Oil marketer KenolKobil is set to spend Sh4 billion to build shopping malls and office blocks in East Africa to reduce its reliance on the fuel business and tap into the lucrative real estate market.

The company said it had began the search for private equity and property development firms to provide part financing and expertise respectively for the planned real estate projects properties in Kenya, Rwanda and Ethiopia.

Last year, Kenol earned Sh250 million annually or 7.6 per cent of its net profit as rental income from retail shops in its service stations and is looking to grow the share to double digits.

“We are looking for private equity and real estate firms to provide technical expertise and part of the capital needed in these investments,” Jacob Segman, the CEO of KenolKobil told the Business Daily in an interview.

“The projects should be complete not later than 2015 and this will help reduce our exposure from the fuel business,” he said.

Kenol will commit $10 million (Sh830) million to Kenya and the remaining $40 million to Ethiopia and Rwanda. The properties will sit on land owned by the oil marketer that it valued at Sh495.3 million in the year ended December.

Kenol joins a growing list of Kenyan companies including Centum Investments, Housing Finance, PE fund Actis and British America Investments into moving into the property market, attracted by high and stable returns.

Rising rents

Rapid urbanisation, population growth and expansion of the middle class remain the main drivers of Kenya’s property market that is riding on nearly three decades of under investment in mid-tier segment of housing.

Property market analysts say rising rents and home prices in Kenya’s urban centres and the region will continue to hold further, underlining real estate as an asset class of premium returns relative to equities, bonds and bank deposits.

The rally in house prices have some Kenyans worried that a bubble may be shaping up, but most analysts say there is plenty of room for the upward momentum.

“Commercial properties can give an average rental return of 12 per cent,” said Farhana Hassanali, the property development manager at Hass Consult—a local real estate consultancy firm.

This has seen the property asset class outperform the Nairobi Securities Exchange (NSE) over the past decade, according to a survey by CFC Stanbic.

CFC says that property prices have risen 3.5 times over the past decade compared to share prices appreciation of 2.42 times over the same period.

Kenol is betting on the commercial properties to cut its reliance from the volatile fuel business which has been worsened by increased regulation of the sector , including the introduction of price controls in December 2010.

Oil business has also been shackled by increased need for working capital that has seen Kenol Kobil emerge as the biggest company in Kenya in terms of revenues but is trailing firms like Safaricom, East Africa Breweries Limited and Kenya Airways on the profit front.

Kenol revenues stood at Sh222.4 billion in 2011 in a year that saw Kenya Airways sales at Sh85.8 billion, Safaricom (Sh94 billion) and EABL (Sh44.8 billion). The oil marketer’s net profit increased from Sh1.9 billion to Sh3.2 billion—which is lower than Safaricom’s Sh 13.1 billion), KQ (Sh3.5 billion) and EABL (Sh7.3 billion).

“Oil companies in the developed world are diversifying from the fuel business and we are doing the same,” Mr Segman said.