Rental income not favourable for small investors

There is a residential project in Lang’ata, Nairobi with three-bedroom apartments and a domestic servant quarters going for Sh12 million, and a three-bedroom without a servant quarters going for Sh10.5 million.

A chat with the sales executive of this project piqued my curiosity when he elaborately described the profile of his new clients, buyers of the apartments.

Majority of the buyers were investors buying the units to rent out as a long-term investment. The rental income would be the return on their investment.

Profitability

This raised the question, is Kenya’s residential renting market profitable for small-time investors?

A property listing check reveals that a three-bedroom house in Lang’ata rents for between Sh40,000 to Sh60,000. In the best conditions where there are no maintenance expenses involved, the units never lack a tenant and the buyers get maximum returns from their minimum investment. At Sh60,000 per month, the rental-income return would be Sh720,000 per year.

The Sh720,000 rental income per year is a 6.9 per cent return on a Sh10.5 million investment.

Despite the hypothetical favourable conditions, a 6.9 per cent return is considered minimal in many investment circles.

Treasury Bills, otherwise known as T-Bills are considered the safest investment because they have a guaranteed return. This comes from the fact that the returns can only be defaulted on when the Central Bank itself goes bankrupt, which is quite rare. Because they are so safe, they are also the securities with the least returns - the higher the risk, the higher the returns.

In order for other forms of investment to attract seasonal investors, the return rates have to be higher than T-Bill rates.

Mature markets

The residential rental market is profitable in more mature markets where the concept of buying finished units to rent out was conceived.

As with other investments in Kenya, as long as the Government continues to borrow money from the market at high interest rates, investments in the rental residential market are not worth investing in, considering their low returns.

There are however, particular groups of people who invest in real estate to gain from price increases in the future.

—koguoko@standardmedia.co.ke