Increasing demand for houses and an increase in the 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.
The survey, whose report was released last week, shows that although each of the EAC member states has distinct challenges to the growth of real estate, 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.
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 to 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 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 activity, causing the shopping mall concept to take root in sub-Saharan Africa.
Dilemma facing banks
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 – 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 Real Estate Investment Trusts to speed up sale of new buildings and widen investment choices for fund managers.
“There are about 25 real estate properties available locally, worth $10m per unit and we need one of them to list before the Real Estate Investment Trusts segment takes off,” Capital Markets Authority chief executive Keith Kalyegira said last month.
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.
Cost. 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.
Article was first published in Daily Monitor