There are several ways to calculate the value of Real Estate property in Kenya.
The most commonly used is the comparison method whereby a similar property nearby whose sale transaction records are known is accessed for comparison. This method can sometimes lead to inaccuracies whereby property is either undervalued or overvalued.
For instance, the Judiciary bought a residential property in Runda for the Chief Justice at a cost of approximately kes 300 million.
I have come up with an alternative method to estimate property whereby the element of yearly rental income and time taken for the property to repay its costs is taken into consideration.
The average international repayment period for most real estate investments is 15 years. In other words, if the rent collected doesn’t equal the cost of the project within 15 years, then we can safely assume that the project is not viable.
The rental income is then analysed to see what the market is willing to pay for the property. This acts as a fool proof method whereby site location, quality of house finishes , access to road and infrastructure are all combined and gauged by the rent that the property can be able to sustain.
For example, a house in Runda can fetch between kes 200,000 to kes 300,000 monthly rent.
Assuming the kes 300,000 monthly rent, this is kes 3.6m per year.
Assuming a 15 year pay back period, the worth of the house is therefore kes 3.6m x 15 years =kes 54m.
Cost of replication of similar house.
Another way to look at the worth of a house is to check the costs that can be used to replicate the same house in the same neighbourhood.
Land at 0.5 acres costs between kes 20m to kes 40m depending on the location. Assuming kes 40m, the land price is added on to the cost of construction.
The average Runda House is approximately 500m2 in plinth area. The average Runda house construction cost per m2 is between kes 40,000 to kes 50,000 per m2. Assuming kes 50,000 per m2, this brings the total construction cost to kes 50,000 x 500m2=kes 25m.
The cost of construction is therefore cost of land kes 40m plus cost of construction kes 25m = kes 65m.
This is the cost of replicating a similar house in the Runda neighbourhood.
This cost of kes 65m does not fall far from the valuation using 15 year payback period at kes 54m.
Therefore, we can safely assume that from an architectural point of view, a Runda house sitting on 0.5 acre plot should cost within kes 54m to kes 65m.
A quick search on houses for sale in Runda in Google and olx also shows that the offer for houses is within the kes 60m bracket.
Demand vs Supply.
In a situation where demand vs supply economics come into play, valuation methods such as the one above usually have the upper hand since the seller makes his profit and the buyer gets his worth, i.e a win win situation.
Investments such as the Southern Sunshine Hotel room for sale at a cost of kes 1.74m per room can also be valued using the above method.
The room has a possibility of bringing in kes 1,500 per day for 70% occupancy rate =kes 31,500, say kes 30,000 per month.
This translates to kes 360,000 per year.
Assuming a payback period of 15 years, this brings the value to kes 360,000 x 15 =kes 5.4m.
Therefore, for a buying price of kes 1.74m, a buyer can then resell the same property to someone else at a fair rate of kes 5.4m per room.
Francis Gichuhi Kamau, Architect.