Analysis of sustainability of Nairobi CBD Land Prices appreciation.

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?

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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

a4architect.com (7 Posts)


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