Topical Feature: Investor “Starter Pack” in Rental Properties

When it comes to rental properties, it is a simple relationship between a landlord and a tenant. The landlord owns property and chooses to rent it out to the tenant. Most landlords have purchased their rental properties using a mortgage and they are therefore responsible for keeping up and paying the mortgage, taxes and costs of maintaining the property.

The rent amount charged will depend on all the costs pertaining to the property. The rent should therefore just be enough to cover the costs. However, the landlord may choose to charge more rent so as to make a profit; in any case wasn’t that the whole point of the investment? Charging more rent for profit isn’t necessarily a good thing in the short term as it may not be attractive to potential tenants. The most common strategy used by landlords is to hold off the profit motive and charge just enough to cover the costs and once the rent is paid off then majority of the rent will become profit.

Another way to look at rental property is on the value appreciation over time which would mean that the landlord will have a more valuable asset! So why not earn some cash on property that will potentially be worth a lot more in future?

All this may seem pretty rosy at first but there are a couple setbacks a landlord can face. The landlord could end up with a terrible tenant who damages who damages property or the risk of not getting a tenant at all! The matter of finding the right tenant would depend on finding the right property that is in an area with low vacancy rate and that is ‘rentable’.

The typical difference between a rental property and stocks, for example, is the amount of responsibility that comes with being a landlord. As a landlord you are responsible for the functioning of the rental property but if this becomes an inconvenience to you then there are very willing and able property managers who can do the job for you.

Global Trends

Millennial growth is the ultimate bet for landlords looking to earn higher returns in the rental market especially in the apartment market. Compared to single home units, there has been a surge in multi-family permits which is expected to cause a spike in new supply especially in the higher end market.

In the US, over a 5 year period, there has been a 20% average increase in asking rent in the housing market. However since 2011, there has been a slowdown in annual rent growth from 8% to 3%. The supply is expected to grow by more than 50% but it is still highly unlikely that demand would grow by more than that so as to realize the landlords greater rent.

What the US market is likely to experience is a downward pressure on rent as the new apartments compete to attract tenants by offering them generous concessions which would force owners of existing buildings to lower rent or face the risk of losing tenants.

To note is that most American developers focused on the higher end market which is now experiencing a potential downturn due to rising supply. However, for moderately priced apartments rents are continuing to rise more quickly. Attractive areas of development have been seen in student housing, malls and office space.

Current trend in the global rental market is the ‘rent then buy’ option which would give potential buyers an option of renting a property before deciding to purchase it. This is an interesting way of boosting the real estate market. How this works is that the potential buyer identifies an ongoing development of interest, signs a lease of let’s say 2 years and also puts up an advance rental of let’s say 10% of the property’s purchase price and a 2% (for example) refundable deposit. Once this is done he can move into the unit. If the potential buyer decides to purchase the unit, then the developer will refund the full rental deposit and the advance deposit. If they choose not to purchase the unit then they would only refund the deposit.

Kenya Trends

The capital city of Kenya, Nairobi, is rapidly urbanizing primarily driven by rural push factors rather than urban industrial growth. The pull that drives rural migrants into Nairobi is the lure of ‘a better life’ leading to a surge in demand in low income housing. In totality demand outstrips supply in some areas primarily due to higher interest rates. Due to this surge in demand, many real estate investors are looking to play in this market and this is expected to cause supply to triple in 2016. To note, some areas such as Athi River, Komarock and Mlolongo are facing the greatest housing supply in the lower end market as developers look to exploit the increasing demand.

Currently, there is a 150,000 deficit in low income housing while a surplus is being experienced in the higher end market. This has had an effect of placing a downward pressure on rent as supply continues to outstrip demand. A major target market in the high end market were expatriates who have actually reduced in size due to security issues thus lowering demand over the years. This is why there is a shift in real estate investor focus from the higher end market to the lower end market.

The service apartments market is a variation of the typical rental investment that has been growing over the years. Kilimani and Westlands have the largest number of serviced apartments while Upperhill continues to be a key interest area as it is a significant office hub. In 2016, we expect to see a growth in serviced apartments in and around office areas and a shift in expatriates choosing them over single home units in the higher end market.

The office market is expected to expand in 2016 as a surge in new office areas spring up around Riverside drive and Parklands. The premier office areas remain to be around Waiyaki Way and Westlands for many tenants. Due to the expected increase in supply in 2016, we see a slower increase in average asking rents as the total take up of office space has been fairly stable since 2013 with a slight downward trend compared to supply that has been more than increasing.

This week in the Kenyan Real Estate Market…

According to popular real estate site Lamudi, these are the current trends in Nairobi for the week:

Interest Rate Watch

T-bills rates have remained fairly stable over the past 3 weeks with a downward trend noted across the three T-bills. The largest decline week-on-week was in the 182-Day T-bill rate followed by the 364-Day T-bill rate.

The stable downward trend in T-bill rates is an indicator of a decline in other interest rates in th market alluding to lower mortgage rates. This is in turn means cheaper credit will be available to boost investment in the real estate market.

Market Data (Weekly Average)