Residential Investment in Africa's Most Luxurious Neighborhoods
Deborah Jesusegun . 2 years ago
African neighborhoods
cost of living rankings
luxury cities
luxury living
real estate
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Article Summary: Introduction At Estate Intel, we evaluate the performance of multiple real estate markets we track across the African continent every week. This week we are analyzing the residential markets in selected luxury neighborhoods in some of Africa’s most notable cities. Lagos, Accra, and Nairobi are among Africa’s most relevant cities with vibrant real estate markets…
Introduction
At Estate Intel, we evaluate the performance of multiple real estate markets we track across the African continent every week. This week we are analyzing the residential markets in selected luxury neighborhoods in some of Africa’s most notable cities.
Lagos, Accra, and Nairobi are among Africa’s most relevant cities with vibrant real estate markets and luxury neighborhoods. For this note, we have chosen three neighborhoods within these three cities. They include
- Ikoyi in Lagos, Nigeria.
- Cantonments in Accra, Ghana.
- Westlands in Nairobi, Kenya.
In Lagos, we selected Ikoyi due to the presence of luxury developments, the high prices of its developments, its prime location, and its proximity to other prime areas such as Victoria Island and Lekki Phase 1. Even though Banana Island has many properties with higher sales and rental values, Ikoyi has a higher level of commercial activity as well as a larger development pipeline.
In Accra, we selected Cantonments because of the presence of luxurious properties, and this has made it home to numerous expatriates. There are also high-rise developments and a high level of commercial activities in the neighborhood. Even though Airport Residential area is a similar prime neighborhood with luxurious properties, Cantonments has a higher demand from diasporans and expatriates in the country, and therefore our choice.
In Nairobi, we selected Westlands due to its status as a prime residential area. With the easing of zoning laws, this area has seen the emergence of key luxury residential nodes such as Riverside Drive, Kitisuru, and Loresho. Its commercial market has also grown with several commercial high-rise developments increasing the number of real estate activities. Compared to other prime residential areas like Karen and Runda, Westlands has lower prices, with Karen and Runda having a residential-estate typology of single-family or lower-density homes. Furthermore, the mix of commercial developments makes Westlands more comparable to Ikoyi and Cantonments.
To complete our analysis, we have ranked these three neighborhoods based on six key factors to determine the most attractive investment environment. These six factors include Rental Yield, Price Appreciation, Pipeline/Competition, Land Prices, Foreign Exchange Stability, and Construction Costs.
1. Rental yields
All three cities have reasonable yields, that range between 6% and 10% on average. However, Cantonments tops every other neighborhood, having the highest yield at 10.2%. Westlands has a yield of 7.94%, and Ikoyi has a yield of 6.03%.
When considering investing in real estate, assets that have a smaller spread between rents and sale prices usually lead to higher rental yields. As a result of the smaller spread between sales and rental values in Cantonments, it ranks highest in yield.
2. Sales Price Appreciation
For a 3-bedroom apartment in 2023, Ikoyi has the highest sales price, where it currently sells for an average of $597,360. Westlands has the lowest among the three, with an average 3-bedroom selling at $200,567. Cantonments, on the other hand, fall in the middle, with an average 3-bedroom selling at $392,226.
Cantonments has had the highest price appreciation trend within the last 5 years in its local currency, with an average 5-year sales growth rate of 22.68%. Ikoyi follows closely at 5.05% and Westlands at 4.85%. The growth in Cantonments can be attributed to the increased demand from expatriates in the area. Therefore, using the sales price appreciation, Cantonments comes first in the ranking.
3. Development Pipeline And Expected Completions
A high development pipeline relative to total stock means that more developers will compete for the demand in that area, potentially reducing attractiveness as an investment destination. Based on the data that Estate Intel is tracking, Ikoyi records the highest number of residential pipeline developments with 1,523 units. High-rise developments with multiple units largely drive this pipeline. Westlands follows next with a pipeline stock of 886 units, and Cantonments lastly with a pipeline stock of 224 units.
In terms of percentage of total stock, Ikoyi still ranks the highest, with its pipeline representing over 20% of its total stock. This indicates low attractiveness from the developer’s perspective. Westlands comes second at 16.70% of the total stock, and Cantonments last at 15.34% of its total stock, thereby indicating a higher attractiveness due to a lower level of supply. This makes Cantonments rank highest in this key factor.
- 4. Land Price Appreciation
In terms of land prices and growth, Westlands has a neutral/stable growth at a 5-year growth rate of 1.48% in its local currency, which is KES 112,334.31/sqm ($ 909.59/sqm).
Cantonments and Ikoyi on the other hand have much more positive growth rates. Cantonments has a 5-year growth rate of 28.52%, while its land price is an average of Ghc 12,700/sqm ($964/sqm). Ikoyi’s prices on the other hand have grown at an average 5-year growth rate of 29.7%. It is also the most expensive in terms of land price at N850,000/sqm ($1,871/sqm). This high growth indicates a high level of demand for land in these areas, thereby driving its prices.
5. Foreign Exchange Stability
It is important to view the price appreciation of a property through the lens of the Forex rate. Even though the price of a property can increase in its local currency, the extent of the currency’s foreign exchange rate can cause an opposite effect on the dollar value.
As of 2022, the average sales price of a 2 bedroom in Cantonments was Ghc 2,803,679.94, increasing to Ghc 3,803,101.7 in 2023, representing a 35.65% annual increase in sales price. However, when these prices are converted to dollars in their corresponding years, it shows a -14.65% decrease.
This shows that even though the property increased in value based on the local currency, it actually reduced in value based on the dollar exchange rate. Therefore, if an investor was to convert his Ghanaian cedis to dollars, he would make loss because the sales price for a 2 bedroom in dollar value for 2023 is lesser than that of 2022. This is a result of Ghana’s extreme currency devaluation in the last year which was over 60%.
The same is true for Westlands. The average sales price of a 2 bedroom in Westlands as of 2022 was KES 16,565,995.66, increasing to KES 18,700,000 in 2023. This represents a 12.88% annual increase in sales price. However, when these values are converted to dollars, it results in a -3.30% decrease in sales price. Just as in Cantonments, an investor would make a loss if he converted his dollar to buy the property, then sold it after a year in order to convert the local currency back to dollars. This negative return is also a result of Kenya’s shilling devaluation of the dollar.
On the other hand, Ikoyi has a different story in terms of Foreign exchange stability. The average sales price of a 2 bedroom in Ikoyi as of 2022 was ₦132,500,000, increasing to ₦200,000,000 in 2023. This represents a 50.94% annual increase in sales price. When these values are converted to dollars (in parallel/black market rates), it results in a 16.53% increase in sales price. Even though the naira currency has been devalued against the dollar, it still gives a positive return. This shows that the property’s value increased at a higher rate than the currency’s devaluation.
Nigerian parallel rates were used because it is the most widely used rate in the country. Other countries mostly use the Central Bank’s rate. It should be noted, however, that Nigeria’s parallel rate (market-determined exchange rate) is about 50% higher than the Central Bank of Nigeria’s rate at ₦755/ US$.
It should be noted that most properties in Ikoyi and Cantonments are priced in dollars, however, the difference between the both is that the rate of currency devaluation in Ghana is higher than the rate at which the property’s value increases in a year. Therefore, Ikoyi ranks highest in Foreign Exchange stability.
6. Construction Cost
According to AECOM’s African cost of construction guide (2021/2022), Nigeria ranks the highest amongst the three countries, in the construction of a ‘luxury unit high rise’. While the cost of construction for this building type in Nigeria is $3,798/sqm, $2,383/sqm in Ghana, and $1,209/sqm in Kenya.
However, we will use the development yield as the key factor being measured and this is calculated by: the rent of a unit/developer’s cost of the unit.
To get the construction cost of the luxury unit high rise in cost/unit, we have assumed that an average luxury 3-bedroom apartment has a size of 194.5 sqm. This value was derived from averaging the collation of specific luxury properties that we track at Estate Intel.
Therefore, the average cost of construction/unit for Nigeria, Ghana, and Kenya are: $738,711, $463,493.5, and $235,150.5 respectively.
Using the formula for development yield stated above, Ikoyi has a yield of 4.0%, Ghana has a yield of 8.8%, and Kenya has a yield of 6.1%. Therefore, Cantonments has the highest development yield.
Based on this analysis above, we have created rankings for these neighborhoods in order of their investment attractiveness. The attractiveness of a neighborhood depends on how high it scores in each factor in relation to the other neighborhoods.
There are only three positions as there are only three neighborhoods.
- Whenever a neighborhood gets the first position in any of the 6 factors outlined above, a score of 5 points is given.
- When the second position is obtained, a score of 3 points is given.
- Lastly, when the third position is obtained, a score of 1 point is given.
This makes the total and highest score 30 points, only achievable if a neighborhood scores 5 points in all factors.
Having explained the rankings, the results are shown below:
Based on these 6 factors used, Cantonments currently presents the most attractive investment out of the three luxurious neighborhoods having 66.67%. Westlands follows closely at 60.00%. While Ikoyi comes in third, with 53.33%.
Notably, while we have focused on the core indicators, other factors could also affect the ranking of an area that may not have been mentioned in this article.
We love your feedback! Let us know what you think about the comparison and rankings by sending us an email at [email protected].
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