Kenya GDP Growth and Its Impact on Real Estate Investments

Kenya's Q3 GDP Growth and Its Impact on Real Estate Investments

Kenya's economic performance in the third quarter of 2024 has significant implications for the real estate sector. This article delves into the latest GDP growth data, explores the factors driving this growth, and analyzes its potential impact on various real estate investment opportunities in Kenya, including those in Mombasa and Kisumu.

Kenya's Q3 2024 GDP Growth

According to the Kenya National Bureau of Statistics (KNBS), Kenya's economy expanded by 4.0% in the third quarter of 20241. This represents a deceleration compared to the 6.0% growth observed in the same period of 20231. While this slowdown may raise concerns, it's crucial to understand the underlying factors and their potential implications for the real estate market.

The manufacturing sector recorded a real GDP growth of 2.3% in the third quarter of 2024, slightly lower than the 2.8% growth recorded during the same period in 20231. This growth was largely driven by the food subsector, particularly sugar production, which rose from 77,686.0 metric tonnes in the third quarter of 2023 to 231,052.6 metric tonnes in the third quarter of 20241. Production of soft drinks also expanded by 27.5%, reaching 164,797.3 thousand liters in the quarter under review1.

Several other sectors demonstrated growth, as shown in the table below:

Despite the overall positive growth, certain sectors experienced contractions. Construction activities contracted by 2.0%, and Mining and Quarrying declined by 11.1%2. These contractions were influenced by factors such as reduced credit extended to construction enterprises and a decline in cement consumption3.

Economic Outlook and Forecasts

While Q3 2024 showed a slight deceleration in GDP growth, the overall economic outlook for Kenya remains positive. The global outlook is being supported by easing global inflation and supply chain constraints4. At the regional level, growth in Sub-Saharan Africa is expected to rebound to 3.6% in 2024 and 4.2% in 2025, driven by improved economic activities as the adverse impacts of prior weather shocks subside and supply chain constraints gradually ease4.

The World Bank projects an average growth of 5.2% for Kenya during 2024-20265. This projection is based on factors such as increased business confidence, the implementation of new trade agreements, and continued private sector growth5.

The African Development Bank (AfDB) offers a more optimistic forecast, with projected GDP growth of 5.4% in 2024 and 5.6% in 20256. The AfDB highlights the services sector and household consumption as the primary drivers of this growth6.

Historical Trends in GDP Growth and Real Estate Investment

Examining historical trends provides valuable context for understanding the relationship between GDP growth and real estate investment in Kenya. Over the past two decades, Kenya's real estate market has experienced significant growth, with its contribution to GDP increasing from 10.5% in 2000 to 13.8% in 20167. This growth has been driven by factors such as infrastructure development, stable GDP growth, and rapid urbanization7.

Data from the World Bank reveals that Kenya's real GDP expanded at an estimated 5.4% in 2023, up from 4.8% in 20225. This growth was supported by a rebound in the agricultural sector and moderate growth in services5. However, it is important to note that Kenya's GDP growth averaged 4.6% between 2019 and 2023, lower than its 10% target in Vision 20306.

Building on these historical trends, let's examine how Kenya's Q3 2024 GDP growth might impact various segments of the real estate market:

Impact on Real Estate Investments

The performance of different real estate investment types in Kenya is closely linked to economic growth. The Kenyan real estate market boasts significant untapped potential. However, the main challenge is its inherent capital-intensive nature, which has been exacerbated by the recent surge in the cost of capital8. This creates both demand and supply-side constraints8.

 

Residential Real Estate

The residential sector in Kenya has shown resilience, with average total returns increasing to 6.0% in the first half of 202311. This positive trend is expected to continue, driven by factors such as population growth, urbanization, and government initiatives like the Affordable Housing Program9. The nationwide housing deficit in Kenya stands at 200,000 units annually, with an accumulated deficit of over 2 million units7. The largest demand has been for affordable housing to cater to the 61% of urban dwellers who live in slums, and there is also a shortage in student accommodation, which accounts for 40% of the deficit7.

Commercial Real Estate

The commercial real estate sector is undergoing a period of adjustment, with the rise of hybrid and remote working models impacting demand for traditional office spaces9. However, Kenya's continued recognition as a regional business hub continues to attract multinational companies expanding into the continent, which contributes to the demand for commercial real estate, particularly in the office sector12. Landlords are increasingly opting for dollar-denominated rents to mitigate forex losses due to the weakening shilling12.

Industrial Real Estate

Industrial and logistics real estate is experiencing an upward trend, with occupancy rates for industrial properties in Nairobi reaching over 85% in 20239. This growth is fueled by the expansion of e-commerce and increased investment in warehousing to support both domestic and cross-border trade9. The growth in transportation and storage activities directly contributes to the demand for warehouses and fulfillment centers, making industrial real estate a promising investment opportunity2.

Real Estate Market in Mombasa

Mombasa, a coastal city in Kenya, offers a unique real estate market with its own set of dynamics. Prime residential developments like Vipingo Ridge, Awali Estate, Pazuri Homes, and Vipingo Beach Estate have flourished, offering an alternative haven for those seeking exclusivity and tranquility13. In the realm of affordable housing, Mombasa County has made significant strides. In 2023, it unveiled 584 housing units through the Buxton Point, Phase I project13.

Nyali has established itself as a prestigious office suburb within Mombasa, commanding higher rents compared to Mombasa Island13. Monthly rates in Nyali typically range from KES 70 to KES 100 per square foot, while in Mombasa Island, they range from KES 60 to KES 9013. Service charges generally fall between KES 20 and KES 35 per square foot in both areas13.

The rental market in Mombasa is also experiencing a shift, with an increase in demand for furnished apartments14. These apartments offer convenience and flexibility, making them particularly appealing to expatriates, short-term visitors, and professionals relocating to the city14.

Real Estate Market in Kisumu

Kisumu, a city in western Kenya, presents a diverse array of investment opportunities in the real estate market. Residential properties, ranging from affordable apartments to luxurious waterfront villas, are in high demand as the city experiences rapid urbanization and population growth15. Commercial real estate, including office spaces, retail outlets, and industrial facilities, is also witnessing increased interest from businesses looking to establish a presence in Kisumu's thriving market15.

The residential sector in Kisumu is relatively nascent, with most of the mega developments, such as Victoria Gardens in Riat Hills, Translakes Estate in Mamboleo, and Lake View Breeze in Milimani Estate, coming up in the last 5 years16. The increase in developments is attributable to government decentralization and urbanization16.

Kisumu City enjoys the advantage of robust tourism, strategic location, infrastructure, positive demographics, positive economic growth, and a rich culture17. These factors are contributing to the massive growth of the real estate sector in the town17.

Expert Opinions and Market Outlook

Experts suggest that the real estate sector in Kenya is poised for continued growth, albeit with some challenges. Cytonn, a leading investment firm, projects a neutral outlook for both the residential and commercial office sectors in the Nairobi Metropolitan Area (NMA)12. They cite factors such as positive population demographics, government initiatives, and infrastructure development as key drivers of growth12.

However, challenges such as a weakening shilling, high inflation, and the rising cost of construction could weigh down the sector's performance12. Despite these challenges, the long-term prospects for real estate investment in Kenya remain positive, with a projected market volume of $944.1 billion by 202918. Kenya's real estate sector in 2024 exhibited notable growth and is expected to reach a value of $733.4 billion (Sh94.5 trillion), with the residential segment dominating18.

Government Policies and Initiatives

The Kenyan government has implemented several policies and initiatives aimed at supporting the real estate sector. The Affordable Housing Program, a key initiative, seeks to build 500,000 affordable homes by 20259. This program offers incentives for developers, including tax breaks and streamlined permit processes, making it an attractive opportunity for real estate investors9. The Affordable Housing Program not only aims to narrow the housing gap but also presents lucrative opportunities for investors seeking government-backed projects in the lower-income housing segment9.

Other government initiatives include infrastructure development projects, such as the Nairobi-Mombasa Expressway and the Konza Technopolis, which are expected to boost property values in surrounding areas9.

Current State of the Real Estate Market

The Kenyan real estate market is dynamic, with varying trends across different segments. While the residential sector remains strong, the commercial sector is experiencing shifts due to changing workplace dynamics9. Rising inflation and increasing interest rates have affected real estate transactions in several ways: investors have been risk-averse, leading to low demand for real estate products and low uptake of loans; financial products, including mortgages, have been increasingly costly due to rising interest rates and the weakening Kenyan shilling; the high cost of living has prompted rent and loan payment defaults and forfeitures; construction materials remain expensive; and there has been a greater appetite for affordable housing solutions19.

The use of proptech solutions, such as Airbnb, xPodd, virtual reality site visits, and smart homes, is also increasing in Kenya19. Furthermore, 3D printing building technology has the potential to reduce transaction costs, make land transactions easier, and improve construction efficiency19.

Overall, the real estate market in Kenya is expected to maintain an annual growth rate of 3.84% from 2024 to 2028, reaching a market volume of KES US$811.40 billion by 202810. This growth is driven by rapid urbanization and continued investment in the sector10. Kenya's real estate sector is on an upward trajectory and continues to experience substantial growth, with a surge in investments10.

Conclusion

Kenya's Q3 2024 GDP growth, while slower than the previous year, indicates continued economic progress with positive implications for the real estate sector. The growth in key sectors like agriculture, transportation, and real estate activities, coupled with government initiatives and infrastructure development, creates a favorable environment for real estate investment.

While challenges such as inflation and rising construction costs persist, the long-term outlook for the Kenyan real estate market remains optimistic. Investors should carefully analyze market trends, government policies, and expert opinions to identify lucrative opportunities in this dynamic market. Based on the analysis presented in this article, it appears that affordable housing and industrial properties are likely to yield the highest returns in light of the current economic conditions and government initiatives.

As a leading real estate company in Kenya, South Front Properties is well-positioned to guide investors through the complexities of the Kenyan real estate market. Our expertise and in-depth market knowledge enable us to provide tailored solutions and assist investors in making informed decisions that align with their investment goals. We specialize in identifying and developing promising projects in the affordable housing and industrial sectors, offering investors access to high-growth opportunities with strong potential for returns.

Works cited

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