MML Group, a Nairobi-based property development firm, released its semi-annual office space report Nov. 26 that showed returns in the real estate segment have continued to beat other asset classes despite a raising terrorism risk factor in the East African nation.

MML said that prime rents for Grade A offices in Kenya’s capital have annual rental yields of up to 17 percent, which is more handsome than other investments such as bonds, which at best will yield 14.5 percent.

James Hoddell, the firm’s CEO, said that he expects the market to surge ahead but the biggest threat may be oversupply.

But five days after the release of the report, Al Shabaab gunmen attacked a quarry in Mandera, a county at the northern tip of Kenya killing 36 workers, just 10 days after hijacking a bus and killing 28 civil servants.

The workers had been moving to the area in response to the town’s growing real estate sector.

The terror group has been wreaking havoc in the country over the last three years, leaving industries such as tourism in limbo, driving up insurance cost as businesses now have to add terror covers, adding to business costs.

Hotels at the coastal areas are operating at 10 percent occupancy at what would normally be the busiest season.

Despite the gloomy outlook insecurity poses, real estate in Kenya has remained resilient to the acts of terror.

Industry experts say that the economic fundamentals will override security threats, the latter they say is a short-term menace while the latter is long-term.

David Nahinga, a Nairobi-based quantity surveyor and founder of real estate firm Ujenzi Bora, says that prices are based cost of credit, cement, land and other variables and not the level of security.

“The prices are based on things whose value is fairly fixed and independent of variables like insecurity” Nahinga told AFKInsider.

“And then again, people tend to take a long-term view when it comes to investment in property. There is always a lot of ‘talking to yourself’ and irrational expectations and faith in property which makes its price sticky upwards or at the set levels.”

Government estimates show that there is an annual housing demand of 150,000 units but the market can only produce 30,000 units and this has created a fertile environment for developers.

And most of the development is going into the rental market which agents say continues to show resilience.

Keja Hunt, a startup that has been featured by AFKInsider, says that there is simply a growing demand for housing being experienced in all parts of the country.

The start-up that connects tenants with landlords says that it has had to expand to other major towns in Kenya to meet the growing demand of housing.

“We also managed to expand from Nairobi and moved to Mombasa and Naivasha so as to take care of the house hunting needs of more Kenyans in different geographical locations,” said Joshua Mutua one of firm’s founders.

Towns like Naivasha, an hour’s drive north of Kenya’s capital Nairobi, are also beginning to attract major investments, a response to rapid urbanisation on major towns in East Africa.

Naivasha is set to have its biggest and most modern shopping complex, a $7 million complex dubbed Buffalo Mall.

Terrorism As A Security Risk

Other property developers who say that Kenya’s property market gives investors a wide and blank canvas to paint a profitable future have not thrown caution to the wind.

Home Afrika, a property development firm that is listed on the Nairobi Securities Exchange, has cited acts of terrorism as a security risk which can delay projects.

“These risks, of which most are covered to a certain extent by insurance policies, could lead to budget overruns, delays in the cash flow planning and delay penalties under pre-sale agreements,” says Home Afrika in its bond prospectus.

The company is raising $10 million to fund projects in major urban areas of Kenya where it also says there is a huge demand.

For now the biggest risk, at least for some developers is unoccupied offices as some areas in Kenya’s capital are showing signs of oversaturation.

Demand for office and high-end apartments is mostly coming from the influx of expatriates from the many multinational corporations that are setting their regional offices.

“Increase in office demand has been fuelled by the rapidly growing professional services sector, the banking and insurance industry, international firms using Nairobi as a regional hub and the government,” Hoddell said.