property to let out, the rental yields have held firmly at above six per cent, more than interest rates from government treasury bonds.

RELATIVE STABILITY

Other reports also capture well the continuing resilience of the housing market as a long-term investment plan in Kenya, “with strong demand holding prices firm throughout the economic slowdown of 2008 and rising prices for houses continuing to drive overall property returns”, says Anthony Mwithiga, Chief Investment Officer at Stanbic Investments.

“At the same time, the relative stability in rental incomes has continued to deliver returns that are now very attractive, considering the current low-interest-rate environment. This data supports our long-held belief that property is a strong asset which has been beating inflation, yet remains under-exploited,” Mwithiga says.

If you want to go the mortgage way, look at the benefits from a long-term capital gain perspective. This is because of the interest rates, type of mortgage and capital appreciations of the property.

Mukhwana of Landex Group Ltd says that, with mortgages, the benefits of off-plan purchases cannot be enjoyed as most financial institutions will only advance loans for finished properties.

“This explains why it’s a long-term investment vehicle. With the average bank interest rate of 15 per cent calculated on a reducing balance and an annual capital gain of 20 per cent, the net gain will grow, albeit slowly. That is why it is a long-term investment,” Mukhwana says.

Land is also another front where the returns are rewarding, especially within Nairobi, where the price is on an upward trend. That appreciation depends on the type of projects that pop up around the area, though.“For instance,” says Alex Muema of Ndata Enterprises, a land-buying company, “about six years ago an acre on the Northern Bypass was going for Sh300,000, but today the same is going for Sh18 million!

“It’s all about strategy. Look at the immediate planning of the area; institutions coming up, road networks, electricity, water and such. These are what attract people, making the rate of growth high.”

Apart from all this, says Sue Muraya of Suraya Properties, it is also important to survey the market before investing in a particular area.“Market research involves understanding the real estate mathematics,” she says. “If you buy a property in, say, Runda for Sh50 million, most of the times it will be a four-bedroom villa sitting on an eighth. The rental yield will be Sh250,000 per month, giving an annual rental yield of Sh3 million.  This means the gross returns are at 16.6 per cent.
“You can instead choose to diversify by buying three Sh15 million maisonettes at the same cost, but which will give you a rental income of Sh100,000 each monthly, or Sh3.6 million annually.”

Last month Landex Group Ltd noted that rent rates in the country have been increasing steadily for the last 18 months, and that they are expected to maintain the trajectory into the near future.

The same report also showed that asking prices for properties, especially apartments and detached houses, moved up significantly in the third quarter of 2014.

Apartment prices had risen by 3.6 per cent, detached houses by 3.2 per cent, and semi-detacheds by 2.4 per cent from the previous quarter.
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