Report tips Mombasa as an ideal location for real estate investment

Cytonn Real Estate, the development affiliate of Cytonn Investments, Monday released its Mombasa Real Estate Investment Opportunity Report 2018, which highlights that the investment opportunity in the County lies in the retail sector in areas with low retail space such as Kizingo, & Tudor, and in site and service schemes in areas earmarked for infrastructural developments such as areas along Mombasa-Mariakani Highway, & Port Reitz.

The report analyzes the current state of the real estate sector in Mombasa County in terms of uptake, rental yields, capital appreciation, and hence, total investor returns.

According to the report, the residential sector recorded average total returns to investors of 7.2% (rental yields of 5.1% and price appreciation of 2.1%).

The retail and office sectors attained yields of 8.3% and 5.1%, respectively, and the land sector recorded an average capital appreciation of 12.6%. Overall, the market recorded average rental yields of 6.2%, which is a decline of 0.9% points from the 7.1% registered in 2016.

The decline is attributable to reduced rental rates in the commercial office and retail sectors as developers seek to attract tenants. Factors such as the sluggish growth of the financial services industry, inadequate infrastructure, and fears of insecurity have caused the reluctance of investors to relocate their businesses to Mombasa, thus hampering the office sector’s performance.

“Our outlook for the performance of the real estate sector in Mombasa County is neutral. However, there exists an opportunity for investment in the retail sector in undersupplied areas such as Tudor on account of an expanding middle class and continued interest from retailers such as Shoprite, restaurants such as Coldstone, Domino’s Pizza as well as LC Waikiki who have recently taken up mall space in Mombasa County.” Said Johnson Denge Cytonn’s senior Manager, Regional Markets.

The residential sector also recorded slow uptake with an annualized uptake rate of 17.5% on average, attributable to increased supply of products for the upper-middle and high-end markets whose prices are out of reach for majority of the population, which is mostly comprised of low to lower-middle income earners.

However, the report noted that the Mombasa Market has potential for growth in future especially with the ongoing infrastructural developments, improved security and the return of political calm.

“The opportunity in the residential sector is in 3-bedroom and 4-bedroom apartments in the upper mid-end segment in areas such as Nyali, Kizingo, and Shanzu with the units recording returns of 7.8% and 9.8%, respectively, higher than the market average of 7.2%.  The commercial sector on the other hand is set to continue on a decline due to reluctance of investors to relocate business to the region, and the local population’s limited ability to occupy investment grade office developments. For land, the opportunity lies in site and service schemes in areas earmarked for infrastructural developments such as areas along Mombasa-Mariakani and Port Reitz roads with the land sector generally attaining a capital appreciation of 12.6% on average.” Said Wacu Mbugua, a Research Assistant at Cytonn Investments.

The drivers of real estate performance in Mombasa, according to the report, include; i) A Positive Demographic Dividend – with the population growing with an 8-year CAGR of 3.9%, which is 1.3% points higher than the national average population growth of 2.6% p.a, ii) Infrastructural Improvements – such as the Standard Gauge Railway (SGR) that started operations in June last year which has improved the ease of doing business in the County and thus attracted investment, iii) Tourism Sector – as Mombasa is recognized as one of the major tourist attraction areas in Kenya, partly due to its rich cultural heritage and also its proximity to the Indian Ocean creating demand for retail facilities,luxury dwellings and accommodation facilities, and iv) Strong Economic Growth –  recording an average GDP Per Capita of USD 935, 34.7% higher than the national average of USD 694 according to a 2015 study by the  World Bank.

Out of the four real estate themes under evaluation in Mombasa County, one theme that is land, has a positive outlook, 2 themes, that is, retail and the residential sectors have a neutral outlook while one theme, that is office has a negative outlook, thus the outlook for the Mombasa real estate market remains neutral.