Residential apartments recorded an average total return of 5.2 percent in comparison to the detached average of 4.2 percent in 2020 according to a report by Cytonn Real Estate.
The retail and commercial office sectors recorded declines in rental yields to 7.5 and 7.0 percent in FY’2020, from 7.8 and 7.5 percent, respectively in FY’2019.
The land sector recorded an overall annualized capital appreciation of 2.3 percent, indicating that investors still consider land as a good investment asset in the long term.
“The main challenges facing the sector during the period under review were;
i) reduced revenue due to slow market uptake and downward pressure on prices and rents,
ii) decrease in the value of building approvals for the first nine months of the year to Kshs 120.8 bn compared to Kshs 176.5 bn recorded over a similar period in 2019,
iii) business restructuring with some firms downsizing,
iv) constrained financing for developers,
v) the existing oversupply in the commercial office and retail sectors, with a surplus of 6.3 mn SQFT and 3.1 mn SQFT, respectively,” stated Fidelis Wanalwenge, a Research Assistant at Cytonn.
Nevertheless, the performance of the real estate sector was cushioned by;
(i) the government’s continued focus on affordable housing projects to serve the middle and low-income earners with the aim of increasing homeownership,
(ii) operationalization and licensing of the Kenya Mortgage and Refinance Company,
(iii) introduction of the Land Information Management System (LIMS) in April 2020 aimed at eliminating fraud and enabling digitization of processes at the lands ministry,
(iv) improvement of infrastructure with ongoing select projects such as the construction of the Nairobi Expressway
(v) easing of travel bans and restrictions in Q3’2020 coupled with the government’s stimulus package such as post-COVID recovery funds, intended to enhance the recovery of the hospitality sector.
The residential sector recorded a decline in performance with average total returns coming in at 4.7 percent from 6.1 percent recorded in 2019 with the price of units correcting by (0.2 percent).
Detached units in Rossyln and Ridgeways recorded the highest returns at 6.3 percent and 6.1 percent, respectively, while apartments in Thindigua and Syokimau recorded the highest returns at 7.5 percent and 6.9 percent, respectively.
According to the report, Gigiri was the best performing office node in FY’2020, followed by Westlands and Karen recording rental yields 7.8% each, attributed to relatively high returns compared to the market averages in addition to availability of high quality spaces suitable for the high-end and middle income clients.
In the retail sector, Westlands and Karen were the best performing nodes recording average rental yields of 9.9 and 9.8 percent, respectively, attributed to presence of affluent residents who have a high consumer purchasing power with the areas hosting high end income earners, the ease of access to the areas, and, relatively high occupancy rates of above 81% against the market average of 75.2 percent.
In hospitality, serviced apartments recorded subdued performance in 2020 with the average rental yields declining by 3.6 percentage points to 4.0 percent in 2020 from 7.6 percent in 2019.
Westlands-Parklands was the best performing node recording an average rental yield of 6.1 percent.
Out of the seven sectors, the outlook is positive for one sector-land; neutral for four sectors-residential, retail, mixed-use developments, and hospitality sector; and, negative for two sectors-commercial offices and listed real estate.
Therefore, the overall outlook for the real estate sector is NEUTRAL, supported by; launch of affordable housing projects, the operationalization of KMRC, expansion of local and international retailers, the government’s post- COVID stimulus package set to boost performance of the hospitality sector, and, improvement of infrastructure opening up areas for investment.
The sector will however continue to experience constraints such as oversupply of 6.3mn SQFT of office space 3.1mn SQFT of retail space and sluggish performance of the REIT market