GIGIRI, KAREN AND WESTLANDS TOP IN COMMERCIAL OFFICE SECTOR RETURNS

Apr 27, 2020

The Nairobi Metropolitan Area (NMA) commercial office market continues to be facilitated by the country’s economic climate with office tenants both large and small continuing to drive current demand levels. Demand for office spaces has been primarily driven by the growth of Small and Medium-Sized Enterprises (SMEs) and the entry of multinational corporations.

The commercial office sector recorded a decline in performance in 2019, with a 0.7% point y/y drop in average yields to 7.7% from 8.3% in 2018, attributed to a decline in uptake of office space attributed to a challenging financial environment, and an oversupply of 6.3 mn SQFT which has created a bargaining chip for potential tenants.

In terms of office space 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 oversupply was 21.6% higher than in 2018 at 5.2 mn SQFT. Assuming current occupancy levels persist, we expect a 1.9% increase in oversupply to 6.5 mn SQFT in 2020

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.

Thika Road and Mombasa Road were the worst performers recording rental yields of 6.3% and 5.5%, respectively, attributed to; (i) poor location as a result of traffic congestions, (ii) the Mombasa Road’s zoning for industrial use, and (iii) lower quality office space.

The table below shows the summary of performance:

Commercial Office Market Performance by Node 2019
Nodes	Price Kshs/ SQFT 2019	Rent Kshs/ SQFT 2019	Occupancy 2019(%)	Rental Yield (%) 2019
Gigiri	13,833	117	80.4%	9.2%
Karen	13,665	111	85.3%	8.3%
Westlands	12,370	104	80.3%	8.3%
Parklands	12,369	97	83.1%	8.2%
UpperHill	12,397	98	80.0%	7.5%
Kilimani	12,680	91	80.9%	7.1%
Nairobi CBD	12,425	89	85.6%	7.1%
Thika Road	12,600	84	80.4%	6.3%
Msa Road	11,400	73	66.5%	5.5%
Grand Total	12,638	97	80.3%	7.5%

Source: Cytonn Research 2019

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%.

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.

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.

The report is available online: (Link here)

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