BIG AMBITIONS AND BIG MONEY IN NAIROBI’S PROPERTY BOOM. But will it hold?
Visitors to Nairobi these days might be forgiven for thinking the city is one, giant building site. Multi- storey apartment blocks, palatial homes and stacks of offices seem to be springing up everywhere
One of the most ambitious and controversial developments is Tatu City. De- scribed by its creators as “the first holistic lifestyle city planned in Africa”, this 1,000-hectare development on a former coffee farm outside Thika, about 25 miles north of Nairobi, heralds a new era in urban planning in East Africa.
The multi-billion-dollar project is a 50/50 joint venture between Tatu City Ltd, and Renaissance Partners, the principal investing arm of Moscow- based Renaissance Group. It is expected to provide homes for around 62,000 people when it is finished in eight to 10 years, and will attract 23,000 visitors to its proposed shops, offices, stadium, technology park and hospital.
However, there have already been some bumps on the road. Several court actions have been lodged against the development by individual landowners but Renaissance Partners says it is keen to resolve these issues speedily and fairly.
Given the investment involved and the international backing, it is hard to see the development being halted. Moreover there is a desperate need for new housing in congested Nairobi.
Martin Tairo, a consultant with Triad Architects in Nairobi, says a 1948 master plan for a colonial capital did not anticipate such massive population growth because movement into Nairobi by locals was very controlled at that time.
But after independence, people flocked to the city, seeking work. This led to the 1973 Metropolitan Growth Strategy that involved the expansion of Nairobi along Thika Road and Mombasa Road to encourage the growth of Thika, Athi River and Machakos.
“Developments like Tatu City are therefore taking advantage of this strategy,” Tairo said. “I am positive it is not the only one. Since the government embarked on the improvement of infra- structure, many such developments that had been conceptualised before will be- gin to be realised,” he said.
The involvement of Renaissance Partners in Tatu City highlights the keen foreign interest in Nairobi’s property market. Analysts say foreign investors are attracted by the growing demand for homes and high returns; property has outperformed the stock market for the past 10 years.
“Nairobi, like so many sub-Saharan cities, is experiencing rapid urbanisation and will by 2020 grow to the 73rd largest city in the world from its current ranking of 108,” said Arnold Meyer, man- aging director and head of real estate, Africa at Renaissance Partners.
“This means an additional 2 mil- lion people will live in greater Nairobi in the next 10 years. Environments such as these offer ideal opportunities for local and international real estate players.”
Laila Macharia is chief executive of Scion Real, a specialised property investment firm that aims to mobilise $25 million for property and infrastructure projects in greater East Africa in 2011-2012. She says foreign interest built steadily from 2003 to 2007 before tapering off in 2008/09. Now, it is building again.
The factors driving the property boom include population growth, movement of people from rural areas to cities, and Kenya’s growing importance as a regional hub. And then there is the simple fact of supply and demand.
“There is increasing demand at all levels, but especially at the middle and lower-middle income brackets,” says Macharia. “There is also very constrained supply due to regulatory and supply- chain bottlenecks. With very high house- hold formation, the highest urbanisation rate in the world and our people rapidly becoming middle-class, we have the makings of a housing crunch in East Africa.”
There are some imbalances, however. HassConsult, which produces Kenya’s only property pricing index, points to an over-supply of large apartments in Nairobi.
“What we are generally finding is that there is a slight slowdown in the up-market segments where your huge villa-mansion type developments are reaching a plateau phase, whereas your mid-market developments are not,” said Farhana Hassanali, a property development manager for HassConsult.
“They are still going up because there is a huge, untapped market there. Demand, which is being prompted by the availability of mortgages, is much higher than supply,” she says.
According to HassConsult, housing prices rose by 8.8 percent year- on-year in the third quarter of 2010, but rents dipped by 3.6 percent as supply grew.
Given the collapse of property prices in some developed nations as part of the global financial crisis, one might wonder if there are similar risks in Kenya. Macharia believes people have learnt the necessary lessons from the property market collapse in the United States where significant relaxing of lending criteria, very low interest rates and over-supply helped trigger a bubble.
“This is not a real risk here at this time: most African countries have very different financial systems and demographics from the U.S. Further, many governments have internalised the lessons of the financial crisis and are put- ting in place regulatory measures to prevent this happening here,” she said.
Hassanali says only a very small percentage of Kenyans have mortgages which means there is huge scope for growth. But with the banks retaining quite stringent criteria for lending, the risks are not the same as in other countries.
Economic fundamentals are also positive in Kenya. The economy is expected to grow by at least 4.5 percent in 2010, up from 2.6 percent in 2009 and 1.7 percent the previous year in the wake of the election crisis.
One problem for developers, and indeed other businesses in Nairobi, is the regulatory environment, with Kenya consistently under-performing in regional surveys on ease of doing business.
“We have a lot of bureaucracy ... there is a lot of corruption. The process of getting approvals, the timeframe involved is very cumbersome,” says Hassanali.
“But as Nairobi picks up its position on the global map, I think there will be a call for a better regulatory framework. I certainly hope the government realises the role of planning in this because if we have unplanned growth we’ll end up with a really terrible situation.” The first residents are expected to move into Tatu City in 2012 with the development being carried out in 10 phases. The site will be divided into small village-like areas, with 30 percent of the land set aside for natural green belts.
“2012 is not a deadline, it is the earliest date in which fast-moving developers can let their buyers or tenants have access post-infrastructure,” says Meyer. “We are creating a world-class infrastructure on which local developers will be able to move into and execute their visions with services and amenities already in place.”
As for the ongoing court actions, Meyer says these are not unusual in a development of this scale.
“We wish to emphasise that the Tatu City project is founded on a deep commitment to fairness, probity, transparency and due process in all its dealings. Litigation and other contingencies are not unusual in projects of this magnitude and, in line with global best practice, we have put in place rigorous systems to justly, effectively and systematically engage with all stakeholders, contingencies and issues as they arise,” he says.
Tatu City is indicative of a wider trend of people moving to the outlying regions of Nairobi, something Hassanali expects to continue.
“Because of the current low land costs (in these areas), it allows developers to target the mid-income market,” she says. “Whether land costs will remain low or not remains to be seen.”
Macharia says Tatu City offers a blueprint for future developments, not just in Nairobi but across the region.
“We now have a cumulative housing deficit of several million homes in eastern Africa. The demand for mixed- income housing in master-planned developments is insatiable right now, especially if units are well-priced and properly phased.”
