Trends in the Kenyan Real Estate Sector: A Focus on Real Estate Investment Trusts (REITS)

Africa's real estate market presents opportunities for investors, primarily driven by rapid urbanization, population growth, and increasing consumer demand. This is despite the challenges plaguing the continent, from infrastructural deficits and regulatory uncertainties among others.

According to data from Statista, real estate investments in Africa has seen steady growth over the past few years. This year, the African real estate market is expected to reach a value of US$15.98tn, with the residential real estate segment dominating with a projected market volume of US$13.39tn in 2024. Further, Statista data anticipates that the African real estate market will experience an annual growth rate of 5.92% from 2024 to 2028, resulting in a market volume of US$20.11tn by 2028.

The past decade has seen three countries: Nigeria, Kenya, and Egypt coming up as emerging as key markets for real estate investment on the continent. South Africa is currently one of the leading destinations for real estate investment in Africa, attracting significant foreign direct investment (FDI) in the sector. When it comes to the sectors driving the growth of Real estate, hospitality and retail sectors are leading, with increasing interest in mixed-use developments and commercial properties seen across the continent.

On the global arena, Statista data shows that the global real estate market was valued at approximately $9.6 trillion in 2020 while commercial real estate investments reached $905 billion worldwide in the same year. The global residential real estate market on the other hand accounted for about 60% of the total global real estate market value in 2020. In 2024, the   global real estate market is expected to reach a staggering value of US$637.80tn by 2024, again  we see the residential real estate segment dominating, with a projected market volume of US$518.90tn in the same year.

Closer home, we have seen the Kenya's real estate sector undergo remarkable growth and

transformation in the past few decades, primarily fueled by urbanization, population growth, and the rising demand for both commercial and residential properties. This growth is further

propelled by the rise of a burgeoning middle class, indicating a shift in lifestyle preferences and economic prosperity within the country.

According to the April 2023 Research Insights on Macroeconomic Outlook and Industry Report by the Kenya Mortgage Refinance Company, the real estate sector contributes significantly to Kenya’s Gross Domestic Product (GDP), accounting for about 7-10% of the country's GDP. Further, Kenya's real estate sector has experienced steady growth over the past decade, with an average annual growth rate of approximately 6%-8%.

As this dynamic sector continues to evolve, it’s vital for investors, developers, and policymakers alike to understand property ownership data and trends, insights that serve as a compass for navigating the ever-changing landscape of Kenya's real estate market. Kenya’s property ownership trends mirror the nation's economic dynamics, demographic shifts, and regulatory environment. Some of the key trends observed in recent years include:

Mixed-Use Developments. With increasing urbanization and demand for integrated living and working spaces, mixed-use developments have become popular in the country’s major cities. These developments typically combine residential, commercial, and retail components to create vibrant urban hubs.

Gated Communities. There has been an increase in gated communities, offering security, amenities, and a sense of community, have gained popularity among middle and high-income earners in Kenya. These developments feature residential properties ranging from apartments to villas, accompanied by recreational facilities and green spaces.

Commercial Real Estate. Kenya's burgeoning economy and expanding business landscape have fueled demand for commercial real estate, particularly office and retail spaces. Nairobi, the capital city, remains a key hub for commercial property investment, attracting both local and international investors.

Affordable Housing. Addressing the housing deficit remains a priority for the current Kenyan government, leading to increased focus on affordable housing initiatives. Public-private partnerships, incentives for developers, and policy interventions are driving efforts to make homeownership more accessible to the wider population.

Why Invest in Real Estate?

Investing in real estate can offer a range of benefits, including steady income, potential for capital appreciation, diversification, tax advantages, government initiatives, infrastructure development, tourism and hospitality, as well as a growing retail sector and control over investment decisions.

While real estate investment requires careful consideration and due diligence, it can be a rewarding and lucrative asset class for investors seeking long-term financial growth and stability. While investing in the Kenyan real estate sector offers numerous benefits, there are also several potential drawbacks and challenges that investors need to be on the lookout for; regulatory uncertainty, land ownership issues, infrastructure deficits, market volatility, financing constraints, market oversupply and environmental risks.

When it comes to Real Estate Investment Trusts (REITs), these have emerged as a popular investment vehicle in Kenya's real estate market, offering investors an opportunity to access the property market without directly owning physical properties.

REITs pool funds from multiple investors to invest in income-generating real estate assets such as office buildings, shopping malls, and residential complexes and other real estate ventures. The primary objective of REITs is to generate income through rental revenues and capital

appreciation from the properties in their portfolio. One notable example is the ILAM Fahari I- REIT, the first REIT to be listed on the Nairobi Securities Exchange (NSE) in 2015. The Fahari  I-REIT provides investors with exposure to a diversified portfolio of commercial properties, offering attractive returns through rental income and capital appreciation.

The ILAM Fahari I-REIT is expected to remain stable following restructuring by current fund manager, ICEA LION Asset Management Limited, This is expected to make room for financial planning and    ensure that the business remains afloat. This is in addition to Naivas supermarket which signed a lease agreement in 2022 to be the anchor tenant at Greenspan Mall until 2031, providing guaranteed income to the REIT over the 10-year period.

As an investor, REITS offers three key advantages: diversification, liquidity, and income distribution. When it comes to diversification, REITs invest in a diverse range of properties, reducing and spreading the investment risk. On the other hand, REIT units are traded on the stock exchange, providing investors with liquidity and ease of entry and exit. Finally, Income REITs are required to distribute at least 80% of their the net after tax income (other than realized capital gains on the disposal of real estate assets) to investors, making them an attractive        option for income-oriented investors.

With the rise of innovative investment vehicles such as REITs, investors have unprecedented opportunities to participate in the growth and development of Kenya's property market while diversifying their investment portfolios. As the sector continues to mature, collaboration between stakeholders, technological advancements, and effective policy interventions will be key to unlocking the full potential of Kenya's real estate sector.

Article by,

Juliet Hinga,
Communications Manager, Strathmore Business School.