The Real Estate sector in Kenya has grown over the years to become one of the largest contributors to the country’s Gross Domestic Product (GDP), supported by factors such as positive demographics including higher urbanization and population growth rates.
Government’s sustained efforts to promote infrastructural development, opening up new areas for investments, emphasis to provide affordable housing and increased accessibility to low-interest loans provided by entities such as Kenya Mortgage Refinance Company (KMRC) among others, had increased investment by both local and foreign investors.
As we assess the growth in the Kenyan property market, it is imperative to recognize the growth achieved by the Real Estate sector, collaboratively with the construction sector, given their interdependence and inherent correlation. Construction and Real Estate sectors jointly contributed to 18.9% to the country’s GDP in Q2’2024, subsequently being the second largest contributors after Agriculture which contributed 19.8%.
The performance surpassed major and perennial sector contributors including transport at 9.5%, financial services and insurance at 9.6%, and manufacturing which contributed 7.9%. The performance of the two sectors confirms their importance to the Kenyan economy, and additionally draws a positive outlook.
Despite the aforementioned growth and positive performance, several challenges hinder the optimal performance of the Real Estate sector.
The Commercial market is facing a challenging landscape, with a recent report showing that in both 2023 and 2024, most investment advisors reported that fewer than 10% of their clients invested in commercial property.
This trend is expected to continue in 2025. Only a small number of clients, about 6%, were reported to have a high interest in commercial real estate investments in 2024, and none are expected to show strong interest in 2025.
Investors are becoming more selective in the types of commercial properties they target. Alternatives such as student housing, land in rural areas, and Real Estate Investment Trusts (REITs), which offer more flexibility and potentially better returns are gaining traction.
Understanding Real Estate Investment Trusts (REITs).
REITs are regulated investment vehicles that enable collective investment in real estate, where investors pool their funds and invest in a trust with the intention of earning profits or income from real estate, as beneficiaries of the trust.
REITs source funds to build or acquire real estate assets which they sell or rent to generate income. The income generated is then distributed to the shareholders at the end of a financial year. They operate income-producing real estate or related assets which may include among others, office buildings, shopping malls, apartments, hotels, resorts, and warehouses.
With REITs, the Trustee acquires the Property and holds it on behalf of beneficiaries, usually the Investor. The Trustee is responsible for the appointment and supervision of the Manager and also ensuring that the assets of the scheme are invested in accordance with the Trust Deed and the Offering Memorandum. They also ensure that distributions from the assets of REIT are made in accordance with the Offering Memorandum.
There exist three types of REITs namely;
1. Income REITs (I-REITs).
This is a form of REIT in which investors pool their resources for purposes of acquiring long-term income-generating real estate including housing, commercial and other real estate. Investors gain through capital appreciation and rental income. The appreciation is usually distributed to unit-holders at the agreed duration.
2. Development REITs (D-REITs).
D-REITs is a type of REIT in which resources are pooled together for purposes of acquiring eligible real estate for development and construction projects. This may include housing or commercial projects. D-REIT can be converted to an I-REIT once the development is complete where the investors in a D-REIT can choose to sell, reinvest or lease their shares or convert their shares into an I-REIT.
3. Islamic REITs.
An Islamic REIT is a unique type of REIT that invests primarily in income-producing, Shari’ah-compliant real estate. A fund manager is required to conduct a compliance test before investing in real estate to ensure it is Shari’ah compliant and that non-permissible activities are not conducted in the estate and if so, then on a minimal basis.
The advantage of REITs is that they are exempted from double taxation; REIT schemes are exempt from corporation tax and are also exempted from income tax except for the payment of withholding tax on interest income and dividends. Other benefits include;
Capital Access & and Access to investments: REITs enable mobilizations of savings from individuals and groups- this means groups and cooperatives will be able to invest in the market. This offers investors especially the middle-income class, easier access and ownership in the growing real estate sector in a manner which is not as capital intensive as a direct purchase of property.
Higher Yields and returns -REITs offer predictable income streams because of long-term lease agreements with tenants thus rental income and management expenses are predictable in both long and short time frames. Notably, the Real estate sector generates positive returns, attaining yields of 10.0%, 8.9% and 5.6% for commercial, retail and residential respectively.
Liquidity -Unlike direct investments in property which are generally illiquid, investments in I-REITs may easily be converted into liquid cash by selling the units in the market or offering them for redemption in the case of open-ended funds.
Portfolio Diversification -Investors -in REITs have the advantage of investing in a variety of real estate e.g. shopping malls, residential projects industrial projects among others.
Professional Management -REITs provide investors with access to professionals such as property managers and fund managers who understand the industry and the business and can take advantage of opportunities.
Transparency - REITs are listed and traded in the public domain making them sufficiently transparent. Additionally, REITs must disclose financial information to the respective investors on material risks and business developments on a timely basis.
Simple Tax treatment – Unlike other partnerships, tax matters for REIT investors are straightforward. REITs are exempt from VAT and stamp duty and for tax purposes its dividends are allocated to capital gains, ordinary income and returns on capital. REITs do not pay taxes at the corporate level and hence investors pay taxes at individual tax rates for the ordinary income portion of the dividend. The portion taxed as capital gains emerges only when the REIT sells assets.
However, REITs, like any other venture, have shortcomings. They include;
The decrease in rental income as a result of the termination of lease agreements or non-renewal of lease agreements and failure to secure to secure replacement tenants in good time.
For close-ended REITs, the investor is not able to access their investment before the end of the investment period. The investor cannot seek to redeem his investment before expiry of the investment period unless there is an arrangement with the Trustee’s consent for the sale of the Investor’s units.
Economic and political situations that could lead to depreciation in the value of the property.
Change in taxes – While REITs are currently exempt from VAT and stamp duty taxes, these benefits may change depending on the regime in place.
Competition from other assets classes e.g treasury bills and stocks.
Limited pool of investors especially institutional investors like pension schemes who are only allowed investment to a tune 30% of asset of trustees.
Market Trends: Investors seek alternative Financing Methods.
The evolving nature of Kenya’s real estate market has spurred developers to explore alternative financing options beyond traditional methods. These options cater to diverse project needs, offering flexibility and innovative approaches to raising capital.
Alternative financing options are reshaping Kenya’s real estate landscape, offering developers innovative ways to fund their projects. While each method has unique benefits and challenges, their strategic application can provide the necessary capital to drive growth in the sector.
As developers continue to navigate an increasingly complex market, a balanced approach combining traditional and alternative financing methods will be essential for long-term success.
This article examines some of the prominent alternative financing methods in Kenya, detailing their features, benefits, and challenges. First we look at the available Traditional financing Methods for real estate developers.
Commercial Bank Loans.
Commercial banks in Kenya are a primary source of funding for real estate development. These loans are typically structured as long-term debt, with the property often serving as collateral. Prominent banks such as KCB, Equity Bank, and Co-operative Bank offer products specifically designed for developers.
Commercial bank loans are characterized by structured repayment terms that range from 5 to 30 years, depending on the loan size and purpose. Interest rates can be fixed or variable, with the latter often influenced by the Central Bank of Kenya (CBK) base rate. Borrowers are required to provide significant security, commonly in the form of the property under development or other valuable assets. Banks also demand detailed financial records, project plans, and proof of repayment capacity.
These loans provide access to substantial funding for large-scale projects and offer predictable repayment schedules that assist in long-term financial planning. Additionally, the legal frameworks governing such loans protect both parties, ensuring transparency and reliability. This option however, can be challenging since the approval process can be lengthy, involving strict assessments of creditworthiness and project feasibility. For instance, , the interest rate charge average was o 14.3% in 2023, ranging between 8.7% to 18.6%.
Bridge Loans.
Bridge loans provide short-term financing for developers awaiting long-term funding or the sale of an asset. These loans are particularly useful in Kenya’s fast-growing markets like Nairobi and Mombasa. Bridge loans typically have repayment periods of 6 to 24 months and are secured by existing assets. The approval process is quick, but the interest rates are higher, often exceeding 15.0%. These loans help cover gaps in funding, ensuring projects remain on schedule. These loans are usually offered by banks and non-bank financial institutes. This funding option offer developers rapid access to capital, which is critical for seizing time-sensitive opportunities or maintaining momentum during transitional phases. However, high interest rates and fees make these loans an expensive option. Delays in securing long-term financing can lead to repayment difficulties and increased costs.
Credit Co-operatives (SACCOs).
SACCOs play a significant role in financing real estate development, particularly for small- and medium-scale developers. Organizations like Stima SACCO and Mhasibu SACCO are known for their competitive loan products. SACCO loans are tied to the member’s savings, typically offering up to three times the savings balance. Interest rates are lower than commercial bank rates, often ranging between 10.0% and 12.0%. Repayment terms are flexible, catering to individual needs. SACCOs promote a savings culture among members while providing accessible loans to those with limited credit histories. The straightforward loan application process is an added benefit. Some of the disadvantages for the SACCOs includes: Loan amounts may not be sufficient for large-scale developments, and the reliance on membership contributions can delay fund disbursement.
Mortgage Loans.
Mortgages are a widely used option for financing both real estate purchases and developments. Institutions like Kenya Mortgage Refinance Company (KMRC), Housing Finance Company (HFC) and NCBA cater to residential and commercial real estate developers with tailored mortgage products.
Mortgage loans offer long-term financing options spanning 15 to 25 years. Borrowers may choose between fixed-rate and adjustable-rate mortgages, depending on their risk tolerance and financial forecasts. These loans are secured by the property itself, with monthly repayment plans designed to match the borrower’s income flow. Additional costs, such as valuation, legal fees, and down payments, are factored into the financing arrangement.
Mortgages provide affordable and structured repayment plans, making them suitable for salaried individuals and businesses with stable incomes. Competitive interest rates and the ability to spread costs over an extended period make this a practical choice for many. Despite these advantages, mortgages are faced by challenges such as initial costs, including legal and administrative fees, can be high. Moreover, informal sector earners may face challenges meeting stringent eligibility criteria due to irregular income documentation.
Government-backed Loans and Initiatives.
The Kenyan government has introduced various initiatives to encourage real estate development, particularly in the affordable housing sector. Programs under the Kenya Mortgage Refinance Company (KMRC) and the Affordable Housing Scheme are prominent examples. These loans offer subsidized interest rates and extended repayment terms. They are designed to support specific sectors, such as low-income housing. Developers must meet stringent eligibility criteria, including adherence to government-set pricing models.
Government-backed loans reduce the cost of borrowing and incentivize socially beneficial projects. They provide critical support for developers focused on addressing Kenya’s housing deficit. The limited availability of funds and bureaucratic processes can slow down approvals and project implementation.
Equity Financing.
Equity financing involves raising capital by selling ownership stakes in a project to investors. This approach is increasingly popular among developers in high-value areas like Westlands and Kilimani. Unlike debt financing, equity financing does not require repayment. Instead, investors share in the project’s profits. Terms are flexible and negotiated between the developer and the investors, often involving detailed agreements on profit sharing and project timelines.
Equity financing reduces the developer’s debt burden, allowing them to focus on execution. It also attracts investors with expertise and networks that can enhance the project’s success. Developers, however, must relinquish partial ownership and control. If the project performs exceptionally well, profit sharing may result in higher costs than traditional financing.
Pre-Sales.
Pre-sales investments involve purchase of properties before or during their construction phases. In Kenya, this approach has gained popularity as it allows investors to acquire properties at prices significantly lower than their anticipated market value upon completion, thereby benefiting from potential capital appreciation. Developers also benefit by securing necessary funding through early sales, facilitating project completion.
However, off-plan investments come with certain risks, including: i) Market fluctuations can lead to a decrease in property value by the time of completion, ii) Developers may encounter challenges that delay or halt the project, iii) Investors failing to meet payment obligations can cause project delays or stalling.
In Kenya, the off-plan property market has been expanding, with developers offering various incentives to attract buyers. For instance, some developers provide flexible payment plans, allowing buyers to pay in installments as the project progresses. Additionally, off-plan properties often come with customization options, enabling buyers to influence design aspects to suit their preferences.
Despite these advantages, it's crucial for potential investors to conduct thorough due diligence. This includes researching the developer's track record, understanding the terms of the sale agreement, and assessing the project's feasibility. Engaging with real estate professionals and legal advisors can provide valuable insights and help mitigate risks associated with off-plan investments. While off-plan investments in Kenya offer opportunities for capital appreciation and favorable purchase terms, they also carry inherent risks that require careful consideration and proactive management.
Alternative financing for Real Estate development in Kenya.
Private Equity Funding.
Private equity (PE) funding has emerged as a viable option for developers seeking substantial capital for large-scale real estate projects. This method involves securing investments from private equity firms or high-net-worth individuals in exchange for a stake in the project. The flexibility of PE funding allows developers to access significant resources without the constraints of traditional loans. Investors often bring valuable expertise and networks, which can enhance project execution and profitability. However, this method requires developers to relinquish partial control of their projects and share profits, which may not appeal to all.
Real Estate Investment Trusts (REITs).
Real Estate Investment Trusts (REITs) represent an innovative financing avenue for real estate development in Kenya. REITs provide a structured mechanism for pooling resources from multiple investors to finance or acquire income-generating real estate assets. The Capital Markets Authority (CMA) regulates REITs in Kenya, ensuring transparency and investor protection. Despite being relatively new in the Kenyan financial market, REITs have shown potential as a transformative tool for real estate financing.
Crowdfunding Platforms.
Crowdfunding has gained traction in Kenya as a modern way to finance real estate projects. Developers leverage online platforms to raise small contributions from a large number of investors. This approach is particularly useful for smaller or community-based projects where traditional financing is challenging to obtain. Crowdfunding allows developers to engage with a broader audience, fostering community involvement and support.
However, it requires a compelling pitch and robust marketing to attract investors. Additionally, regulatory frameworks governing crowdfunding in Kenya are still in their infancy, posing risks for both developers and investors.
Joint Ventures.
Joint Ventures (JVs) have become a cornerstone for real estate financing in Kenya, especially in scenarios requiring shared resources and expertise. A Joint Venture is a strategic partnership between two or more entities; typically developers and landowners to co-develop a project and share profits or benefits. These partnerships are particularly prevalent in Kenya due to high land costs and the capital-intensive nature of large-scale projects.
Joint Ventures in Kenya often involve landowners contributing their land as equity, while developers bring the capital, technical expertise, and project management skills. This arrangement minimizes the need for upfront cash investment by developers and ensures that landowners participate in the financial success of the development. Legal agreements outlining profit-sharing, roles, and dispute resolution mechanisms form the backbone of such partnerships, ensuring transparency and trust.
Venture Capital.
Venture Capital (VC) is an emerging financing option in Kenya’s real estate sector, targeting innovative and high-growth projects. Traditionally associated with startups, VC funding has found relevance in developments such as affordable housing and tech-driven real estate solutions.
VC firms provide significant capital to projects in exchange for equity stakes. They often focus on developments with unique value propositions, such as incorporating smart technologies or addressing housing shortages. Unlike traditional lenders, venture capitalists also offer strategic guidance, leveraging their expertise and networks to enhance project viability.
Venture Capital benefits includes:
i). VC injects substantial funding into projects, enabling developers to undertake ambitious initiatives that might not be feasible with conventional loans.
ii) The collaborative nature of VC funding provides developers access to mentorship and strategic partnerships.
iii) The equity-based model means that developers are not burdened with immediate repayment obligations, offering flexibility during early project stages.
Best Locations for Real Estate Development in Kenya.
Kenya has only about 27,000 mortgages, according to the Central Bank. While 61 % of Kenyans own their homes, only three percent of those homeowners actually bought the houses, while 93 % of homeowners built their own houses and three percent inherited them, according to the Kenya National Bureau of Statistics.
The vast majority of the owned homes are in the countryside. In the cities, people overwhelmingly tend to rent. A mere nine percent of Nairobians live in a home they own. The city counts 1,5 million households, of whom 91 % are renters.
To solve the shortage of decent urban housing, a number of real estate developers have been offering more flexible payment plans to prospective homeowners. Instead of having to pay the full amount upfront, buyers can now make smaller monthly installments. This opens the door to homeownership for many individuals who would have otherwise been priced out of the market.
This has propelled the real estate market to an ever-growing investment that has caught wind in the Kenyan market. Whether investing in commercial or residential real estate, there are several key elements that are the backbone of any real estate property.
The location of the property is one of the most important aspects to consider before making any financial decisions.
The site determines the type of property to develop and the target population who will eventually lease or buy the property. It would not be ideal to put up a residential property in the middle of a town, nor would it be practical to put up a commercial building in the middle of a residential street.
In Kenya, there are ideal locations where commercial or residential properties may be set up. These are the most ideal locations to invest in since any property will be optimal for the location.
There are many real estate investment business opportunities in Kenya. Some cities and towns are better choices. They have high property demand, strong economic growth, and good infrastructure.
Here are the top spots for real estate investment and their best areas.
1. Nairobi – The Economic Hub.
The capital city is the most dynamic real estate market in Kenya. There is a high demand for the development of residential, commercial and mixed-use properties. This demand comes from its large population and economic activity.
Best Area for Investment:
Karen – Ideal for luxury homes and gated communities.
Kilimani and Westlands - perfect for high-end apartments, office space, and AirBNB rentals.
Ruaka and Ruiru – emerging hotspots for affordable housing and rental apartments.
2. Mombasa – The Coastal Investment Hub.
Mombasa, the second largest city in Kenya, is a great place for real estate investors. Its place makes it a center for tourism and business. The coastal city attracts both local and international investors in search of rental properties and holiday homes.
Nyali and Bamburi- Luxury is suitable for apartments and high end rent.
Shanzu – Servated apartments and an increasing area for holiday homes.
Diani – Famous for beach properties and resorts.
3. Nakuru – The Fastest-Growing City
Nakuru, now a city, is one of the fastest growing urban areas of Kenya. It is an important investment place due to its low cost, better infrastructure and growing population where you can Invest your money in.
Best Area for Investment:
Njoro – Cheap land and housing projects.
Lanet – A developing residential area with the increasing demand for rental apartments.
Milimani – Ideal for Upscale homes and commercial development.
4. Kisumu – The Western Kenya Investment Hub.
Kisumu, the largest city of western Kenya, has increased continuously. This growth comes from more business activities and urbanization. The real estate sector benefits from growing middle class and ongoing infrastructure projects.
Best Area for Investment:
Milimani- Ideal for high end residential properties.
Riat Hills – Popular to Gated communities and modern apartments.
Mamboleo-a rapidly growing residential area with demand for affordable housing.
5. Eldoret – An Agricultural City
Eldoret is one of the rapid expanded city of Kenya, run by a strong agricultural economy and a high student population. The city has become an attractive investment destination for rented housing and commercial development.
Best Area for Investment:
Kapsoya- Popular for middle-income residential properties.
Annexes – growing area with increasing demand for rental units.
Pioneer – Ideal for students residence near universities.
Investment opportunities:
Types of Real Estate Investments in Kenya.
Investment in real estate in Kenya provides various opportunities based on your budget, risk level and goals. Here are the main types of real estate investment and their benefits.
1. Residential properties.
Residential real estate in Kenya is a popular choice due to high housing demand. Investors can focus on various sections, such as:
Apartments – Great for rental, especially in cities like Nairobi, Mombasa and Kisumu.
Townhouses and Villa-Karen target high-income buyers in areas such as Runda and Nyali.
Bungalows and standalones are found in suburban areas such as Ruiru, Kitengla and Athi River.
Affordable Housing- A growing market with government support, aims to earn medium and low-come.
Best Location:
High-end property-Nairobi(Karen, Runda, Kilimani), Mombasa (Nyali, Diani).
Mid-range property-Nairobi (Ruaka, Ruiru, Langata), Nakuru, Eldoret.
Affordable Housing – Satellite Town (Kitengela, Athi River, Juja, Thika).
2. Commercial properties.
Commercial real estate includes office location, retail shops and warehouses, often offering high fare returns. Demand increases with Kenya expanded business sector.
Office Location – Nairobi includes upper hill, vest and kilimani in major areas.
Retail location – Supermarkets, malls and small businesses require strategic places.
Warehouses and industrial properties-Ruiru, growing demand in the Athi River, and with the Mombasa-Nairobi highway.
Best Location:
Office Location – Nairobi (Westland, Upper Hill, CBD).
Retail Business – Nairobi, Mombasa, Kisumu, Nakuru.
Warehouse and Logistics.
Hubs – Major Highway (Ruiru, Athi River, Thika Road).
3. Land investment.
Buying land is a long -term investment strategy that provides high appreciation rates, especially in developing areas. Investors can do:
Buy and hold – Buy land and later sell at high prices.
Land Subdivision – Buy large parcels and subdivisions for resale.
Developed and Sale – Build houses, apartments, or commercial properties for resale.
Best Place for Land Investment:
High-development urban region-Nairobi outskirts (Kitengela, Juja, Ruiru).
Tourism Hotspot – Mombasa, Diani, Naivasha.
Agricultural land – Nanyuki, Laikipia,Edoret, Nakuru.
4. Short -term rentals (airbnb and serviced apartments).
Short -term fares in Kenya have gained popularity, especially in major cities and tourist destinations. They provide higher returns than traditional fare but require active management.
Nairobi and Mombasa – High demand for AirBNB from trading passengers and tourists.
Diani and Naivasha – ideal for holiday homes and holiday rental.
University Town (Edoret, Kisumu, Nakuru)-Demand for student housing and short-term migration.
Best Location:
Business Hub – Nairobi (Westland, Kilimani, Upper Hill).
Tourist Destination – Mombasa, Diani, Naivasha.
University cities – Eldoret, Kisumu, Nakuru.
5. Mixed-use development.
Mixed-use properties combine residential, commercial and recreational places, offering many revenue currents. This type of investment is increasing in popularity, especially in Nairobi and Mombasa.
Example: Two rivers, Garden City, The Hub Karen.
Ideal for investors in search of stable long -term income.
Choosing the right investment
The best real estate investment depends on your goals:
For stable fare income: residential and commercial properties.
For high appreciation: land investment.
For flexible income: short -term rent (airbnb).
For diverse income currents: mixed-utilization development.
Challenges in Kenya’s Real Estate Market.
Real estate investment in Kenya can be profitable, but it also has challenges. Investors must navigate these issues to succeed. Knowing these risks helps you make smart choices and safeguard your investment.
1. High Property Prices.
The cost of land and property in Kenya has risen sharply, especially in cities like Nairobi and Mombasa. This rise can make it hard for new investors to join the market.
How to Overcome It:
Think about investing in satellite towns where property prices are lower, like Ruiru, Kitengela, Juja, and Athi River.
Join real estate investment groups (SACCOs or Chamas) to pool funds and buy property together.
Seek out government-supported affordable housing projects that provide cheaper investment options.
2. Land Fraud and Ownership Disputes.
Land fraud is a common problem in Kenya. Cases of fake title deeds, double land allocation, and illegal land sales happen often.
How to Overcome It:
Conduct a land search at the Ministry of Lands to check if the title deed is real.
Work with a trusted lawyer and surveyor to verify property ownership and boundaries.
Make sure all transactions are documented and signed before a lawyer to prevent future disputes.
3. Slow Property Liquidity.
Real estate is less liquid than stocks or bonds. Selling property can take months or even years, especially in low-demand areas.
How to Overcome It:
Invest in high-demand locations where properties sell or rent quickly.
Consider short-term rentals (Airbnb) in major cities and tourist spots for quicker returns.
Diversify by combining land banking with rental properties to keep a steady income.
4. High Cost of Construction and Development.
Developing property needs a lot of money. The costs for materials, labour, and approvals keep increasing.
How to Overcome It:
Use alternative construction methods like prefabricated materials to save money.
Work with experienced contractors to prevent delays and extra costs.
Use developer financing options to spread costs over time.
6. Economic and Political Uncertainty.
Political instability and economic downturns can lower property values and rental income.
How to Overcome It:
Diversify investments across various locations and property types to lower risk.
Keep an eye on government policies and infrastructure changes that can affect real estate trends.
Invest with a long-term view, as property markets tend to recover over time.
Conclusion.
Kenya’s real estate market offers great investment opportunities. This growth stems from urbanization, improved infrastructure, and increasing demand for homes and commercial spaces. However, successful real estate investing requires careful planning, thorough research, and wise decisions.
To summarize, the best places to invest in real estate in Kenya include:
Nairobi – High-end apartments, office spaces, and Airbnb rentals.
Mombasa – Holiday homes, serviced apartments and beachfront properties.
Nakuru – Affordable housing and rental apartments.
Kisumu – Modern apartments, student housing and retail spaces.
Eldoret – Student housing, rental apartments and commercial buildings.