![[Kenya] Real estate performance dips on low property demand, growing supply, Cytonn report](Images/2018/07/real estate Africa.jpg)
[Kenya] Real estate performance dips on low property demand, growing supply, Cytonn report
The real estate sector in 2018, recorded continued investment across all themes driven by the political stability following the conclusion of the electioneering period.
This coupled with the continued positioning of Nairobi as a regional hub that has led to increased entry of multinationals creating demand for residential units, retail space, commercial offices and hotels, the kicking off of the affordable housing initiative which has gained momentum with the launching of projects such as the Pangani Estate in Nairobi, and the improving macroeconomic environment, with the country’s GDP growing by 6.0% in Q3’2018, higher than the 4.7% recorded in Q3’2017.
In terms of performance, according to Cytonn’s 2018 Real Estate Review, the sector recorded rental yields of 9.0% in retail, 8.1% in commercial office, 8.0% in mixed-use developments (MUDs), 7.4% in serviced apartments and 4.7% in residential sector, resulting to an average rental yield for the real estate market of 7.4%, compared to 7.6% in 2017.
Capital appreciation in Nairobi and its metropolis averaged at 3.8% in 2018from 6.5% in 2017 and thus the real estate sector recorded a total return of 11.2% in 2018 compared to returns of 14.1% in 2017, showing a slow-down in real estate operators’ performance.
According to Johnson Denge, Senior Manager Regional Markets at Cytonn, “The slump in the 2018 real estate returns is attributable to a slowdown in demand for property amid the growing supply, evidenced by the 3.0% points decline in the residential sector occupancy rates and the 0.4% points decline in occupancy rates in the retail space on account of increased supply of mall space recording a growth of 4.8% y/y in Nairobi to 6.5mn SQFT in 2018 from 6.2mn SQFT in 2017. However, it is important to note that development returns for investment grade real estate is still estimated to be approximately 23.0% to 25.0% p.a. in the mid and long term.’’
According to the Cytonn’s Report, real estate is expected to record increased activities in 2019 supported by the government’s focus on the affordable housing initiative which has gained momentum with the launching of projects, the continued positioning of Nairobi as a regional hub which has led to the continued entry of multinationals creating demand for residential units, retail centres, commercial offices and hotels, political stability and the improving infrastructure such as the development of sewer system in Ruiru and road network, for instance the ongoing construction of Ngong Road and the Superhighway linking Jomo Kenyatta International Airport to Rironi area in Limuru along the Nakuru- Nairobi highway.
However, investors, have to conduct research to identify market niches and investment opportunities in the market given the overgrowing supply in some of the themes such as the retail sector, the office sector and selected markets in the residential sector, which is likely to affect occupancy rates, and thus returns.
Among the key challenges facing the sector during the year were; uncertainty surrounding statutory approvals particularly in light of the ongoing demolitions of allegedly legally approved buildings, lack of financing as loans remain out of reach for a majority of aspiring homebuyers, an oversupply in some of the themes such as the retail sector which recorded an oversupply of 2.0 mn SQFT of space and a tough operating environment characterized by low private sector credit growth, which averaged at 4.4% as at October 2018, compared to a 5-year average of 14.0%.
The residential sector recorded a decline in performance with average rental yields dropping marginally by 0.5% points, attributable to a decline in occupancy rates which reduced by 3.0% points on average, from 84.0% in 2017, to 81.0% in 2018, attributable to increased stock in the market against minimal uptake.
‘’During the year, apartments performed better than detached units, with average annual uptake of 26.6% compared to detached units’ 20.5%, and average returns of 11.4%, compared to detached units returns of 8.9%, ‘’ stated Wacu Mbugua, an assistant research analyst at Cytonn. “We attribute the growth in demand for apartments to their affordability especially as loans remain out of reach for a majority of aspiring homebuyers,’’ Wacu added.
“Notably, the year witnessed more efforts towards delivering affordable housing, with policies and financing initiatives geared towards making it a reality. Out of the seven Nairobi Urban Regeneration Projects, Pangani Estate, a project that is expected to delivered 1,000 units to the market, was launched towards the end of the year and we expect more projects to follow suit before the end of 2019,’’ noted Patricia Wachira, a research associate at Cytonn.
According to the report, the investment opportunity in the residential sector is in select areas that offer high and stable returns such as Runda Mumwe for detached units, Kilimani for upper mid-end apartments, and Donholm/Komarock, Thindigua for lower mid-end apartments. These areas recorded returns of 14.8%, 11.5%, 14.4% and 13.8% respectively.
The commercial office sector performance in Nairobi improved, albeit marginally, with the asking rents increasing by 1.3% from Kshs 101.0 per SQFT in 2017 to Kshs 102.3 per SQFT in 2018. The occupancy rates increased by 0.7% points from 82.6% in 2017 to 83.3% in 2018, resulting in a 0.2%-point increase in rental yields from 7.9% in 2017 to 8.1% in 2018. “The slight improvement is attributed to the political stability that has led to increased economic activities and the continued positioning of Nairobi as a regional hub that has led to increased entry of multinationals, “said Juster Kendi, a research analyst at Cytonn.
“We remain cautiously optimistic on the performance of commercial office space in Nairobi, despite the marginal increase in returns, and occupancy, as the sector has an oversupply of 4.7mn SQFT, and thus investors are likely to face challenges on exit, when selling and renting. However, we recommend investments in differentiated concepts such as serviced offices which have low supply with a market share of just 0.35% and high returns with average rental yields of 13.4% compared to a market average of 8.1%, ‘’ she added.
