When you visit Kenya’s capital of Nairobi you are likely to experience a lively city. Cranes and scaffolding dominate most parts of the city’s skyline, as commercial buildings are starting to take shape. But this should not come as a surprise.
After all, Nairobi is entrenching its position as a front-runner in East Africa’s real estate sector due to the large capital inflows it has attracted in recent years. And now Nairobi is believed to be the gateway into East Africa.
These were some of the views shared by delegates at the 2016 East Africa Property Investment Summit (EAPI), the biggest conference of its kind in the region. The conference is a good indicator of investor sentiment towards East Africa as it draws a wide mix of real estate professionals and investors.
Judging from the various discussions that were held at EAPI, it’s clear that real estate players are upbeat about East Africa’s prospects. Firstly, the good news story about the region is that economic growth is expected to be on the upside.
Unlike its counterpart West Africa, which is reliant on China as a trading partner, East Africa’s economy is diversified and less reliant on export commodities. This has made its economy more resilient to headwinds. Underscoring this is that the economic growth rate of many East Africa countries like Tanzania, Kenya, Ethiopia, and Rwanda, is expected to accelerate by 6% to 7% in 2016/17. While China’s economy is feeling the pinch due to declining manufacturing activity, weak demand and low commodity prices, African economies reliant on the county for trade will likely be under pressure.
There is no doubt that East Africa’s strong economic growth is having a positive spin-off for the region’s real estate sector. In Nairobi, for example, a number of office, retail, and residential real estate projects are underway and largely driven by private developers. Real estate seems to be in vogue: with corporates demanding office space; retailers are looking to roll out more stores in a market already seeing a glut of shopping malls; and people are seeking residential housing as they move to the middle and upper class.
Despite the solid real estate opportunities in East Africa, there is an equal amount of risk in the region. Questions are now emerging about whether people will buy the residential product delivered to the market due to affordability issues. Also, the industrial sector is still finding its feet in East Africa and has not grown as expected. The biggest challenge undermining the sector’s potential growth is the poor infrastructure of road and electricity networks. Industry players need to deliver the infrastructure that is desperately needed, as it will unlock many real estate opportunities.
Historically, real estate wasn’t seen as a tradable asset class, but more African countries beyond South Africa, are adopting the globally accepted Real Estate Investment Trust (REIT) structure, which creates a uniform tax dispensation for listed property stocks. There is progress on this front, with investment bank Stanlib launching East Africa’s first REIT on the Nairobi Securities Exchange in 2015, giving global investors indirect exposure to Kenya’s property market. If the rest of the continent fast-tracks the adoption of the REIT structure, then this may allow more investors to be exposed to real estate and new capital can be raised by listed property companies to fund projects.
Another big challenge East Africa needs to overcome is the reluctance of property developers and investors in using the services of real estate consultants before and during the planning phase of a development project. There are many examples of buildings that have failed because developers didn’t properly plan a development. It’s quite challenging to convince real estate professionals that there is a need to bring in consultants for property management, maintenance and creating efficiencies in buildings.
Nonetheless, these challenges do not take away from East Africa’s prospects, which are definitely promising.