Big business potential in East Africa’s smaller cities and towns

Kenya’s capital Nairobi has for decades attracted people in rural areas in pursuit of higher education and job opportunities. Those who came for the first time in the 1990s relished the sight of the tall buildings, which at the time were non-existent in other towns.

Today, real estate developments have taken off in emerging towns across Kenya. Shopping malls, for instance, are opening up in previously agricultural towns. In these fast-growing urban centres, new opportunities are emerging – from coffee shops to private schools.

For Kenyan retail chain Nakumatt Holdings, secondary cities present big business opportunities. In 2011 Nakumatt opened its first store in Nakuru, an agricultural town located 160km outside Nairobi. Thiagarajan Ramamurthy, regional director for strategy and operations at Nakumatt, says there were already numerous other grocery outlets in Nakuru at the time. But even as a late entrant, he notes revenues from Nakuru show the “latent potential” available there.

“Every town has potential for retail business today,” he says.

He notes that Nakumatt’s decision-making on expansion is guided by population numbers and their spending power, access to good retail locations and the economic activity in a particular area.

Although Nakumatt operates multiple stores in towns across Kenya, Ramamurthy says there is need to open more, particularly in towns where they only have one or two outlets.

“Not all small towns can afford a hypermarket or a big development, but they can afford a mini-mall,” he explains.

In Tanzania, Dar es Salaam is the financial hub. However, four cities namely Mbeya, Arusha, Mwanza and Zanzibar are emerging fast due to growing populations and thriving economic activities. Mwanza, for instance, has mining and agricultural industries, and is located in the Lake Victoria region where fishing and trade activities with Kenya and Uganda take place.

However Heri Bomani, CEO of Tanzania-based diversified company Pangani Group, says investors should look beyond the four emerging hubs.

“You don’t just have to focus on Mwanza as the central hub (in the lake region). If you go researching you will find towns like Kahama where there are specific opportunities one can exploit.

“Kahama which is located about 200km from Mwanza today has 13 [bank] branches. So if you are looking at banks as an indicator of development, you’ll see Kahama has really taken off. Kahama is [also] very popular for regional trade. People from the DRC, Rwanda and Burundi, come there to buy their goods and avoid going into Dar es Salaam. So there is opportunity for hotels to provide accommodation for traders.”

Lack of retail space

But despite the opportunities, Nakumatt’s Ramamurthy notes that entry into some areas has been limited by lack of retail space.

Lordship Africa, a real estate company established in Europe 25 year ago, is involved in retail property projects in various towns across Kenya. These include fast-growing areas such as Nanyuki, Naivasha, Eldoret, Kisumu, Narok, Lamu and Malindi.

“But one of the problems we are having at the moment is the land prices,” says Jonathan Jackson, chairman of Lordship Africa. “People living in those areas have seen what is happening in Nairobi. We were looking at a very nice piece of land in Eldoret (located about 300km north of Nairobi). We were told initially we could buy it for around $106,000 to $127,000 an acre. We got there and the owner [asked for] $1m an acre. So we are finding a lot of problems actually finding land at a reasonable price in good locations.”

Speculators seek to cash in

In Tanzania there has been consistent speculation in the gas-rich region of Mtwara, leading to an escalation of land prices.

“You will be happy to find an acre of land in the centre of Mtwara for less than $250,000, which is quite a lot for an upcountry city. What you are not seeing though in Mtwara is people doing developments,” says Bomani.

He explains that speculators bought land in the area with the assumption that gas investments would be made in Mtwara. However, the projects have moved further north.

“They bought land purely to speculate and flip – not with the view to develop. And what they are realising now is that they can’t exit,” says Bomani.

Where it sees a good location to open up a store, Nakumatt approaches land owners and convinces them to put up mini-malls.

“We do the numbers for them [showing] the period it will take for them to get [their money back]… and what we will pay them on a monthly basis.”

In some cases Nakumatt then leases the entire mall and sub-leases to other smaller retailers like coffee houses and fashion stores. This strategy, Ramamurthy explains, makes it more attractive for someone based in Nairobi and owns land in a small town to develop it, since they will not have to engage in management of the property. It also brings down Nakumatt’s rental costs.

Despite the big money land can fetch, Ramamurthy has one piece of advice for land-owners in emerging towns in East Africa.

“Don’t sell, rather develop,” he says.