Tough financial environment hit Property Owners as rental returns drop
Rental yields for property owners dipped in 2019 due to harsh business environment and increased supply according to the latest report released by Cytonn Investments.
The report themed “Supply-Driven Market”, focuses on the performance of the Commercial Office market in the Nairobi Metropolitan Area based on rental yields, occupancy rates, as well as demand and supply, to identify the trends, with the research conducted on 9 office nodes in the Nairobi Metropolitan Area (Westlands, Kilimani, Karen, Parklands, Thika Road, Upperhill, Nairobi Central Business District (CBD), Gigiri and Mombasa Road).
According to the report, the commercial office sector performance softened in 2019 with a 0.7% point year to year drop in average rental yields to 7.7%, from 8.3% in 2018, attributed to a decline in uptake of office space attributed to a tough financial environment, and an oversupply of 6.3 mn SQFT which has created a bargaining chip for potential tenants, thus lower rental rates.
“The outlook for the Commercial Office sector is NEGATIVE given the current office space oversupply and expected stagnation in performance in 2020 given the current Coronavirus pandemic. With the Coronavirus, many corporates have also now tested working from home, and as such, it is unlikely that occupancy levels will recover to the levels they used to be at previously, at least in the medium-term. However, we expect a slowdown in construction activities allowing the existing demand to absorb the current supply,” said Wacu Mbugua, Research Analyst at Cytonn.
Gigiri, Karen and Westlands were the best performers in 2019 recording rental yields of 9.2%, 8.3%, and 8.3%, respectively, attributed to increased demand by businesses and multinational companies due to their proximity to the Central Business District (CBD) and other business nodes, relatively good infrastructure network, their superior locations and availability of quality Grade A offices, enabling them to charge a premium on rentals. According to the report, the investment opportunity within the Nairobi Metropolitan Area is in areas with low supply and high returns such as Gigiri and in differentiated concepts such as mixed-use developments (MUDs) and serviced offices recording rental yields of up to 7.9% and 12.3%, respectively.
Grade B office spaces recorded the highest rental yields at 7.9% compared to Grade A and Grade C rental yields of 7.4% and 7.2%, respectively. Grade B offices were the most common in the market with a market share of 52.1%.
In terms of supply, 1.5 mn SQFT of office space was delivered to the Nairobi Metropolitan Area in 2019 with an average occupancy level of 80.5%. This resulted in a cumulative supply of 6.7 mn SQFT against a demand of 0.3 mn SQFT and thus an oversupply of 6.3 mn SQFT. The main drivers for the sector were (i) Kenya’s growing presence as a regional hub, and (ii) increased entry of multinational corporations resulting in increased development of commercial office spaces.