In Kenya, we hold a very strong culture. Since colonial invaders long ago clumsily decided on our national boundaries, we have developed a strong sense of national identity as well as of maintaining our ethnic and other diversities.
In the investment space, different nations favour different stores of value for their hard-earned savings. Russia and Central Asia tend to prefer precious metals, the United Kingdom holds pensions, while in the United States people strongly prefer stock equities. But here in Kenya, we prefer and love our real estate investments.
Holding property is extremely important to us. However, given that our main store of savings value is in real estate, it foments a litany of scammers and unscrupulous developers. Buying off-plan developments carries significant risk, with very little recourse if a project falls through. Even existing homes, plots and apartments come with title deed fraud risks. Consequently, buyers have become increasingly careful, relying on legal advisers to ascertain a property’s legitimacy before purchase.
However, what about real properties coming up all over Nairobi, Mombasa and in several county headquarters such as Eldoret, Kisumu and Nakuru? Internationally, investors tend to look at the projected return on investment (ROI) for real estate. In Kenya, developers also show projected monthly rental income as the ROI for a project.
But what developers often do not show would-be buyers are the annualised ROI figures for prospective projects and comparisons with nearby rental incomes and ROIs of similar developments. Since there is no national database of real estate projects or rental prices, it is hard for individual investors to conduct due diligence on a property’s anticipated ROI.
But our ROI on real estate rental returns is staggeringly low. In the United States, one can easily get a 12 percent annual ROI on residential real estate investments, and the tax regime there allows investors to write off mortgage loan interest and repair expenses to drastically reduce taxes, which is much harder to do here in Kenya.
In Nairobi, an investor might put Sh3 million into purchasing a studio apartment in Kiambu and receive only Sh18,000 a month in rent. Unfortunately, that gives a 7.2 percent gross annualised ROI, but after the 7.5 percent flat tax on rental income and an assumed 10 percent agent fee, depending on the building and project, the investor is left with only a 5.9 percent net return. Conversely, one could spend Sh6.5 million buying a one-bedroom apartment in Kilimani that may sit vacant because of oversupply before the rent is lowered to attract a tenant. One might then achieve Sh55,000 a month in rent, yielding a gross ROI of 10.2 percent, but after income taxes and agent fees, this falls to 8.4 percent.
Sadly, though, when one drives through Westlands Road or Ring Road, Kilimani, we see numerous vast, upscale new one- and two-bedroom apartment blocks going up everywhere. Many of the buildings block sunlight from neighbouring apartments. In a slowing economy, as any developing nation progresses towards middle-income status and beyond, who will fill those new units, and at what rents?
Supply and demand will eventually fill the apartments, but at what monthly rental price points, and will investors be satisfied with the resulting ROI? Even the unexpected 2025 collapse of USAID caused the loss of tens of thousands of middle- and high-income NGO jobs in Kenya that could have occupied some of those buildings. As artificial intelligence starts to reach its grubby fingers into our service sector and cause massive job losses, which industry or sector will employ the newly unemployed who can rent those units?
Ironically, though, we do have an investment vehicle in Kenya that provides fantastic returns compared with other countries. While in the United States, the United Kingdom, Germany and Japan, savings account interest rates range from 0.5 percent to 4.9 percent in annual ROI before taxes, here in Kenya we can achieve a staggering 6 percent to 11.5 percent annual ROI on bank savings accounts or fixed-term deposits. Further, our annuity sector, run by our big insurance companies, offers annual returns of 10 percent, 11.5 percent and beyond.
All the while, the Kenya Revenue Authority gives us favourable tax rates on savings income at 15 percent, rather than earned income tax rates. If someone is disciplined and will not touch their principal investment, one can earn far better returns on savings, fixed-term and annuity investments than in the residential rental real estate market.
As Kenya’s savings ROIs remain notably higher than those in many other countries while rental income ROIs remain lower, one cannot help but ponder whether we will start to see a shift in our preferred store of value over the next five years. It also leaves one asking what further steps the Central Bank of Kenya can take to enhance trust in savings accounts and fixed-term deposits, and what the Insurance Regulatory Authority can do to improve trust in insurance companies’ annuity products.