Current market rate for Nairobi CBD land is kes 300,000,000 an acre.
Assuming this land price is doubkled, to kes 600,000,000 an acre, would the land still be profitable?
Will it significanlty affect rental prices?
We can answer these questions by calculating Return on Investment on an assumed land cost of kes 600,000,000 per acre for a 10 and 20 storey building.
We will use known factors such as below
1. cost of NEMA and City Council Licencing at 0.1 and 1.3% of construction cost.
2. Cost of construction per m2 at kes 60,000.
3. Cost of consultancy at 12% of estimated cost of construction.
4. Cost of financing at 15% per annum for 2 years.
20 storey building.
|
|
|
| Cost Item |
Kshs
|
%
|
| Land |
600,000,000.00
|
11.18660829
|
| Preliminary |
42,336,000.00
|
0.789327081
|
| Construction |
3,024,000,000.00
|
56.38050577
|
| External Works |
151,200,000.00
|
2.819025288
|
| Contingency |
60,480,000.00
|
1.127610115
|
| Architectural fees |
181,440,000.00
|
3.382830346
|
| Quantity Surveying |
60,480,000.00
|
1.127610115
|
| Structural Engineering |
60,480,000.00
|
1.127610115
|
| Elec/Mech Engineering |
30,240,000.00
|
0.563805058
|
| Interior Design/Landscaping |
15,120,000.00
|
0.281902529
|
| Legal fees |
30,240,000.00
|
0.563805058
|
| Project Management fees |
30,240,000.00
|
0.563805058
|
| Marketing |
170,100,000.00
|
3.17140345
|
| Financial Charges |
907,200,000.00
|
16.91415173
|
| Total |
5,363,556,000.00
|
100
|
|
|
|
|
|
|
|
|
|
| Financing Plan |
Kshs
|
%
|
| Developer |
2,142,996,000.00
|
39.95476136
|
|
|
|
| Debt Finance |
3,024,000,000.00
|
56.38050577
|
| Presales |
680,400,000.00
|
12.6856138
|
| Total |
5,363,556,000.00
|
109.0208809
|
|
|
|
| PROFIT |
|
|
| TOTAL SALES FOR 20 floors |
6,804,000,000.00
|
37800
|
| TOTAL EXPENDITURE |
5,363,556,000.00
|
|
|
|
|
| NET PROFIT |
1,440,444,000.00
|
|
|
|
|
| % Profit Margin |
26.85613798
|
|
|
|
|
| Take home ammount. |
2,040,444,000.00
|
|
|
|
|
| Rent |
56,700,000.00 |
|
| Rent per year |
680,400,000.00 |
|
| ROI |
7.882945326
|
|
In a 20 storey building with land costing kes 600m per acre, constructed at 75% ground coverage and 70% of built up area rented or sold out, the building will return its investment in 7.8 years at a rent of kes 150 per square foot. Current rents in Nairobi are close to this figure at the moment.
10 storey building.
Assuming the same factors as above, but in this case, the building is constructed on only 10 floor levels, the arithmetics are as below.
|
2
|
|
|
|
|
|
|
|
|
|
|
|
| Cost Item |
Kshs
|
%
|
| Land |
600,000,000.00
|
20.09038665
|
| Preliminary |
21,168,000.00
|
0.708788841
|
| Construction |
1,512,000,000.00
|
50.62777436
|
| External Works |
75,600,000.00
|
2.531388718
|
| Contingency |
30,240,000.00
|
1.012555487
|
| Architectural fees |
90,720,000.00
|
3.037666461
|
| Quantity Surveying |
30,240,000.00
|
1.012555487
|
| Structural Engineering |
30,240,000.00
|
1.012555487
|
| Elec/Mech Engineering |
15,120,000.00
|
0.506277744
|
| Interior Design/Landscaping |
7,560,000.00
|
0.253138872
|
| Legal fees |
15,120,000.00
|
0.506277744
|
| Project Management fees |
15,120,000.00
|
0.506277744
|
| Marketing |
89,775,000.00
|
3.006024102
|
| Financial Charges |
453,600,000.00
|
15.18833231
|
| Total |
2,986,503,000.00
|
100
|
|
|
|
|
|
|
|
|
|
| Financing Plan |
Kshs
|
%
|
| Developer |
1,376,223,000.00
|
46.08142031
|
| |
|
|
| Debt Finance |
1,512,000,000.00
|
50.62777436
|
| Presales |
359,100,000.00
|
12.02409641
|
| Total |
2,986,503,000.00
|
108.7332911
|
|
|
|
| PROFIT |
|
|
| TOTAL SALES FOR 20 floors |
3,591,000,000.00
|
18900
|
| TOTAL EXPENDITURE |
2,986,503,000.00
|
|
|
|
|
| NET PROFIT |
604,497,000.00
|
|
|
|
|
| % Profit Margin |
20.2409641
|
|
|
|
|
| Take home ammount. |
1,204,497,000.00
|
|
|
|
|
| Rent |
28,350,000.00 |
|
| Rent per year |
340,200,000.00 |
|
| ROI |
8.77866843
|
|
If the rent is kept at kes 150 per square foot, the Return on Investment is 8.7 years.
This is a very profitable venture.
Conclusions.
Even if the current land price per acre for Nairobi CBD properties rise by 100%, the rent increase will be very slight if the developers construct at 75% ground coverage and keep the floor levels to 10 and above.
Ths means the land price will keep on increasing until such a time that the cost will affect the rent significantly.
Assuming a worst case scenario where land price increases to kes 1.2billion per acre, and the developer constructs only 10 floors, the Return On Investment will be within 10.5 years.
Internationally, Return on Investment of over 15 years marks the point of unviability. Such a Return on Investment on a 10 storey building sitting on a 1 acre piece of land will only be reached if the land price reaches kes 2.8 Billion.
Assuming the current rate of appreciation per year of land price at 50%, this will be reached after 17 years in the year 2030.
Francis Gichuhi Kamau, Architect.
info@a4architect.com
