The first thing you need to know about Nairobi is that it is not a place for sensitive ears.
It all starts with the daily commute.
The new dual carriageway is not finished yet? No Tarmac? Never mind. Nothing that a detour through this construction site and some serious suspension cannot handle. It looks like this road disappears into a track through a freshly dug trench up ahead. Never mind. Let’s plough on through. No time to turn back now. That looks like a pedestrian in the middle of this eight lane highway. It is? Never mind. He will probably dodge the 4X4. And, to be fair, he looks pretty relaxed about the whole thing.
The only thing about this account that has been excised is the loud and frequent use of foul language. But this is the reality of life in a fast-emerging market where a growing economy and population must contend with a severely limited supporting infrastructure.
Navigating the Nairobi backstreets is the only way to avoid the hours of stationary traffic gridlocked on the one main road into the centre of town – no matter how white knuckle the ride might be.
“You should see it here after it rains,” laughs Knight Frank Kenya’s head of agency Anthony Havelock as he veers past a weaving taxi, and flies over yet another completely necessary and almost universally ignored speed bump.
“Once the mud flew up so high on a drive home from work that it ended up on the roof of the car. Another time I saw an entire minibus sunk in a ditch. Welcome to the Kenyan chaos.”
Chaotic it might be. But a stabilising commercial market, a 5.3% predicted growth rate and the discovery of oil reserves in the north of the country last year also makes Kenya one of Africa’s most attractive real estate offerings.
Add to this the fact that it boasts some of the biggest projects under construction in sub-Saharan Africa and, as a former British colony, has legal and land registry systems similar to those used in the UK, you would think that British property firms and investors would be queuing up to get in on the action. So where are they?
Risk and reward
The question mark over the limited number of British companies operating in Kenya – and specifically Nairobi – is usually raised in reference to the dominance of overseas investment from the east rather than the west and the clear evidence of Chinese construction companies operating in the country.
“Where are the Brits? There is so much expertise that would be welcomed here,” says Michael Kingshott, director of African-based property developer Aspire.
“We are working with the Chinese on Garden City, a mixed-use project which at 32 acres is the biggest on the continent outside South Africa, but it’s the type of scheme where we would have welcomed UK involvement. It’s a shame.”
Rohan Patel, director of corporate development at Grenadier – one of the biggest developers in Kenya – adds: “We are looking to jv on some of our bigger schemes in the next three to five years and we would absolutely work with a UK firm if the appetite was there. The only reason we haven’t so far is that there do not appear to be many British companies in the market.” [see pages 72-73 for full interview].
While Kenya has attracted significant foreign investment – the figure stood at $249m (£148m) last September – this is not as high as some might have expected given the tripling of foreign direct investment into Africa overall to $182bn in the past decade.
The fear is that misconceptions and political problems might have put investors off – particularly those from the west.
The view in Nairobi is that the country’s current president Uhuru Kenyatta has made would-be investors nervous. Kenyatta – with his deputy William Ruto – faces charges of crimes against humanity at the international criminal court in The Hague for allegedly orchestrating post-election violence that killed more than 1,000 people following a disputed presidential election in 2007.
“I think western investors may have a particularly sensitive moral compass when it comes to this sort of thing,” says one local property developer in Nairobi.
“It has taken the western world – particularly the British and the Americans – a long time to accept the president after he came into power last year because of the alleged crimes against humanity. So what did he do? He went to China. And the Chinese are now investing like crazy and are over here building our roads and major developments. Fast. And most likely at a highly discounted rate than aid from the EU.”
The attitude towards the Chinese in Kenya is, by and large, positive. Chinese construction companies are well regarded as being quick and efficient. But this does not eliminate the desire to see more western investment – not least because there are serious questions over the real cost of the Chinese involvement in African real estate.
“We are not sure how much has been given away in terms of minerals and fishing rights,” adds the source.
“It could be a big price to pay, or a comparatively small one in order to get new airport terminals, ports, roads and railways. The issue is that we don’t know what agreement was reached. We do like the Chinese input here to a degree. But there is a worry over what it has cost us and nervousness is building. An influx of western investment and expertise would certainly be welcomed.”
And there is a clear gap in the market.
“I think we might be one of the very few UK funds operating in Kenya,” says Koome Gikunda, investment principal at emerging markets equity fund Actis.
“The UK is well represented by architects and consultants out here. But not so much on the funding side.”
Of course there are other issues to get to grips with. Security is one, and while many would argue that emerging markets always come with a degree of risk, not even those operating in Kenya – and Nairobi in particular – would argue it is always a straightforward market.
“It’s certainly challenging to work here sometimes,” says Grenadier’s Patel. “The pace at which things happen feels slow compared to some other big cities. There are infrastructure bottlenecks which are frustrating and there are the security issues, but then these are the things that plague most developing cities and countries. And, actually, Kenya is developing at a remarkably fast pace. When I worked for KPMG in 2000, I did a review of the economy. It had shrunk, which is a disaster for a developing country. Since 2002 it has taken off with the new government. Overall, this is a positive time.”
Compelling case
Setting aside concerns over the incumbent president and potential nervousness about entering the African market in general, the UK’s slow uptake is certainly not likely to be down to doubts over Kenya’s performance as a burgeoning real estate market.
The country’s office market has stabilised after a period of feared oversupply in the past 12 months and prime office yields in the capital are reaching 9% as international corporates move in. In the past 12 months Google, Nestlé, Colgate Palmolive, Procter & Gamble, JPMorgan, Oracle, and GE Capital have all moved into Nairobi.
This has, in part, been down to the fact that Kenya is now cementing itself as a regional business hub – a process which has been speeded up by the shift from Cairo to Nairobi as the preferred base for African and Middle Eastern headquarter buildings due to political unrest in Egypt.
Knight Frank Kenya’s managing director Ben Woodhams says: “It’s worth pointing out other contributing factors such as the saturation of the property market in South Africa. This is causing South African developers, retailers and investors to look north for new markets, and Nairobi is naturally high on the list with its lack of currency controls and its emerging middle class.”
As for the oil discovery, Knight Frank’s Havelock describes this as “the icing on the cake” off the back of an already fast-growing economy, government support in infrastructure upgrades and “the multinationals waking up to the fact they can’t run Africa from Johannesburg.” He also points out that the Kenyan shilling (KES) has been stable against the dollar with the exchange rate hovering at around 85KES to the dollar ?for some time now.
The major growth drivers come down to a lack of supply across all sectors. There was relatively little development since the country gained independence from Britain in 1963 until the early 2000s.
The growth rate rocketed after 2008 when Kenya was left unscathed by the global financial crisis and, since then, interest has soared creating a land race and a development boom.
The demand for housing far outstrips supply, the arrival of international corporates to Nairobi has corrected a feared oversupply in the offices sector and retail is going from strength to strength despite an inevitable dip after the Westgate attack.
“The tragic Westgate incident has seen retail take a hit,” says Havelock. “But it remains a huge growth market as there is so little supply. We are seeing increasingly western brands arriving on the scene. Take KFC, for example. There was nothing like that here before it was brought in last year. There was a queue for more than an hour every day for months after it opened. It’s the sort of brand people here want to see. The demand is huge and as the occupiers become increasingly international and as the quality of the stock improves, we’ll start to see prelets. The whole market will change.”
The residential market is shifting fast from seeing houses dotted across sprawling, rural areas to city-centre high-rise developments thanks to the fast rise of an emerging middle class. Rents are now reaching up to $4,400 a month in some prime areas as buying is nigh on impossible for most people.
While an average lower middle-class home can cost from around $50,000 to purchase, there are just 20,000 mortgages in the whole of Kenya – a country with a population of 45m. This is down to interest rates of up to 15% a year on the loan.
The key driver behind the commercial office market is the arrival of more international occupiers. Leasing deals have gone from being around 5,000 sq ft as a general rule to nearer 20,000 sq ft – “we now have around 10 on our books for 50,000 sq ft,” says Havelock. And it is this which is driving the construction of mega-schemes in Nairobi and across Kenya. Mixed-use projects with swathes of commercial office space, a serious hotel anchor and some prime residential to attract a new tranche of occupiers.
Google is already in Nairobi – albeit operating out of a Regus serviced office for now – and other major western brands are expected to follow.
“The Kenyan market out here has been extremely buoyant for the past eight months,” says Jonathan Yach, chief executive of Broll Kenya.
“We are seeing more investment than ever before and it is fuelling the sorts of huge schemes in Nairobi such as Garden City that will attract internationals and local companies and will, in turn, continue to drive that growth.”
The key will be whether sufficient infrastructure will be delivered in time to support the growth.
The construction of a major ring road around the city – effectively Nairobi’s version of the M25 – is helping fuel development. The effect is expected to be colossal as East Africa’s main connecting route – which runs from Mombasa all the way to Rwanda – also cuts straight through Nairobi’s Central business district. As a result, city centre congestion is horrific. The already considerable flow of local traffic is swelled by legions of trucks and lorries passing through, and the hope is that the completion of the new major highway avoiding the city centre will help to ease traffic problems.
The majority of development in the city is following the upgraded infrastructure and is heading east where the major highway is being upgraded from two to 12 lanes and where landholders are generally smaller. This avoids developers coming up against single families in control of large swathes of farmland likely to charge a huge amount for a purchase.
In a city where land prices can hit as much as $6m per acre anyway this makes life much easier.
The three Ls
The message for UK developers and investors keen to enter the Kenyan market – challenges and all – is that the door is wide open for business. But while the legal and land registry systems are relatively in line with the UK system – not to mention the expectation that REITS could soon be introduced to the Kenyan market – there are some quirks when it comes to doing business that are worth touching on.
First up – leases. They are the reverse of the way they work in the UK. In Kenya all commercial leases have to be over five years and most are five years and three months. There are no such things as rent reviews, rather index linked leases. This means if your rent is linked to Kenyan shillings your increases would currently stand at around 7.5-10% pa compared to around 5% if rent is linked to the US dollar.
That leads on to the second point which is how you can borrow and whether most developers do so in the local currency or in dollars. Many more are raising debt on the dollar now according to Havelock – though this does have an effect on the occupational leasing market. If the debt is done on a dollar basis then the desire is for rents to be delivered in dollars too.
While this is fine if you are renting to a big international company such as Google, it does not work for local companies that are getting paid in shillings. This has, in turn, added another complex layer to the development process on certain schemes.
So, the holy trinity of working in Kenya comes down to the three Ls. Leasing, Lending and Learning foul language. That, and investing in a powerful four-wheel drive with serious suspension and serious, serious brakes.
Emily.Wright@estatesgazette.com
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