Kenya’s retail sector to maintain annual growth of 7.4pc in the next 2-3 years

The retail sector in Kenya outlook is positive offering higher returns compared to other asset classes with average returns of 25.0 percent.

Cytonn Investments Senior Manager, Regional Markets, Mr Johnson Denge said, “The sector is projected to have a growth Compound Annual Growth Rate (CAGR) of 7.4 percent in the next 2-3 years.”

“We expect less development of brick and mortar malls and more growth in terms of expansion from foreign retailers,” he added.

However, the firm’s Kenya’s Real Estate Sector Retail Report themed, “Cautious Optimism in the Face of Turbulence” observed that “Retail sector performance softened with yields declining by 0.4 percentage points from 8.7 percent to 8.3 percent as a result of increased supply and a tough operating environment.”

The report was based on research conducted on 8 retail nodes in Nairobi and the key urban cities of Eldoret, Mombasa, Kisumu and the Mt. Kenya Region, which include Nyeri, Meru and Nanyuki Towns.

According to the report, there has been an increase in the supply of retail space, with Nairobi alone recording a 41.6 percent increase in supply y/y due to the opening of malls like Two Rivers and Rosslyn Riviera on Limuru road and NextGen Mall on Mombasa Road.

The high supply, led to lower occupancies and lower asking rents which led to a decrease in returns with the average rental yield declining in the whole market to 8.3 percent in 2017 from 8.7 percent in 2016, and a 0.4 percent points decline in the Nairobi area to 9.6 percent from 10.0 percent, over the same period.

Occupancy rates declined by 2.7 percent points in the whole market to 0.2 percent in 2017 from 82.9 percent in 2016, and 9.0 percent points in Nairobi to 80.3 percent from 89.3 percent, over the same period.

“The sector is likely to experience a shakeup with the leading retail outlet in Kenya, Nakumatt, exiting its flagship stores and thus leaving some malls without an anchor tenant. This is likely to be an opportunity for more foreign retailers to come into the country, thus changing the landscape of how the sector has been operating,” noted Denge.  

Other than Nairobi, Mombasa ranked as one of the best-performing markets in the region due to low supply and a relatively high GDP per Capita.

On the performance of the key urban cities, the report noted that Nairobi, Kisumu and Mt Kenya region had the highest rental yields of 9.6 percent and 9.1 percent and 9.1 percent, respectively.

Eldoret was the worst performing region owing to its low rental rates of Kshs 96.0 PSQFT, 46.9 percent lower than the market average of Kshs 141.0/SQFT, and its rental yields remained the same as last years at 6.6 percent.