Real estate vs equity and bond markets: Which way investors?

Over the last decade, a local realtor has been releasing quarterly reports on land and property development growth.

Barring minor differences with other such listings, Hass Consult’s Quarter Two report for 2024 shows how land in Nairobi and satellite towns continues to appreciate. For example, an acre in Nairobi’s Upperhill has almost topped Sh500 million.

Other city suburbs where an acre of land has appreciated astronomically include Westlands (Sh472.4 million), Parklands (Sh419.9 million) and Kilimani (Sh401.8 million).

With such high land prices coupled with what some have suggested as a glut in residential units in some locations, the debate about whether to invest in the “marathon” real estate or to put your money on “sprinting” equity markets, such as treasury bills or bonds for quick returns, is not dying anytime soon.

Proponents of each investment vehicle have reasons for choosing their route as the best way to achieve financial security.  Following one such online banter, a writer stated that proponents of each investment category were like workers whose only tool in their hands was a hammer.

Every problem becomes a nail because they hardly enlarge the scope of possibilities presented by each scenario. “It all depends on what one wants,” says Ian Kahara, a developer in Kiambu and Kajiado counties.

“Someone seeking passive income without too much hassle will clearly opt for treasury bills or bonds. On the other hand, someone wishing to build long-term term wealth with some reasonable capital will opt for real estate.”

Trading in treasury bills and bonds allows the government to raise funds for projects while paying buyers some interest since the papers are sold at a discount and redeemed at face value.

Such trading is considered low-risk since the papers are backed up by the government. However, they tend to have very low yields, usually below inflation rates, and can be affected by other factors such as the politics of the day or corrupt dealings around the projects funded by the proceeds.

On the other hand, real estate portfolios can be quite wide considering some may invest in land only, residential, commercial, hospitality or industrial units.

Realtors agree that returns on investment depend on different factors, foremost among them being location. Rental income and property value appreciation are two key routes that investors in the sector use for long-term financial gains.

Price volatility

Edwin Dande, executive director and chief executive officer at Cytonn Investments Management, says a key tenet of any investment is diversification with real estate being an essential component.

Diversification, he says, lowers potential risks and hedges one against price volatility in any given business segment.

“I would recommend any investor to put 25 per cent of his portfolio in real estate. The sector provides consistent long-term returns that are not correlated to the volatile equity returns, hence the need for diversification,” says Mr Dande.

In Kenya, land has been a key indicator of performance in the real estate sector. Apart from those who acquire it for immediate construction projects, some buy it for speculation purposes, hoping to strike a jackpot when the time and price are right. This can take years.

According to Hass Consult’s Q2 report, land outperformed other asset classes such as equities, bonds and savings.

For example, the report shows that if one had invested Sh1 million on land in some of Nairobi’s satellite towns in 2007, it would be worth Sh12.06 million today.

Had the same amount been invested in bonds over the same period, it would have returned Sh4.14 million and Sh1.61 million had the money been invested in a savings account.

The government-initiated Affordable Housing Programme (AHP) hinges on the availability of State-owned land for construction, thus lowering the cost of houses.

“The government intends to make serviced land available to private developers through a public-private partnership (PPP) to support a large-scale supply of affordable homes. In addition, the government will provide infrastructure such as water, sewage, access roads and power to attract the private sector,” says the Kenya Institute for Public Policy Research and Analysis (Kippra).

Informal settlements

In the plan, the government hopes to build about 250,000 housing units annually to house the 6.5 million people in slums and informal settlements across the 47 counties.

How AHP will affect other investors in the real estate sector remains to be seen.

In the meantime, the Hass Consult report shows that developers see renewed opportunities for commercial and residential real estate in Upper Hill as the current supply wears thin.

But like any other investment, real estate also has its risks, key among them the market volatility where cyclical fluctuations, high interest rates or the laws of supply and demand suppress expected returns.

The construction industry is also cost intensive where cash is sunk into projects that take years for sales to close and requires an investor to have extra funds to cover unexpected expenses. Then there are operational costs, including hiring caretakers in the case of rentals and property and maintenance managers.

“The increase in the cost of credit and that of building inputs has negatively affected real returns for developers, limiting the propensity to absorb higher land costs in areas with lower purchasing power,” says the Hass Consult report.

The real estate sector has seen phenomenal growth in the last 15 years, spurred by massive government spending on infrastructure projects such as roads, railway lines, and power projects. Developers saw a sector that guaranteed decent returns on investments and a panacea to financial freedom.

To financial institutions, however, the sector is a double-edged sword. While it controls billions in terms of property that banks use as collateral, the industry sits right on the top of non-performing loans list.

Data from Kenya National Bureau of Statistics shows that gross loans advanced to the real estate sector increased by 3.7 per cent to Sh499 billion in Q1 of 2024, from Sh481 billion in Q1 of 2023.

However, gross Non-Performing Loans (NPLs) in the sector shot up by 15 per cent to Sh117 billion in Q1 of 2024, from Sh101.70 billion in a similar quarter last year.

“This can be attributed to delayed repayments resulting from a challenging business environment, higher existing taxes and new tax implementations, and, increased loan interest payments following Central Bank rate hikes,” says a Cytonn analysis.

Owing to the challenges, the real estate sector can be down, but never out. Government papers too, guarantee some quick returns, and it is up to the investor to decide which route to take.