Kenya and Rwanda will be the focus for private equity real estate firms Fusion Capital and Taaleri as they look to grow their investments in the region’s real estate market.

Although Fusion did not reveal the value of its next fund, the company said it would invest 50 per cent of it in Kenya, 30 per cent in Rwanda, and the rest in Uganda.

Fusion Capital executive director of real estate Daniel Kamau said the bulk of their investments would go to Kenya because the country has a vibrant economy and increased appetite for residential and commercial space driven by the business and global bodies that are setting up there.

According to Cytonn’s analysis of Kenya’s real estate retail sector, Perspective on Kenya’s Retail Sector published in July 2016, “Residential units generate an average rental yield of 5 per cent, while commercial and retail sectors generate an average yield of 9 per cent and 10 per cent respectively in Nairobi.”

High returns

Cytonn Real Estate estimates that investors in Kenya’s real estate earn 25 per cent returns per annum, compared with an average of 10 per cent per annum for traditional classes.

Fusion Capital says the challenging business environment in Uganda, coupled with the high costs of construction that eat into property developers’ earnings, led to the lower investment in the country. A Knight Frank Uganda real estate and property market outlook projects a mixed picture.

The market is characterised by a combination of high interest rates, weak shilling and a low demand for both prime office and residential properties. The proposed increase in excise duty charged on a 50 kg bag of cement from $0.15 to $0.29 is forcing cost-conscious property developers to hold back their investments.

This “could raise market prices, depress consumer demand and discourage new investments,” the Knight Frank Research notes.

Knight Frank says Uganda’s office sector has been the hardest hit of all the property sectors over the past 24 months, with prime rents falling to as low as $12 per square metre in some properties. However, during the first half of 2016, yields for office space remained stable, ranging between 9 per cent and 10 per cent for grade A offices and 8 per cent for grade B offices.

In Rwanda, Fusion teamed up with Taaleri, a Finnish private equity firm, to develop the $40 million Kigali Heights — a grade A 12,500 square metre office space complex.

“We are done with construction. We are waiting for the occupancy permit. By November 1, we shall start collecting rent,” said Denis Karera, the managing director of Kigali Heights Development.

At least 90 per cent of the available retail, and 40 per cent of office space, have already been booked. The retail brands include Java, Mr Price, Bosini, Simba Supermarket, Ecobank and Bank of Kigali.

Taaleri plans to grow its African real estate fund from $6 billion to $30 billion by investing properties in Kenya and Rwanda.

“We are looking to do residential, offices, commercial and retail properties. Rwanda is a very investor friendly country,” said Antti Jussi, the head of real estate funds at Taaleri.

There is a growing appetite for quality retail space in Rwanda. The return on investments in apartments is projected at 14 per cent per annum.

Kefa Angwenyi, a real estate consultant, said residential units that cost between $5,700 and $7,600 on the Rwandan market are likely recover 40 to 100 per cent of the capital they invested within five years.

Rwanda has a shortage of planned houses for middle- and low- income earners. The Kigali Housing Market Preferences Report by Planet Consortium shows the city is short of 458,265 units, which require $2.5 billion in financing.

A major challenge in Rwanda is the high cost of construction, averaging 18 per cent of the total cost.

Shelter Afrique is building 2,700 units in Rugarama, a suburb in Kigali. The project will cost $160 million, and Shelter Afrique’s debt and equity exposure will be $60 million; financing and equity is also being provided by the Development Bank of Rwanda.