Kenya Retail Real Estate Sector Report, 2019

In the past year, the retail real estate sector in Kenya has continued to witness growth evidenced by an increase in malls and the number of international retailers taking up retail spaces in the country. The retail sector recorded a 1.1 mn SQFT increase in mall space in 2018, leading to a supply of 12.5 mn SQFT in 2019 from 11.4 mn SQFT in 2018. New mall openings included; The Karen Waterfront in Karen, expansion of Sarit Centre in Westlands, and Mwembe Mall in Mombasa, among others. 

The main drivers of the retail real estate sector were; (i) positive demographics as Kenya’s urban population continues to expand at an annual rate of 4.3%, (ii) continued change in tastes and preferences by a growing middle class towards international products, thus, creating a niche for international retailers, (iii) improved infrastructure that has encouraged a growth in mall space, and (iv) growth of Small and Medium-Sized Enterprises (SMEs). In addition, we see retail spaces differentiating themselves in a bid to attract footfall by focusing on entertainment and recreational facilities as seen in malls such as Two Rivers and Karen Waterfront.

However, the sector faces several challenges due to a tough financial environment, pushing property managers to employ prudent methods in a bid to retain tenants and also to target international anchor tenants.

Despite these challenges, we expect the performance of the retail sector to be cushioned by the presence of strong international retailers such as Carrefour and Shoprite, food chains such as Subway, Burger King and KFC, as well as local retailers such as Tuskys and Naivas. These retailers have continued to take up space in malls and mixed-use developments, in a bid to expand their local footprint, thus providing a boost to the retail sector. Overall, the formal retail sector in Kenya remains relatively low at approximately 35.0%, in comparison to countries such as South Africa at 60.0% and therefore, we expect to see more growth in the sector.

In 2019, the Kenyan retail sector’s performance dropped slightly with average rental yields declining by 1.6% points to 7.0%, from 8.6% in 2018. Occupancy rates declined by 8.7% points to 77.3% in 2019, from 86.0% in 2018. The decline in performance is mainly attributed to an introduction of 0.8 mn SQFT of retail space into the Kenyan market driving down rents and occupancy rates by 10.2% and 4.8% points, respectively. Some of the additional retail spaces include the Waterfront Mall and Signature Mall.

The Nairobi Metropolitan Area (NMA) Retail Performance declined by 1.0% points to 8.0%, from 9.0% in 2018, attributed to an increase in retail space supply of 0.8 mn SQFT within the past year with the addition of malls such as Waterfront, The Well, Mountain View and the expansion of Westgate and Sarit Centre malls. Kilimani, Ngong Road and Westlands were the best-performing retail nodes within NMA recording rental yields of 9.9%, 9.2% and 9.2%, respectively, in 2019 attributed to the nodes serving the upper middle income and high-end population, who have relatively high purchasing power.

The sector’s performance in key urban cities softened, recording average rental yields of 7.0% in 2019, 1.6% points lower than the 8.6% recorded in 2018. The reduced performance is largely attributed to a 10.6% reduction in rental rates to Kshs 118 per SQFT in 2019, from Kshs 132 per SQFT in 2018, and a surplus in retail space coupled with stiff competition among malls in some nodes such as Nairobi, which recorded an oversupply of 2.8 mn SQFT.

The key regions covered which include Kiambu, Mombasa and Mt. Kenya, have a total mall space supply of 16.1 mn SQFT against a demand of 14.4 mn SQFT, resulting in an oversupply of 1.7mn SQFT. Nairobi, Uasin Gishu, Kisumu and Nakuru Counties had the highest oversupply of 2.8 mn, 0.2 mn, 0.2 mn and 0.1 mn SQFT, respectively. Kiambu County had the highest space deficit of 0.8 mn SQFT while Machakos, Kajiado, Mt.Kenya and Mombasa had a space deficit of 0.2 mn SQFT each.

The outlook for the sector is neutral and we expect to witness reduced development activity in Nairobi, with developers shifting to county headquarters in some markets such as Kiambu and Mt. Kenya that have an existing retail space demand of 0.8 mn and 0.2smn SQFT, respectively.