Tanzanian commercial capital Dar es Salaam’s real estate has been ranked ahead of Nairobi and Addis Ababa in the World Bank’s latest cities report, which cites land fragmentation and weak property rights as the sector’s biggest impediments in Africa.

The report, which was released Thursday, estimates the economic value of Dar’s real estate at $12 billion ahead of Nairobi’s $9 billion – a $3 billion gap.

Ethiopian capital Addis Ababa comes in third at $6 billion, while Kigali (Rwanda) is fourth at $2 billion. Uganda and Burundi were not included in the study.

The World Bank report, however, describes Dar, Addis and Nairobi as having low economic/replacement values compared to cities with similar income levels.

“The low economic value comes from the way land is organised – in small fragments – reducing the scope to scale up investment in housing and commercial complexes. Small scale urban development increases cost of construction and makes it costly to lay down supporting services and infrastructure,” Somik Lall of the World Bank said, adding that there is need to clarify property rights – “because in many parts of Nairobi, land is not utilised to its full potential.”

The report also urges Nairobi and Dar to co-ordinate land and transport development in order to create value.

“As you will see in cities such as Nairobi, the share of land allocated for mobility – is limited. This further reduces the extent to which the city can support economically dense structures.”

Related stories

Dar sets the pace for East Africa with rapid bus transit system
INFOGRAPHIC: BRT buses cut down Dar's commute time
The changing face of Dar es Salaam
In Nairobi, for instance, commercial and industrial structures account for 55 per cent of the total value of building stock — even though these structures occupy just four percent of the city’s area.”

“Residential development is urgently lacking,” it says, adding to a growing chorus on Kenya’s housing deficit of about 200,000 units annually.

Property development has more recently been seen as a safe investment bet in Kenya, making it a popular cash-generating option for investors.

This is evidenced by the numerous giant cranes on the city’s commercial districts such as Upper Hill and Westlands.

Property experts acknowledged that office space charges are higher in Dar at an average of $22 per square metre compared to Nairobi’s $12 – $14.

Nairobi "more lucrative"

They, however, said that rents have been falling in Dar even as growth remains steady in Nairobi, making the Kenyan capital more lucrative in terms of return on investment.

“Honestly, we are struggling to sell space in Dar. So based on a long-term view, Nairobi’s capital value will be higher,” said Ben Woodhams, the managing director of Knight Frank – a property firm with a footprint in Kenya and Tanzania.

READ: Why Nairobi is in the global investors' top five watchlist

“At the end of the day, it doesn’t matter how much it costs to construct a building but how much returns it generates,” he added.

The World Bank report, however, says Nairobi has the highest replacement value for its built-up area and built-floor area ahead of Dar, Addis Ababa and Kigali, even as it lags the global standards.

“Our analysis of imagery from satellites and geographic information systems (GIS) confirms that in African cities, capital investment not only appears low near the urban core, but rapidly declines outside it.”

Mr Woodhams said property markets in Dar and Nairobi tell of different stories since the majority of new buildings in Tanzania are government-funded while Kenya’s is private sector-driven.

He said that the swanky public buildings in Dar are likely to generate near zero-returns in the near term since they are occupied by parastatals and government departments, meaning Dar is expected to record a drop in capital value should the lull in the private sector activity persist.

Read the rest of the article in the Business Daily.