High Rates Trigger Capital Shift From Real Estate

Actis’s exit from Kenyan real estate signals a structural repricing of frontier property risk as high funding costs, currency volatility, and illiquidity compress returns. The decision underscores the limits of long-duration exposure when yields fail to offset financing and FX swings. Kenya’s economy is expanding at an estimated 4.7–5.3% in 2025, but the investment calculus has shifted. The shilling (KES=X) has traded in a 150–165 corridor against the U.S. dollar, the policy rate sits around 12.5–13.0%, and 10-year local-currency yields remain in the low-to-mid teens.

With project debt typically 300–500 basis points over the sovereign curve, hurdle rates for commercial and mixed-use builds push beyond 17%, while prime rental yields cluster near 6–7%. This spread inversion extends breakeven timelines beyond private equity fund lives and erodes dollar investors’ risk-adjusted returns.

The return squeeze runs through funding, currency, and absorption. Dollar liabilities magnify shilling debt service when the currency weakens, while leases remain largely shilling-denominated and slower to reprice. Prime office vacancies in Nairobi are near the mid-20s percent by market estimates as supply outpaced take-up, compressing yields from 9–10% in the prior cycle.

Construction costs have risen roughly 10–15% year on year on imported inputs and tax changes, lifting replacement costs above achievable sale prices in several sub-markets. These dynamics prolong cash-conversion cycles to five–seven years and raise equity contributions to satisfy lenders’ debt-service cover ratios, diluting internal rates of return even before currency translation.

Macro conditions amplify the pressure. Headline inflation has moderated to about 6–7% in 2025 from last year’s highs, but real borrowing costs remain restrictive. Hard-currency funding is still expensive as Kenya’s Eurobond curve trades at double-digit yields, while domestic liquidity prefers T-bills. The shilling’s depreciation improved export competitiveness but inflated import costs and dollar debt service.

Under these constraints, institutional capital is rotating toward assets with shorter payback, contracted revenues, and better policy insulation—data centers with anchor tenants, logistics parks tied to trade corridors, and regulated infrastructure with tariff indexation. These models provide clearer cash flow and lower exit risk than speculative development.

Capital-market structure compounds the challenge. Kenya’s listed REIT segment remains thin, with low turnover and wide bid-ask spreads, limiting institutional exit routes. Domestic pension assets have grown, but allocations to alternatives are still small, offering limited local absorption for large secondary sales. Absent deeper REIT liquidity, standardized valuation, and currency-hedging instruments, foreign investors face persistent illiquidity premia. By contrast, frontier-exposed vehicles such as the iShares Frontier and Select EM ETF (FM) can capture Kenya’s consumption and infrastructure upside without locking capital into long-duration construction risk.

Policy can improve the calculus, but sequencing matters. Digitized land registries and title assurance reduce legal friction; standardized approvals and predictable utility connections cut time to revenue; and incentives for income-producing, infrastructure-adjacent REITs could attract duration capital if governance is credible. Mortgage deepening helps absorption only if real incomes recover and rates move decisively lower.

A practical bridge is real estate with FX-linked counterparties—warehousing for export logistics, cold-chain assets for agro-processing, and worker housing tied to special economic zones—where dollar-indexed leases or hard-currency revenues reduce currency mismatch and shorten cash-conversion cycles.

For markets, the signal is already visible in relative spreads and asset allocation. Property risk premia have widened, while logistics and digital infrastructure attract incremental flows. Re-entry into development is plausible if funding costs, FX volatility, and exit pathways normalize. The forward test is measurable and time-anchored. By mid-2026, watch for the policy rate falling below 11%, the 10-year local yield inside 11.5%, and KES=X stabilizing within 150–160. Sector indicators should show prime vacancies below 20%, two consecutive quarters of positive net absorption, and a meaningful uptick in listed REIT turnover from 2024 levels.

If these thresholds are met alongside construction-cost inflation easing below 8%, risk-adjusted returns can reprice and selective private capital can re-engage. Without that alignment, consolidation will shift assets toward domestic pensions and conglomerates, and real estate’s multiplier could subtract up to 0.4 percentage point from annual GDP through 2027.