Friday 12 September 2014

Kenya’s Construction Sector Booms

Robust infrastructure development has over the last five years created an unprecedented construction boom in Kenya. Indeed, the housing sector has grown so much so that the Central Bank is now concerned that the sector is being financed by dirty money. In January, Central Bank governor Prof. Njuguna Ndungu announced that the bank would conduct a survey to ascertain the source of the money behind the boom.

The governor’s concern was that the high level of activity in the housing sector did not match the low level of home purchase borrowing.  According to the Kenya National Bureau of Statistics (KNBS), the construction industry generally recorded the slowest growth in the last quarter of 2012, expanding at only 0.6 per cent as compared to a growth of 3.6 per cent in 2011. This was attributed to high bank interest rates as most builders rely on credit for financing.That notwithstanding, Kenya’s 3.4 billion dollar real estate industry is one of the fastest growing and most lucrative in the Eastern African region. Developers are now focusing on homes for middle income and low income groups, following a season where investors burnt their fingers in an oversupply in the high-end apartment market. Most of these housing projects are concentrated along the corridors of major road developments and in old dilapidated housing units built in the colonial era.
For the small investors, these projects have provided a myriad of investment opportunities. The newly-commissioned Thika superhighway, for example, has given rise to thousands of housing units from investors who saw its potential due to easy accessibility to the city centre and connectivity to other parts of Nairobi and its outskirts. Timber suppliers, ballast and sand depots and hardware shops dominate the shopping centres that dot the highway.

Hesbon Mwangi is one of those small investors for whom the construction boom has been a Godsend. In company with two of his brothers, he runs two hardware shops and a sand and ballast supply business along Thika road, as well as a timber supply shed in Ngong’ where he started eleven years ago. Mwangi says he was down on his luck when he parked his old truck at a shopping centre at Ongata Rongai in Ngong’ where there was a lot of housing construction. He was hired to transport building materials for different developers, and while at it discovered there was a lot of money to be made by trading them. Soon after that, his brother provided start-up capital with which they set up a timber yard on the outskirts of Ngong’ town.

In 2008, Mwangi noticed the high level of building activity going on in the Roysambu, Kasarani and Kahawa West areas and set up two hardware shops in Kahawa West and Kasarani to take advantage of the construction boom. He stocks cement, iron bars, ceramics, roofing materials, nails, tiles, pipes and he stocks according to demand. To maximize his profits, he teams up with other shop owners to buy materials such as cement and tiles from manufacturers in bulk so that they are cheaper.

“The good thing about the business in these areas is that it is not large companies but mainly individuals building houses to rent out. Unlike big construction companies, they do not have regular suppliers, and they tend to source the materials from near their building sites to minimize transport costs,” Mwangi explains. He says cement is so far his fastest moving supply, and he can sell from between 70 to 150 bags a day.

The middle- and low-level income housing market is in no danger of drying up soon. According to the KNBS, Nairobi City Council approves an average of 320 building plans per month. That number is however nowhere close to satisfying the demand for housing units in Nairobi, which stands at 250,000 units against a supply of 60,000 units annually. Improved road networks have eased that problem somewhat as the construction boom spreads to the outskirts where it is now increasingly easier to commute from.

According to investment advisers, the construction boom provides opportunities galore for investors, even with little start-up capital. Individual opportunities exist for investment in cement blocks making, stabilized earth brick making and machinery leasing services. These machines include trucks, asphalt mixers, bulldozers, compactors, concrete mixers, concrete pumps, cranes, excavators, loaders, concrete saws, concrete trucks and concrete vibrators among others. Hardware shops are also an appealing and lucrative option. Among the products that are in high demand are cement, marble, granite, tiles, plywood, timber, furniture, steel, doors, flooring, stone, sandstone, limestone, slabs, faucets, sanitary ware, glass and pipes.

On a larger scale, the vibrant construction trend has seen major investors rushing in to tap into the profits. A high demand for steel has precipitated plans for steel plants worth millions of dollars in the country. The government-owned Numerical Machining Complex plans to set up a 62.5 million shillings steel plant in Athi River, while locally owned Devki Steel Mills, which already owns plants in Athi River and Ruiru, plans a 175 million shillings plant in Kitui. At the same time, Korean Posco Steel, the third largest global steel manufacturer, plans a 3.7 billion dollar investment in a steel plant in Kenya.

Mantrac, the sole distributor of Caterpillar brand of machinery, has injected 160 million shillings to expand its warehouse in Nairobi’s Industrial Area and plans to invest another 24.6 million shillings to expand its Nairobi facility.  Vigorous infrastructure development has provided a big market for earth movers and heavy diesel generators.

Major government and private construction projects on the pipeline include the construction of LAPSSET cluster of projects that include the Lamu Port, the highway that will connect the port to South Sudan and Ethiopia and a pipeline that will run along the highway. Others include the expansion of the Isiolo airport, the relocation of Wilson Airport to Ruai, the Lake Turkana wind power plant, Konza city which is dubbed Africa’s Silicon Valley, as well as the Tatu city in Kiambu area, among others.
It is estimated that Kenya’s infrastructure construction industry value will double between 2010 to 2015.