According to property dealers, developers are turning towards residential properties which have shorter payback period and are cheaper to construct.
“Developers who build office buildings in Upper Hill, where an acre of land goes for about Sh170 million, would take at least 20 years to recoup their investments compared to between 10 to 15 years in residential areas,” says James Muthoga, a Nairobi based property dealer.
The cost of building one square metre of residential space is Sh40,000, compared to Sh60,000 per square metre of commercial space.
“The cost of building one square metre of commercial space is very high making residential houses the choice for investors,” says Mr Daniel Ojijo, the chief executive of Mentor Group Holdings, a Nairobi based property consulting firm.
The stagnating selling price of commercial space in Nairobi is also a major reason as to why developers are shying away from the commercial real estate sub-sector.
“The selling price of commercial space has stagnated at between Sh11,000 and Sh15,000 per square foot since 2008 due to increased supply of office space and shrinking rental returns,” said Peter Kimeu, the head of projects administration at Housing Finance.
On the other hand the selling price of residential buildings has been on a steady rise for the past few years, thereby attracting more property investors keen to tap higher returns.
A recent wealth report revealed that in 2011 the market prices for luxury property in Nairobi rose by the highest margins globally (25 per cent), defying a weak global economy and high lending rates.