Westlands and Karen Ranked The Best Perfoming Retail Nodes in the Nairobi Metropolitan Area

Kevin Namunwa | Nov 23, 2020

Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their Kenya Retail Sector Report-2020. The report analyses the performance of the retail sector in Kenya through tracking the changes in occupancies, rental yields and rental rates. It also outlines the retail space demand, opportunity and outlook of the sector.

According to the report, the 2020 period recorded subdued performance across the various real estate themes resulting from the tough operating environment as the economy grappled with effects of the Coronavirus pandemic.

In the retail sector, performance declined recording average rental yields of 6.7%, 0.3% points lower than the 7.0% recorded in 2019. The subdued performance is largely attributed to: i) reduction in rental rates in a bid to attract tenants amid a tough economic environment which saw the rental rates in the sector post a 2.1% decline to Kshs 115.1 per SQFT in 2020, from Kshs 118.0 per SQFT in 2019, and, ii) reduced occupancy rates which declined by 0.7% points Y/Y from 77.3% in 2019 to 76.6% in 2020 attributable to reduced demand for physical retail space due to growing focus on e-commerce and scaling down of retailers in the wake of reduced revenue inflows.

The performance of the key urban centres in Kenya is as summarized below:

(All values in Kshs unless stated otherwise)

Summary of Retail Performance in Key Urban Cities in Kenya
Region	Rent/SQFT 2020	Occupancy% 2020	Rental Yield 2020	Rent Kshs/SQFT 2019	Occupancy 2019	Rental Yield 2019	2020 ∆ in Occupancy (% points)	2020 ∆ in Rental Yield (% points)
Mount Kenya	125.0	78.0%	7.7%	129.8	80.0%	8.6%	(2.0%)	(0.9%)
Nairobi	168.5	74.5%	7.5%	168.6	75.1%	8.0%	(0.6%)	(0.5%)
Mombasa	114.4	76.3%	6.6%	122.8	73.3%	7.3%	3.0%	(0.7%)
Kisumu	97.2	74.0%	6.3%	96.9	75.8%	5.6%	(1.8%)	0.7%
Eldoret	130.0	80.2%	5.9%	131.0	82.3%	7.9%	(2.1%)	(2.0%)
Nakuru	55.7	76.6%	5.9%	59.2	77.5%	4.5%	(0.9%)	1.4%
Average	115.1	76.6%	6.7%	118.1	77.3%	7.0%	(0.7%)	(0.3%)

Source: Cytonn Research

Rental yields within the Nairobi Metropolitan Area (NMA) declined by 0.5% points to 7.5% from 8.0% in 2020 attributable to decline in demand for space evidenced by a drop in occupancies by 0.6% points from 75.1% in 2019 to 74.5% in 2020 and marginal decline in rent of by 0.1% to Kshs 168.5 from Kshs 168.6 per SQFT. The subdued performance is also attributed to the current oversupply of retail report spaces by 3.1 mn SQFT, shifting focus to e-commerce leading to decline in demand for physical retail spaces, constrained consumer spending given the tough economic environment and exit by some retailers to cushion themselves against the negative effects of the Coronavirus pandemic.

Mt. Kenya region offers the best investment opportunity to retail space developers, with high rental yields of 7.7%, 0.1% points higher compared to market averages of 6.7%, the region currently has an existing retail space deficit of 0.7 mn SQFT, the under supply signals high demand. Within the Nairobi Metropolitan Area (NMA), the opportunity lies in Westlands and Karen which were the best performing retail nodes with rental yields of 9.8% and 9.2%, respectively attributed to relatively high demand as the neighbourhood host affluent residents with high consumer purchasing power, ability to charge a premium on rates on the high quality retail spaces, relative good infrastructure thus ease of access into the areas and relatively high occupancy rates of 80.9% and 79.1%, respectively above the market average of 74.5%.

The table below summarizes metrics that have a possible impact on the retail sector, that is the retail space supply, performance, retail space demand, and concluding with the market opportunity/outlook in the sector;

Key: Green – POSITIVE, Grey – NEUTRAL, Red – NEGATIVE highlights sectorial outlook

Kenya Retail Sector Outlook 2020
Measure	Sentiment 2019	Sentiment 2020	2019 Outlook	2020 Outlook
Retail Space Supply	Majority of the Kenyan regions that is Kiambu County, Mt Kenya region, Machakos, Mombasa and Kajiado are undersupplied and therefore, we expect to see developers shifting their focus to these regions. However, in the short-run we expect developers to scale back on the top-tier regions that are oversupplied, that is, Nairobi, Kisumu, Uasin Gishu and Nakuru with more development picking up based on demand from international retailers and investors as well as improved financial environment	Main urban cities such as Nairobi and Kisumu have an existing oversupply of space while regions such as Kiambu County and Mt Kenya region are undersupplied and therefore, we expect to see developers shifting their focus to these regions. This will be supported by demand from international retailers and expansion by local retail chains	Neutral	Neutral
Retail Market Performance	The retail sector performance in the Nairobi Metropolitan Area declined by 5.4% and 4.7%, respectively to record rental yields of 8.0% and occupancy rates of 75.1%, respectively. Nairobi and Mt Kenya were the best performing region with average rental of 8.6% and 8.0%, respectively. Kisumu’s performance dropped significantly due to increased mall supply	The retail sector performance recorded a decline of 0.3% and 0.7% points in average rental yields and occupancy rates, respectively, coming in at 6.7% and 76.6%, respectively Nairobi and Mt. Kenya were the best performing regions with average rental yields of 7.7% and 7.5%, respectively, attributable to relatively high demand for quality retail space demand for space in malls. We expect the sector’s performance to be cushioned by entry of local and international retailers taking up prime retail space left by their troubled counterparts.	Neutral	Neutral
Retail Space Demand	Despite four major cities i.e. Nakuru, Uasin Gishu, Kisumu and Nairobi being oversupplied, the rest are undersupplied including Kiambu with a retail space demand of 0.8mn SQFT	Nairobi, Kisumu and Nakuru are the most oversupplied areas by 3.1 mn, 0.3 mn and 0.2 mn SQFT of space, respectively while areas such as Mt Kenya are under supplied by 0.7 mn SQFT	Neutral	Neutral
Market Outlook	The outlook for the sector is NEUTRAL and we expect to witness increased development activity in areas outside Nairobi, with developers shifting to satellite towns and county headquarters in markets such as Kiambu and Mt. Kenya that have an existing retail space demand of 0.6 mn and 0.7 mn SQFT, respectively.