Published On: Sun, Sep 7th, 2014

Nairobi : The Green city in the Sun changing skyline as Commercial Real Estate rises

By: Joel Macharia

The Nairobi skyline is among the most recognisable cityscapes in the world. For over 40 years, the iconic upturned hut atop the Kenyatta International Conference Centre (KICC) has helped people immediately recognize the profile of “The Green City in The Sun”. Standing tall at 105 metres, the KICC has become as integral a piece of Kenya’s identity as Mount Kenya and the Masai Mara. While it was once the tallest building in Kenya, this title is now held by Times Tower, which stands at 140 metres, followed by Teleposta Towers at 120 metres.

Nairobi’s history of towers began with the 20-storey Hilton Nairobi in 1969, the 20-storey National Social Security Fund building in 1973, and the 30-storey KICC in 1974. Buildings in the city had remained relatively short until the late 1960s, when the city experienced its first skyscraper boom. From 1960 to 1980, Nairobi witnessed a major expansion of skyscraper and high-rise construction, with many of the city’s office towers completed during this period. A near 20-year lull in building construction followed, before picking up again in the late 1990s and early 2000s. Over the last 10 years, the city has experienced something of a renaissance in construction. As at the end of 2013, there were over 20 buildings either topped out, under construction, approved, or on-hold and proposed in Nairobi. At least 85 percent of those stand as tall as 65 metres (15 floors) or more.

This rebirth of property development in Nairobi has attracted global attention. In its 2012 Wealth Report, real estate management company, Knight Frank, ranked Nairobi as the fastest-growing real estate market in the world, outpacing cities like Miami and Monaco. Real estate prices in Nairobi rose 25 percent between January and December 2011. Nairobi was also voted as one of the top 10 cities to watch by global real estate firm, Jones Lang LaSalle, out of 150 cities globally.

Several factors come into play in driving this demand, from local governments to global business interests. Generally, the latter is attracted to Kenya’s strategic position economic and geographic – in the African continent. Recent discoveries of oil and gas in Kenya, Uganda and Tanzania have increased interest in East Africa, as companies move in to take advantage of new opportunities in infrastructure and extractive industry development. Companies in logistics, security and trading have set up offices in Nairobi as a base to monitor and invest in the commodities boom expected in the region.

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Kenya is setting up to actively harness it natural resources. Growth in manufacturing, technology and telecoms, finance and business services, outsourcing, retailing and hospitality are generating an urgent requirement for modern commercial real estate infrastructure. Multinationals, especially in the technology sector, have established or expanded their presence on the African continent, with Nairobi as the central hub. Companies such as Intel, IBM, Google and Microsoft have established sales and research centres in Nairobi to tap into the Eastern and Central African markets. This has increased demand for top-quality office space, and has driven the development and expansion of existing real estate.

Commercial office rents have been on an upward trend over the past five years, growing at an annual rate of 14.1 percent, according to Business Daily newspaper. A study carried out by the Mentor Group, a real estate development and management company, projected that 1.7 million square feet of office space will come into the market annually between 2013 and 2015. The increasing interest in Nairobi as a business hub, coupled with the growth of the tourism industry, has fuelled hotel developments. Global chains such as Best Western, Kempinski and Crowne Plaza have joined local hotels such as the Sankara, The Tribe and Boma in increasing the total number of beds on offer.

In Nairobi, total international arrivals registered a compound annual growth rate of 4.3 percent between 2000 and 2012. Arrivals declined by one third in 2008, following the post-election violence in December 2007. The country then had three consecutive years of recovery, with a drop of 6.1 percent in 2012. The number of bed-nights also saw a compounded growth rate of 5 percent between 2000 and 2012. There was a 29 percent drop in 2008, though demand quickly bounced back, up to 77 percent, the following year. The number of bed-nights has been relatively stable in subsequent years, even in the election year of 2012/2013, at an average 1.6 million bed-nights a year.

The government is actively facilitating real-estate development. In 2011, the Kenyan government, through the ICT Board, announced plans to develop a $14.5-billion technology city on 2,000 hectares about 50 kilometres southeast of Nairobi. The Konza Technopolis will host businesses, hotel and schools, and bring in myriad international investors. In addition to this, the government also launched the Lamu Port South-Sudan Ethiopia Transport (Lapsset) project, a rail, road and pipeline network running from the Lamu port on Kenya’s northcoast to the South Sudan and Ethiopian borders. This project will also bring about the development of three resort cities and airports. The offices created by the implementationof Kenya’s new constitution created upward pressure on the commercial real estate market, particularly in the capital city’s central business district and Upper Hill areas. For instance, the new constitution introduced the Supreme Court, which leased an entire newly constructed office block in Upper Hill.

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Across the country, county headquarters are under construction, as governors’ and senators’ offices and residences, local county parliaments and associated offices are being set up. Rather than take up space in existing government offices, the county officials are setting up new offices, driving local investment in real estate and inviting investors to set up businesses in their counties. One of the most visible counties, Machakos, approximately 100 kilometres southeast of Nairobi, got investors to commit $646 million in investments in the county. As a response to this growing centre outside the capital, Kenyans based in Nairobi are making investments in their hometowns to tap into the growing interest. They have constructed hotels, malls, estates and commercial buildings to be used as offices.

The Kenyan consumer has not been left behind in driving demand for commercial real estate. In the last 10 years, Kenya’s middle class (defined by the Kenya National Bureau of Statistics as anyone who earns between $278 and $2,310 per month) has grown from 1 percent of the population in 2007 to 5 percent in 2013. According to a newly released ranking by New World Wealth, Nairobi’s population of high net worth individuals is growing at an alarming rate – second only to Ghana’s Accra. The survey also found that the Kenyan capital was home to 5,000 dollar millionaires last year, placing it fifth in Africa. The population of Nairobi’s dollar millionaires is expected to grow by 6.3 percent annually, up to 8,100 by 2020.

This group of newly wealthy Kenyans has been the catalyst for the building of several new malls over the last decade – from just four in Nairobi only to 26 spread out across the country. Several developers have started projects to compete with existing malls such as the Sarit Centre, the Junction, Galleria, Westgate and Greenspan Mall in the lower-middle-income neighbourhood of Doonholm. According to Business Daily, a consortium of investors called Azalea Holdings is behind a $46-million mall project dubbed the ‘Hub Karen’ in Karen. “The Hub Karen is a twophase project, with the completion of phase one estimated by the third quarter of 2015. The first phase will offer 30,000 square metres of gross leasable area on two levels of retail,” said the firm in a statement. The second phase is planned for completion in 2018. The investors have lined up a mix of debt and equity to finance the project. Its estimated size and project value make it one of the biggest shopping malls ever built in Nairobi.

International investor perceptions about potential opportunities in Africa are slowly improving. The global search for commodities, a growing internal consumer market and better macroeconomic fundamentals have helped to boost foreign investment in Nairobi real estate. A significant chunk of the foreign investment coming into real estate originates from South Africa. African Land Investments, which has applied to list on the Johannesburg Stock Exchange, is venturing into Kenya’s real estate market with an eye on buying completed office blocks, warehouses and malls as part of its Sub-Saharan Africa expansion. Stanlib, an investment management company, is looking at deals that could see it invest as much as $600 million in shopping malls, while Sanlam is looking to invest up to $635 million in a varied set of properties.

Private equity firm Actis is putting up Garden City, a $150-million investment that will be East and Central Africa’s largest shopping mall when it is completed in 2015.

Institutional investors, such as insurance companies, pension funds and asset management companies, are carrying out the development of high-rise office buildings and hotels. CIC Insurance is seeking to raise $34.6 million in the next two years to fund real estate projects and for regional expansion. It will also be building a high-end estate near Tatu City, along the Thika Highway. Insurance and asset management company British American is putting up a $48.5 million, 30-storey office tower and car park in Upper Hill. It is in fierce competition with its rival, UAP insurance, which is also putting up a 30-storey building in Upper Hill.

Through a joint venture with Delta Corp East Africa, Mukesh Ambani, chairman of Reliance Industries and India’s wealthiest man, has also cashed in on Nairobi’s commercial real estate boom. The joint venture has, over the past five years, developed and sold properties such as Delta House in Westlands and Delta Centre in Upper Hill, which was bought by the World Bank in 2011 for $22.8 million.

The Kenyan Somali community is another key player in the Nairobi real estate scene. Eastleigh, a suburb east of the Nairobi CBD, is at the centre of a network of trade that connects the Arabian Peninsula, Somalia, Kenya and East and Central Africa. According to a report by Chatham House, a London-based think tank, entitled “Somali Investment in Kenya”, members of this community have invested and transformed the suburb into a bustling commercial centre, buying up residential blocks and converting them into modern retail outlets. Indeed, many Somalis in Western and Middle Eastern countries have been attracted by Kenya’s vast business opportunities. Most of the investment centres on family-owned businesses, thought it does extend to real estate as well. This funding from the wider Somali diaspora has been crucial to the expansion of Eastleigh. While the capital investments for small enterprises vary, they typically involve sums of between $3 million and $5 million. Commercial mall companies such as Amal, Baraka Bazaar, Garissa Lodge and Sunshine Plaza fall within this category, with maximum annual turnover of $7 million.

The Chatham House report states that many entrepreneurs who began in the informal sector have expanded their businesses, turning them into contemporary shopping malls operating inside the formal economy. They include Garissa Lodge, Amal Shopping Plaza, Liban Shopping Complex, Baraka Bazaar, Shariff Shopping Complex and Sunrise Shopping Complex. These discount malls now attract customers from across Nairobi and beyond. Apart from the large-scale shopping malls, there are also several Somali- owned hotels, guest houses, lodges and restaurants in Eastleigh. It further showed that some Kenyan property dealers claim prices have tripled in areas where Somalis dominate, such as Eastleigh. This has given rise to friction between Somalis and Nairobi residents who suspect that the expansion of Somali business may be financed by piracy or other illegal activities.

Ben Kimathi, aged 65, owns and lives in a three-bedroom semi-detached maisonette sitting on three eighths of an acre in Upper Hill’s Kiambere Road, a treelined mixed-use neighbourhood just a few minutes’ walk from the Nairobi Central Business District. He tells of his encounter with Somali money: “I was leaving my gate when these two Somali gentlemen approached me, and asked if I owned the property and if I would be willing to sell. As a joke, I told them I would but for a hundred million shillings ($120,000). There was a few minutes of rapid-fire conversation between them, and then one of them turned to me and asked, ‘If we give 120 million [shillings], can you be out in the next three days?’ I almost fainted.”

The value of the property according to Kimathi’s valuators was KSH70 million ($84,000). Kimathi declined the offer.

Kimathi’s example illustrates just how distorted prices of land in Nairobi have become. The cost of land, the cost of interest, taxation on construction material and the high inflation rates are driving the cost of real estate higher still. Yet a more pressing challenge is the overload on the city’s infrastructure. Nairobi is said to have only 6,000 public parking bays, despite the city having over 500,000 cars. The city’s population density is 4,515 people per square kilometre on its 696 square kilometres, compared to 71 for the rest of the country. This lack of infrastructure forces developers to incur additional costs, sometimes by as much as 30 percent. Given the rapid rate of expansion in the city, these needs must be urgently addressed for Nairobi to realize its true real- estate potential.

Despite the challenges currently faced by the real-estate sector, all indicators are that the sector, particularly commercial real estate, will continue to grow. Factors such as ongoing economic growth, favourable demographics, a lack of existing commercial real estate stock, improving governance, the expanding middle class, and increased foreign direct investment only point to greater demand and growth of the opportunity for investment in the Green City in the Sun.

Source: Ventures Africa

 

By Joel Macharia

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Nairobi : The Green city in the Sun changing skyline as Commercial Real Estate rises
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