If you had Sh30 million in hand, would you dive into Nairobi's booming real estate market or would you try your luck at the Nairobi Securities Exchange? This is a question that still puzzles many investors.
While the bricks and mortar have symbolised security and wealth, the allure of quick returns from equities is its attraction.
Investment experts weigh in on the returns and risks of both vehicles, and on which investment route could yield better returns for your money.
Kenneth Mbae, Managing Director of Centum Re, says, "Assuming you have Sh10 million and choose to invest either in real estate or equities, real estate will give you a stable rental income or annual rental yield of between seven percent to 11 percent."
"Equities, on the other hand, are dependent on performance. Unless you have those high-dividend counters like StanChart, the average return is five percent to six percent annually."
However, Mr Mbae is quick to point out that real estate returns are not created equal, pointing out that developers mostly enjoy higher returns than passive buyers.
"If you buy a house, your yield is seven percent to nine percent, but if you build it yourself, like people build apartments, the yield is 15 percent to 20 percent, and some do up to 25 percent."
Beatrice Chege, Head of Mortgage at Absa Bank Kenya, weighs in for the everyday investors who risked with a mortgage or are looking to take a mortgage and invest in rental properties.
"With property, especially rental, it’s not just a debt repayment model. It can work as an investment that pays itself off faster than most people expect," she explains.
She brings numbers to life through a relatable scenario. "Let’s say you take a Sh30 million mortgage and you want to invest in real estate, your location as an investor is everything. In high-demand, middle-income areas, a one-bedroom unit rents at about Sh38,000 monthly.
With Sh30 million, I would buy five units and take a mortgage for 15 years because when rental income is your basis for repayment, you can stretch the loan term," she adds.
With five units generating Sh190,000 per month, Mrs Chege explains how your rental income can transform a mortgage into a self-repaying asset.
"Your mortgage repayment on a Sh30 million loan over 15 years is about Sh400,000 per month. But if you channel back the Sh190,000 monthly rent into the loan repayment, you will clear your mortgage in 6.5 years—or seven years, but not 15 years. It can act as both a debt clearance tool and a proper investment that shortens your repayment period."
Even when you factor in hidden costs like maintenance, taxes, legal fees (3 percent of the loan amount), and valuation fees (around 1 percent), she says the investment remains lucrative.
Property opens doors that equities don’t
According to Mr Mbae, when it comes to property, it has an advantage of a distinct financing edge. "I can borrow Sh10 million from a bank and buy a house, but I can’t walk into a bank and borrow Sh5 million to buy stocks. That road doesn’t exist," he says.
However, the property loan borrowing doesn’t come easy; it has its own pitfalls.
"The lowest mortgage rate I know in the market is Kenya Mortgage Refinance Company at 9.5 percent. Most banks are offering 13 percent to 15 percent. Considering that rental yields hover around seven percent to nine percent, you will need to top up from other sources just to cover the mortgage interest,” Mr Mbae warns.
For those who are purely buyers, property may not look as attractive once financing costs are layered in. But for developers, the story changes.
"If you are developing property, not buying, your yield can far surpass equities," he reiterates.
A pillar of stability
Both experts agree that one of real estate’s biggest advantages lies in its stability. "Equities are subject to market fluctuations. A company's performance may dip, which can affect your returns. In contrast, rent is stable, especially in urban places like Nairobi, where the demand remains high," Mr Mbae says.
Mrs Chege points out Kenya’s relentless urbanisation. "The stability of real estate is driven by the fact that the market is heavily rental-noted. You will always get tenants; the demand for rental properties will always be there. Plus, property appreciates over time."
However, she warns investors to avoid sinking their entire fortune into luxury properties.
"I wouldn’t encourage someone to buy one single property worth Sh30 million for investment. That’s a very high-end property, and high-end properties aren’t necessarily the best for returns. Where the demand is, that’s where your investment should go. The low- to middle-income segment is where you get better returns. These are properties priced between Sh6 million and Sh10 million."
Property returns vs Equity gains
Mrs Chege’s example reveals that five units yielding Sh190,000 monthly translates to Sh2.28 million annually. "That’s a return of about eight percent per year on your Sh30 million," she says.
And unlike equities, this return grows as rent rises and property appreciates. "Equities have different returns; some might give you more than eight percent, others less. You’d need to compare specific stocks or portfolios. But generally, the annual return from property, depending on location, ranges between eight percent and 12 percent," she adds.
"If you are a retail investor who is depending on the mix of financing, how you do it determines the return. If you are borrowing, then there is no comparison because I don’t think you can also go borrow and invest in the same quantum in equities. Real estate allows you to invest using borrowed money," Mr Mbae adds.
For property developers, the gains are even sharper. "If someone were to build an apartment block that gives them a combined rent of Sh70,000 per month, they’ll have built it for Sh5.6 million; their rental yield is like 15 percent. The same rental income goes for a buyer, but with much lower upfront capital," Mr Mbae explains.
Diversify your portfolio
Even with all the merits of real estate, Mrs Chege warns against putting all your eggs in one basket. "Once you already have a real estate portfolio, it’s always good to diversify. You don’t want to hold only property or only equities. Have a diversified portfolio so that at any point in time, one part is performing well."
She cites the example of banking stocks, which have yielded impressive returns in recent times. "Certain bank equities have very good returns now, but will that be the same time next year? You don’t know," she says.
For the average investor, the experts say property offers tangible security, stable returns, and the unique ability to leverage financing.
Equities, although promising with their fluctuating high and low rates, are very volatile and susceptible to external shocks.
"It’s not a one-size-fits-all. It’s about strategy, timing, and diversification," Mrs Chege says.
