Category: Uncategorized

 

 

Development of Flats at Ngong. Return on Investment in Sale vs Rental options.

Cost Item	Kshs	%
Land	2,500,000.00	2.945889894
Preliminary/council approvals	294,000.00	0.346436652
Construction	63,000,000.00	74.23642534
External Works	3,150,000.00	3.711821267
Contingency	1,260,000.00	1.484728507
Professional fees. 4%	2,520,000.00	2.969457014
Project Management fees. 1%	630,000.00	0.742364253
Marketing	170,000.00	0.200320513
Financial Charges. 18% p.a interest	11,340,000.00	13.36255656
Total	84,864,000.00	100
Financing Plan	Kshs	%
Developer	21,864,000.00	25.76357466
Debt Finance	63,000,000.00	74.23642534
Presales	12,000,000.00	14.14027149
Total	84,864,000.00	114.1402715
PROFIT
SALE OPTION
TOTAL SALES FOR 30 UNITS	120,000,000.00
TOTAL EXPENDITURE	84,864,000.00
NET PROFIT	35,136,000.00
% Profit Margin	41.40271493
Take home ammount.	37,636,000.00
RENT OPTION
Rent per unit	18,000.00
No. of Units	30.00
Rent for 30 units monthly	540,000.00
Annual rent	6,480,000.00
Return on Investment. Years.	13.10

Conclusion.

 

If the project is sold at 100%, the Returns are quite high. If the project is rented out, returns will be in 13 years which is within the 15 year period hence a viable option.

 

The project can have 50% of units for sale to cater for the high interest rates cost of financing then the 50% of the units that remain are rented out.

This way, the high cost of finance/borrowing is mitigated by sale of units and the client remains with 15 units from which to collect rent from.

Francis Gichuhi Kamau, Architect.

RETURN ON INVESTMENT FOR KASARANI ,SANTON AREA 1 BEDROOMED AND BEDSITTER UNITS.

1 bdm	area	number	rent	rent for 3 units	annual rent	construction cost	ROI
	29	3	10000	30000	360,000.00	2,175,000.00	6.041667
Bedsitter	area	number	rent	rent for 3 units	annual rent	construction cost	ROI
	19	3	6000	18000	216,000.00	1,425,000.00	6.597222
http://muthaiga.olx.co.ke/clean-spacious-1-brm-flat-15-000-iid-562086153
http://muthaiga.olx.co.ke/spacious-bed-sitter-to-let-iid-561988705

 

Conclusion,
The Return on Investment at an average of 6 years is impresive. This means a lowering of rent to enable competitiveness can be put in place if need and demand/supply arises.

Francis Gichuhi Kamau, Architect.

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

https://maps.google.com/?ll=-4.384677,39.549472&spn=0.006055,0.010568&t=h&z=17

Housing costs in Kenya.  Why cost of acquiring a home in Kenya is high.

On average, Kenya has one of the lowest construction rates in the world. Kenya also has one of the highest land prices in the world, much higher than in developed countries such as USA.

Housing cost can be divided into 3 basic categories.

1.Low cost

2.Middle cost

3.High cost

Low cost housing.

This costs an average of kes 20,000 per m2 to construct. These houses are mostly in areas such as Kayole, and over 2 km from tarmac in major towns around Nairobi.

The breakdown is as below.

low cost
Cost Item	Kshs	%
Land	500,000.00	16.58925017
Preliminary	20,000.00	0.663570007
Construction	2,000,000.00	66.35700066
External Works	20,000.00	0.663570007
Contingency	4,000.00	0.132714001
Professional fees	100,000.00	3.317850033
Project Management fees	10,000.00	0.331785003
Marketing	0.00	0
Financial Charges	360,000.00	11.94426012
Total	3,014,000.00	100

 

From this, we can see land cost is around 16.5 % of total housing costs. This is more or less within the international averages of 20%.

This means that in low cost housing, bank interest at 11.9% of total housing costs is what needs to be adjusted so as to reduce costs.

 

Middle cost housing.

 

middle
Cost Item	Kshs	%
Land	1,500,000.00	32.34501348
Preliminary	20,000.00	0.431266846
Construction	2,500,000.00	53.9083558
External Works	25,000.00	0.539083558
Contingency	5,000.00	0.107816712
Professional fees	125,000.00	2.69541779
Project Management fees	12,500.00	0.269541779
Marketing	0.00	0
Financial Charges	450,000.00	9.703504043
Total	4,637,500.00	100

 

In middle cost housing, using the average cost of construction at kes 25,000 per m2 for a 100m2 house, the land cost is 32% of the total housing cost. This is higher than the international average of 20%.

Such areas as Kitengela, Ngong, Ruiru where a 1/8^th piece of land costs 1.5m will give the scenario above.

The financial charges, with interest rate at 18% is also quite high.

Solution will be for Government to look for ways that will reduce interest rates and reduce cost of land.

 

High cost.

high cost
Cost Item	Kshs	%
Land	3,000,000.00	40.62563478
Preliminary	20,000.00	0.270837565
Construction	3,500,000.00	47.3965739
External Works	35,000.00	0.473965739
Contingency	7,000.00	0.094793148
Professional fees	175,000.00	2.369828695
Project Management fees	17,500.00	0.23698287
Marketing	0.00	0
Financial Charges	630,000.00	8.531383303
Total	7,384,500.00	100

 

For high cost housing, an abnormally huge percentage of housing costs are taken up by land. The 40% land costs are way beyond the average 20% in other parts of the world.

In high class neighborhood such as Kahawa sukari, garden estate etc, most of the housing cost is taken up by the land.

Conclusion.

Land price appreciation in Kenya on average has a rate of between 25 to 100% annually.

Last year the price of 1 acre of land in Upper Hill CBD was kes 250m.

Current asking prices for the same acre is kes 400m. This represents a 60% appreciation rate per year.

Last year a residential plot in Syokimau 1km form tarmac was going for kes 1.5m. Its currently selling for 2.5m. This represents 66% appreciation annually.

This appreciation on land price is higher than the international average of 5 to 10%.

Construction cost for a middle class building in 2008 was kes 18,000 per m2. After 5 years, it has gone to kes 25,000.

This represents 8% annual appreciation rate which is normal and in tandem with the international rates.

Clearly, Kenyan land appreciation rates have gone viral and only the Land Commission can tame this with the introduction of Idle land taxation.

Francis Gichuhi Kamau, Architect.

info@a4architect.com

		area	cost	cost per floor	no of units per floor	rent	Rent per year	ROI
bedsitter rent	6000	22	550,000.00	5,500,000.00	10	60000	720000	7.64
1 bdm rent	8000	30	750,000.00	4,500,000.00	6	48000	576000	7.81
2 bdm rent	11000	60	1,500,000.00	6,000,000.00	4	44000	528000	11.36
3 bdm rent	15000	100	2,500,000.00	5,000,000.00	2	30000	360000	13.89

Bedsitters and I bedroomed will give a faster RETURN ON INVESTMENT than 2 and 3 Bedroomed units. These are more desirable in terms of profitability.
Francis Gichuhi Kamau, Architect.