The real estate sector recorded an array of activities across all themes in Q1’2019 supported by continued demand for investment property from multinational individuals, firms and the growing middle class.
According to the latest real estate analysis by Cytonn Investments, the Kenyan Government’s efforts towards provision of affordable housing as part of its Big 4 Agenda, and continued infrastructural improvement were among the activities that shaped the sector in Q1 of 2019.
According to Cytonn, the key challenges that continue to face developers and end users in the real estate sector include access to financing with private sector credit growth coming in at 4.4 percent in October 2018, compared to a 5-year (2013-2018) average of 14.0 percent, high land and construction costs, especially in the Nairobi Metropolitan Area, and increased supply in selected sectors such as the commercial office and retail sectors with a surplus of 5.2mn SQFT and 2.0mn SQFT, respectively, as at 2018.
In Q1’2019, the real estate firm reported that the residential sector continued to witness an increase in investor interest in the residential sector, particularly due to the ongoing focus on bridging the affordable housing shortage in Kenya.
In Q1’2019, the commercial office sector recorded a marginal decline in performance recording 0.1 percent and 0.9 percent points decline in average rental yields and occupancy rates, to 8.0 percent and 82.4 percent in Q1’2019, from 8.1 percent and 83.3 percent, respectively, in FY’2018.
The negative performance was largely driven by a reduction in asking rents by property managers to attract tenants as a result of a surplus of office space that stood at 5.2 million SQFT as at 2018 giving tenants a higher bargaining power. Asking rents decreased by 1.7 percent to an average of 100 shillings per SQFT from 102 shillings per SQFT in 2018, while asking prices remained stable at 12,574 shillings per SQFT.
In terms of Nairobi submarket analysis, Gigiri, Westlands and Parklands were the best performers in Q1’2019 recording rental yields of 9.6 percent, 9.1 percent, and 9.1 percent, respectively, as a result of their superior locations hosting multinational companies and offering quality Grade A offices, enabling them to charge a premium on rentals.
Areas affected by traffic snarl ups, low quality office space and are not necessarily primary business nodes such as Mombasa Road and Thika Road had the lowest returns with average rental yields of 5.8 percent and 6.2 percent, respectively.
Nairobi CBD’s performance improved as rental yields rose by 0.6 percent points, to 8.2 percent in Q1’2019 from 7.6 percent in FY’2018 driven by 1.4 percent and 5.3 percent points increase in rental rates and occupancy rates respectively attributed to the node’s attractiveness to Small and Medium Enterprises (SMEs) as a result of its affordable rental rates and large customer base present in the Central Business District.
Cytonn retains a negative outlook on the performance of the commercial office sector attributable to an oversupply of 5.2mn SQFT of office space thereby reducing occupancy rates translating to a decline in rental yields. Investments opportunities in the sector are in differentiated concepts such as serviced offices that attract yields of 13.4 percent such as Westlands, as well as areas with low supply of office space such as Gigiri
The retail sector’s performance softened recording 0.5 percent points decline in rental yield to 8.5 percent in Q1’ 2019 from 9.0 percent in FY’ 2018. This is attributed to an increase in supply which saw average occupancies drop by 3.0 percent points from 79.8 percent in FY’2018 to 76.8 percent in Q1’ 2019 and average rents declined by 3.9 percent to 174.3 shillings SQFT/month from 178.2 shillings SQFT/month in 2018 as property managers/owners reduced rental charges to attract tenants.
In terms of submarket analysis in Nairobi, Westlands and Kilimani were the best performing retail nodes with average rental yields of 11.5 percent and 10.7 percent, respectively, as the areas are affluent neighbourhoods hosting middle – high-end income earners with high consumer purchasing power and thus tenants are willing to pay higher rents for retail space in the area.
Mombasa Road and Satellite Towns were the worst performing nodes recording rental yields of 6.8 percent and 6.3 percent, respectively. The poor performance is attributable to low rental charges as a result of traffic congestion along Mombasa road and competition from informal retail space in Satellite Towns.
Karen, Mombasa Road, and Thika Road nodes recorded the largest declines in rental yield q/q, of 1.7 percent, 1.1 percent, and 1.0 percent points, respectively. The decline in performance is attributable to a 15.2 percent, 6.4 percent, and 4.2 percent points decline in occupancy rates for Karen, Mombasa Road, and Thika Road, respectively due to increasing retail space with the opening of malls such as Waterfront and The Well in Karen and Coholo in Mlolongo.