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Why Kenya’s residential property market is shifting to multi-unit housing

27 March 2016, 15:12 RADING BIKO

Nairobi - While housing prices in Kenya’s residential real estate market stabilized late last year, land costs have seen significant increases, indicating a rise in demand for apartment units.

According to the latest housing price index from the Kenya Bankers’ Association, released at the end of January, average housing prices edged up by just 1.14% in the last three months of 2015. This marked the third consecutive quarter with a less than 2% period-on-period increase.

Across the board

As average housing prices have declined, land prices in the capital have recorded significant growth. Prices in Nairobi have risen five-fold since 2007, with average land costs in the city up 9% in 2015.

While the centrally located Upper Hill area of Nairobi had the most expensive land in 2015, averaging around KSh206.2m ($2m) per hectare, land prices in outlying areas, such as Kitisuru, Loresho and Gigiri, increased at the fastest pace.

According to a recent survey by housing consultancy HassConsult, land prices in Nairobi’s satellite communities rose by around 11.9% last year, almost three percentage points ahead of comparable acreage in the city centre.

In Kiserian, a satellite community south-west of central Nairobi, land prices rose by more than 25% over the period.

“With the devolution plan driving infrastructure development in outlying areas, there are significant prospects for further real estate sector growth,” Charles Odere, chairman and CEO of real estate company RE/MAX Kenya.

Multi-unit focus

Land inflation has already begun to change the shape of Kenya’s property market, prompting a shift away from standalone houses and towards multi-unit buildings.

The KBA noted that apartments, which saw relatively higher price movements last year, accounted for more than 90% of the units offered in the fourth quarter, followed by maisonettes (5.8%) and bungalows (1.41%).

“This justifies the increased appetite and relative affordability for apartments by an apparently growing middle class,” the report said.

Developers are increasingly building up rather than out, as they seek to maximise returns against a backdrop of limited urban space.

“We are seeing a lot of lending for housing being channelled to residential projects in the outskirts of major hubs like Nairobi,” Jared Osoro, director of research and policy at the KBA,  “Lending for commercial development of multi-unit housing is particularly significant.”

Appetite for new multi-unit housing saw the value of approved residential building plans climb by 11.2% in 2015, according to data from the Nairobi Directorate of Planning, Compliance and Enforcement.

Just over 60% of the approved building plans were for residential developments in and around the capital, for a total value of KSh147bn ($1.5bn). Investment in non-residential developments, meanwhile, declined marginally, falling by less than 1% to KSh95.18bn ($936.5m).

Shortfall in entry-level housing

Despite continued investment in boosting residential housing stocks, Kenya continues to experience a nationwide housing deficit.

Although 50,000 new residential units are added to housing stocks annually, national demand for new housing runs at around 250,000 units per year, Jacob Kaimenyi, cabinet secretary in the Ministry of Land, Housing and Urban Development, told media earlier this year.

In early February the government announced plans to provide both financial and non-financial incentives to the private sector to help bridge this 200,000-unit gap, which mainly exists at the lower end of the housing market.

Among the incentives proposed is the provision of serviced land to developers, access to affordable financing and legislative reforms of land-related laws. A national housing fund to help finance social and low-cost housing is also being considered, Kaimenyi said.

“Financing remains very costly in Kenya, not just for buyers but for developers as well,” Chetan Hayer, director of real estate developer Nirbhau Group, “In addition to these kind of incentive programmes, we need to reform the way that mortgages are structured to ensure funding can be released during construction, not just when properties are completed.”

The government will be looking for these incentives to encourage some developers to shift their focus towards mass housing schemes and entry-level residential projects. Such projects could become more attractive to the private sector, particularly if demand and sale prices in the middle-to-high end of the residential sector continue to stall.

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