Dec 17, 2023

In October 2022, we released the Nairobi Metropolitan Area Mixed-Use Developments (MUDs) Report 2022, which highlighted that Mixed-Use Developments (MUDs) recorded an average rental yield of 7.4%, which was 0.9% points higher than the 6.5% rental yield for the retail, commercial Office and residential themes in 2021. The relatively better performance was mainly attributed to; i) an improved business environment, ii) strategic and prime locations of the developments with the capability to attract prospective clients, and, iii) preference by target clients due to their convenience hence improved demand and returns to investors.

This week we update our report with 2023 market research data in order to determine the progress and performance of MUDs against the market performance of single use Residential, Commercial Office, and Retail developments. Therefore, this topical will cover the following:

1. Overview of Mixed-Use Developments,
2. Mixed-Use Developments Performance Summary in 2023, and,
3. Mixed-Use Developments Investment Opportunity and Outlook.

Section I:  Overview of Mixed-Use Developments

A Mixed-Use Development (MUD) is an urban development that combines multiple Real Estate themes including residential, commercial, retail, and hospitality. Due to this integration, a single development project serves more than one purpose within a single location. MUDs thus offer benefits such as enhanced access to amenities and services, and, convenience of living and working areas at the same place. Consequently, they have been gaining traction in Kenya owing to the various changing life patterns and needs of clients. For the year 2023;

1. Property developer Mi Vida Homes broke ground for the construction of three projects namely, Amaiya, 237 Garden City (237 GC) and KEZA located within Garden City along Thika Road, and Riruta areas respectively. This came more than a year after the developer announced plans to begin construction in April 2022. For more information, see Cytonn Weekly #47/2023,
2. Absa Bank Kenya announced a strategic partnership with Unity Homes, a leading property developer of residential communities in Kenya, which will allow potential home buyers to access affordable mortgage loans backed by the Kenya Mortgage Refinancing Company to purchase homes at Unity One. For more information, please see our Cytonn Weekly #36/2023,
3. The International Finance Corporation (IFC) disclosed details of a Kshs 2.9 bn (USD 20.0 mn) proposed loan to Centum Real Estate Limited (CRE), a wholly owned subsidiary of Centum Investment Company Plc. According to disclosures from the IFC, the loan will be used to partially finance Centum’s Mzizi Court project consisting of 1,940 affordable housing units located at Two Rivers. For more information, please see our Cytonn Weekly #36/2023,
4. Pan Pacific Hotels Group, a subsidiary of Singapore-listed UOL Group Limited, one of Asia’s most established hotel and property companies, opened a luxurious hotel facility dubbed ‘Pan Pacific Serviced Suites Nairobi’ located at the Global Trade Centre (GTC) in Westlands. For more information, please see Cytonn Weekly #24/2023,
5. French retailer Carrefour Supermarket, opened a new outlet at the Business Bay Square (BBS) mall located in Eastleigh, Nairobi, bringing the retailer’s number of operating outlets countrywide to 20. The recently launched mall, with phase 1 currently at about 90.0% complete, comprises of retail facilities, banks and micro-finance institutions, food courts and restaurants, medical facilities, a mosque, commercial offices, entertainment and recreation facilities, and a kid’s playground. For more information, please see our Cytonn Monthly - May 2023,
6. Improvon, a South African based logistics and industrial developer, announced ongoing expansion efforts to set up mini-warehouse units at Nairobi Gate Industrial Park in Northlands City, Ruiru. The facility targets medium-sized firms seeking specialized logistics solutions and already hosts two 5,000 SQM depots. For more information, see our Cytonn Weekly #15/2023,
7. Centum Real Estate, the development affiliate of Centum Investment Company PLC, completed the construction of phase one of its 32 luxurious four-bedroom duplexes dubbed ‘Loft Residences’, which sits on 3.9 acres situated in Two Rivers. For more information, see our Cytonn Weekly #07/2023,
8. Madison Insurance entered into a Joint-Venture (JV) agreement with Housing Finance Company (HFC), a subsidiary of HF Group, to develop a Master Planned Community project dubbed ‘Villakazi Homes’ in Athi River, Machakos County. For more information, see our Cytonn Weekly #07/2023,
9. Local retail chain Cleanshelf Supermarket opened a new outlet located in Greenpark Estate along Mombasa road, Athi River bringing the retailer’s number of operating outlets countrywide to 13. For more information, For more information, see our Cytonn Weekly #07/2023, and,
10. Additionally, Tatu City, a mixed-use satellite city development, launched a luxurious lakeside-living project dubbed ‘Kofinaf Tatu Residences’, sitting on a 200-acre piece of land within Kofinaf Estate, located in Tatu City, Kiambu County. For more information, see our Cytonn Weekly #02/2023.

Some of the factors that have been driving the growth of MUDs include;

1. Evolving Lifestyles and Consumer Preferences: Mixed-Use Developments present a convenient and integrated lifestyle that resonates with urban living preferences. Consequently, there is a growing demand for such developments in Kenya due to shifts in lifestyle patterns, leading to an upswing in their construction,
2. Growing Demand: Kenya exhibits relatively high annual population and urbanization growth rates of 1.9% and 3.7% respectively, surpassing the global rates 0.8% and 1.6%, as of 2022. This dynamic demographic landscape fuels the demand for development, propelling the growth and success of Mixed-Use Developments. Furthermore, the market demand for diverse and integrated spaces that cater to the varied needs of residents and businesses has been a significant driver. Mixed-Use Developments respond to this demand by providing a holistic solution in a single development,
3. Relatively Higher Returns: The incorporation of diverse real estate themes within a single location makes Mixed-Use Developments more financially rewarding compared to single-use developments. Investors can capitalize on multiple revenue streams from the sale and lease of residential, office, and retail spaces,
4. Improved Infrastructure: Recent years have witnessed significant advancements in infrastructure, fostering the establishment of Mixed-Use Developments. Massive infrastructure projects, such as the Nairobi Expressway and Western Bypass, play a pivotal role in supporting the development of these integrated spaces,
5. Optimal Land Utilization: Given the scarcity of appropriate land, especially in urban settings experiencing heightened population and urbanization growth, Mixed-Use Developments (MUDs) guarantee the effective utilization of available land by integrating various asset classes within a single project and location,
6. Risk Diversification: Mixed-Use Developments offer a risk mitigation strategy by providing diversification across various asset classes. This shields against market forces that might negatively impact a specific theme, such as low uptake or demand,
7. Strategic Locations: Mixed-Use Developments are often strategically positioned in urban areas with ample infrastructure, catering to both high and middle-income demographics. This accessibility attracts a substantial number of high-end potential clients, and,
8. Sustainability: Mixed-Use Developments seamlessly integrate different real estate classes in a single project and location, optimizing space usage. This approach minimizes the need for extensive commutes, as residents can live, work, and shop all within one locale, contributing to a more sustainable lifestyle.

Despite the aforementioned factors, there exist various setbacks hindering the development and performance of MUDs such as:

1. High Costs of Development: Developing and financing Mixed-Use Developments (MUDs) proves to be more costly than single-use projects. This is due to the need for intricate designs to guarantee the seamless integration of diverse Real Estate themes. The challenge lies in making the overall project both appealing and functional, making it challenging for developers to secure funding from banks and other stakeholders for MUDs. Adding to the complexity, construction costs have seen an increase in 2023. This rise is attributed to inflationary pressures resulting from supply chain disruptions and the depreciation of the Kenyan Shilling. Consequently, the expenses associated with importing construction materials have surged in turn increasing the costs of construction,
2. Oversupply in Select Real Estate Sectors such as the 5.8 mn SQFT in the NMA commercial office market, 3.3 mn SQFT in the NMA retail market, which in turn hinder optimum performance of the developments, and,
3. Coordinating Different Uses: Integrating the diverse uses included in MUDs may be challenging, as each Real Estate theme has different needs and requirements. Incorporating the right mix requires specific management considerations, as the tenants need to complement each other and support the overall goals of the development, which may be difficult to implement.

Section II:  Mixed-Use Developments Performance Summary in 2023

1. Summary of MUDs Performance in Comparison to General Market Performance

Mixed-Use Developments recorded an average rental yield of 8.4% in 2023, 1.3% points higher than the respective single use themes which recorded an average rental yield of 7.1% in a similar period the previous year. The relatively better performance was mainly attributable to changing client preferences and MUDs attractiveness driven by the diversity in amenities and social offerings they provide to clients.

The retail and commercial office themes in the MUDs recorded 1.0% and 0.7% points increase in average rental yields to 9.8% and 8.0%, respectively in 2023, from 8.8% and 7.3% in 2022. This was mainly supported by the addition of prime spaces fetching higher rents and yields such as Business Bay Square (BBS) Mall, improved absorption rates on account of reduced supply of office space delivered into the market as compared to a similar period in 2022, and, aggressive expansion strategies explored by both local and international retailers. For the Residential theme in the MUDs, the average rental yield improved by 1.6% points to 6.8% in 2023, from 5.2% in 2022 majorly attributable to an increase in rents per SQM chargeable. The table below shows the performance of single-use and Mixed-Use development themes between 2022 and 2023;

Cytonn Report: Thematic Performance in MUDs Vs. Key Nodes Hosting MUDs Market Performance 2022-2023
	MUD Themes Average		Market Average
	Rental Yield % 2022	Rental Yield % 2023	Rental Yield % 2022	Rental Yield % 2023	∆ in y/y MUD Rental yields	∆ in theme Rental Yields
Retail	8.8%	9.8%	7.8%	8.5%	1.0%	0.7%
Offices	7.3%	8.0%	7.0%	7.3%	0.7%	0.3%
Residential	5.2%	6.8%	5.5%	5.7%	1.6%	0.2%
Average	7.4%	8.4%	6.8%	7.1%	1.0%	0.3%
*Market performance is calculated from nodes where sampled MUDs exist

Source: Cytonn Research

1. Mixed-Use Developments Performance per Node

In terms of performance per node, Karen, Limuru Road and Westlands were the best performing of all sampled nodes with average MUD rental yield of 9.7%, 9.5% and 8.8% respectively, 1.3% points, 1.1% points and 0.4% points higher than the market average of 8.4% in 2023. The remarkable performance was largely attributed to; i) the presence of prime retail and office spaces fetching higher rents and yields, ii) quality infrastructure supporting investments, and, iii) affluent residents with high consumer spending power. On the other hand, Thika Road was the worst performing node with an average MUD rental yield of 7.1%, 1.3% points lower than the market average of 8.4%. The relatively poor performance was mainly attributed to; i) low rental rates attracted by developments, ii) the long commute to main commercial zone coupled frequent with traffic snarl-ups and congestion along Thika Road, and, iii) a relatively lower consumer spending power of residents. The table below shows the performance of Mixed-Use Developments by node in 2023;

Cytonn Report: Nairobi Metropolitan Area Mixed Use Developments Performance by Nodes 2023
Location	Commercial Retail			Commercial Office			Residential				Average MUD Yield
	Rent (Kshs/SQFT)	Occupancy	Rental Yield	Rent (Kshs/SQFT)	Occupancy	Rental Yield	Price (Kshs/SQM)	Rent (Kshs/SQM)	Annual Uptake	Rental Yield
Karen	270	92.5%	11.5%	125	82.5%	7.8%					9.7%
Limuru Road	325	82.5%	12.1%	112	75.5%	7.2%	162,030	1,538	27.2%	9.0%	9.5%
Westlands	211	70.3%	9.5%	134	74.7%	9.0%	284,147	3,448	13.7%	7.9%	8.8%
Kilimani	193	83.2%	9.7%	114	82.4%	7.6%					8.6%
Upperhill	147	75.7%	8.0%	102	81.3%	8.5%					8.3%
Eastlands	243	84.7%	11.2%	80	67.5%	5.4%					8.3%
Mombasa Road	203	75.0%	8.7%	90	80.0%	7.2%	118,812	662	13.7%	6.0%	7.3%
Thika Road	198	76.7%	9.2%	111	75.0%	7.8%	126,545	732	17.8%	4.2%	7.1%
Average	211	77.9%	9.8%	116	77.2%	8.0%	174,434	1,603	16.8%	6.8%	8.4%
*Selling prices used in the computation of rental yields for commercial office and retail themes entailed a combination of both real figures and market estimates of comparable properties in the locations of the Mixed-Use Developments (MUDs) sampled

Source: Cytonn Research

3. Performance of Real Estate Themes in MUDs versus Single-themed Developments’ Performance

In our Mixed-Use Development analysis, we looked into the performance of the retail, commercial office and residential themes:

1. Retail Space

The average rental yield of retail spaces in Mixed-Use Developments came in at 9.8% in 2023, 1.3% points higher than single use retail developments that realized an average rental yield of 8.5%. This was mainly attributable to the high rental rates that MUDs generated at Kshs 211 per SQFT when compared to the Kshs 189 per SQFT recorded for the single-use retail spaces owing to the addition of prime quality spaces attracting higher rates such as Business Bay Square (BBS) mall located in Eastleigh.

Limuru Road and Karen were the best performing nodes with the average rental yield at 12.1% and 11.5%, significantly higher than the market average of 9.8%. This was mainly driven by; i) increased and relatively higher rental rates which translates to higher returns, ii) stable occupancy rates, relatively higher than the market average, iii) presence of residents with high incomes and significant purchasing power, and iv) the availability of sufficient infrastructure that effectively supports the MUDs. Conversely, Upper Hill recorded the lowest rental yields at 8.0%, 1.8% points lower than the market average of 9.8%. This was attributed to the popularity of the area as a commercial office node, coupled with a limited presence of retail developments, and, ii) relatively lower rental rates in comparison to other retail nodes in the Nairobi metropolitan Area. The table below provides a summary of the performance of retail spaces in MUDs against market performance in 2023;

Location	MUD Performance			Market Performance			∆ in MUD/Mkt Occupancy	∆ in y/y MUD/Mkt rental yield
	Rent/SQFT	Occupancy (%)	Rental Yield (%)	Rent/SQFT	Occupancy (%)	Rental Yield (%)
Limuru Road	325	82.5%	12.1%	202	74.0%	8.7%	8.5%	3.4%
Karen	270	92.5%	11.5%	217	85.0%	10.0%	7.5%	1.5%
Eastlands	243	84.7%	11.2%	160	71.7%	6.2%	13.0%	5.0%
Kilimani	193	83.2%	9.7%	192	82.3%	9.9%	0.9%	(0.2%)
Westlands	211	70.3%	9.5%	216	77.6%	9.1%	(7.3%)	0.4%
Thika Rd	198	76.7%	9.2%	165	80.7%	7.5%	(4.0%)	1.7%
Mombasa Rd	203	75.0%	8.7%	168	78.7%	8.0%	(3.7%)	0.7%
Upper Hill	147	75.7%	8.0%
Average	211	77.9%	9.8%	189	78.6%	8.5%	1.9%	1.6%

Source: Cytonn Research

2. Commercial Office Space

The average rental yield for commercial office spaces in MUDs came in at 8.0%, 0.7% points higher than single use commercial developments which realized an average rental yield of 7.3% in 2023. The performance by MUDs was largely attributed to the high rental rates chargeable per SQM within the developments driven by; i) the presence of prime grade A offices fetching higher rental rates owing to their superior quality, sustainable and energy efficient features designed to enhance businesses and workers’ experience, and, ii) their strategic locations appealing to multinationals and international organizations which enhances demand.

In terms of submarket performance, Westlands, Upper Hill and Karen were the best performing nodes posting average rental yields of 9.0%, 8.5% and 7.8% attributable to; i) the existence of upscale business parks like GTC, the Hub and the Galleria business park among others, offering higher rental rates and returns, ii) well-established and ample infrastructure linking the nodes, and, iii) heightened demand for the prime locations, attracting clients willing to pay premium rents for the spaces. In contrast, Eastlands exhibited the lowest performance among nodes, with an average rental yield of 5.4%, primarily due to: i) the presence of lower-quality office spaces offering lower rents, and, ii) inadequate quality infrastructure incapable of seamlessly supporting MUDs. The table below shows the performance of office spaces in MUDs against the single use themed market in 2023;

(All Values in Kshs Unless Stated Otherwise)
Cytonn Report: Performance of Commercial Offices in MUDs Vs. Market Performance 2023
Location	MUD Performance			Market Performance
	Rent/SQFT	Occupancy (%)	Rental Yield (%)	Rent/SQFT	Occupancy (%)	Rental Yield (%)
Westlands	134	74.7%	9.0%	114	75.2%	8.4%
Upper Hill	102	81.3%	8.5%	98	83.4%	7.9%
Karen	125	82.5%	7.8%	116	79.7%	8.3%
Thika Road	111	75.0%	7.8%	79	80.1%	6.0%
Kilimani	114	82.4%	7.6%	98	76.1%	7.1%
Limuru Road	112	75.5%	7.2%	115	81.8%	8.5%
Mombasa Road	90	80.0%	7.2%	71	67.9%	5.2%
Eastlands	80	67.5%	5.4%
Average	116	77.2%	8.0%	99	77.7%	7.3%

Source: Cytonn Research

3. Residential Space

In 2023, residential units within MUDs achieved an average rental yield of 6.8%, marking a 1.1% increase compared to the single-use residential market average of 5.7%. This relatively improved performance was primarily influenced by an increase in asking rents to Kshs 1,603 per SQM from Kshs 1,030 per SQM recorded in 2022. Additionally, the supply of newer developments decreased as compared to a similar period last year which allowed for absorption rates to stabilize. Notable projects delivered during the year include, Centum's Loft Residences comprising 32 four-bedroom luxurious units situated within Two Rivers. This was in comparison to last year’s supply of 225 units injected through the Mi Vida project at Garden City.

Regarding sub-market performance, Limuru Road and Westlands emerged as the top-performing node with an average rental yield of 9.0% and 7.9%, attributed to; i) the presence of high-end developments commanding premium rents, ii) the area's robust infrastructure including Limuru, Redhill and Mwanzi roads, along with the Nairobi Expressway, and, iii) the area’s proximity to amenities such as shopping malls enhancing the desirability of apartments in the locations. Conversely, Thika road ranked as the least performing node, registering an average rental yield of 4.2%, mainly due to the lower prices and rental rates associated with developments within that specific area. The table below summarizes the performance of residential spaces in MUDs against the single themed market in 2023:

Cytonn Report: Performance of Residential Units in MUDs Vs. Market Performance 2023
Location	MUD Performace				Market Performance
	Price/SQM	Rent/SQM	Annual Uptake	Rental Yield %	Price/SQM	Rent/SQM	Annual Uptake	Rental Yield %
Limuru Road	162,030	1,538	27.2%	9.0%	108,246	546	16.5%	5.2%
Westlands	284,147	3,448	13.7%	7.9%	125,592	812	15.3%	5.7%
Mombasa Road	118,812	662	13.7%	6.0%	76,673	428	12.2%	5.7%
Thika Road	126,545	732	17.8%	4.2%	82,469	467	11.1%	5.8%
Average	174,434	1,603	16.8%	6.8%	86,151	494	12.4%	5.7%

Source: Cytonn Research

Section III:  Mixed-Use Developments Investment Opportunity and Outlook

The table below summarizes our outlook on Mixed-Use Developments (MUDs), where we look at the general performance of the key sectors that compose MUDs i.e. retail, commercial office and residential and investment opportunities that lies in the themes;

Cytonn Report: Mixed-Use Developments (MUDs) Outlook
Sector	2023 Sentiment and Outlook		2023 Outlook
Retail	The average rental yield of retail spaces in Mixed-Use Developments came in at 9.8% in 2023, 1.3% points higher than single use retail developments that realized an average rental yield of 8.5%. This was mainly attributable to the high rental rates that MUDs generated at Kshs 211 per SQFT when compared to the Kshs 189 per SQFT recorded for the single-use retail spaces owing to the addition of prime quality spaces attracting higher rates such as Business Bay Square (BBS) mall located in Eastleigh We expect the retail spaces within MUDs to continue with the improved performance attributable to aggressive expansion strategies explored by both local and international retailers in a bid to establish market dominance and take up existing gaps left by retailers who have exited the market such as Nakumatt, Uchumi, Shoprite and Choppies Supermarkets,  positive population demographics driving up demand for goods and services, and, increased capital investments from foreign entities in the Kenyan retail market amid e-commerce developments. However, the existing oversupply of 3.3 mn SQFT in the retail market within the Nairobi Metropolitan Area, challenging economic conditions such as inflationary pressures, eroding the purchasing power of consumers, which could have a dampening effect among retailers and the continued shift to e-commerce are expected to curtail the performance of the sector Investment opportunities lie in Limuru Road, Karen and Eastlands, with the nodes providing relatively higher rental yields		Neutral
Office	The average rental yield for commercial office spaces in MUDs came in at 8.0%, 0.7% points higher than single use commercial developments which realized an average rental yield of 7.3% in 2023. The performance by MUDs was largely attributed to higher rental rates owing to the presence of quality, and sustainable and energy efficient spaces to enhance businesses and workers’ experience We expect a gradual increase in the uptake of commercial office spaces supported by gained traction in co-working spaces. However, the sector’s performance is still expected to be weighed down by the existing oversupply of office spaces at 5.8 mn SQFT of space. Key to note is that there exist fewer developments in the pipeline compared to last year, which is expected to curb the office space deficit Westlands, Upperhill, and Karen provide the best investment opportunities owing to their relatively higher rental yields resulting from higher rates chargeable due to the superiority in quality of spaces in the areas in comparison to other nodes		Neutral
Residential	Residential units within MUDs recorded an average rental yield of 6.8% in 2023, 1.1% points higher than the single-use residential market average of 5.7%. This was driven by an increase in asking rents to Kshs 1,603 per SQM from Kshs 1,030 per SQM recorded in 2022. Additionally, the supply of newer developments decreased as compared to a similar period last year which allowed for absorption rates to stabilize The best investment opportunity lies in Limuru Road and Westlands, which recorded the highest rental yields, above the market average		Neutral
Outlook	Given that all our metrics are neutral, we retain a NEUTRAL outlook for Mixed-Use Developments (MUDs), supported by the remarkable returns compared to single-use themes, changing client preferences, and MUDs attractiveness driven by the diversity in amenities and social offerings they provide to clients. However, the existing oversupply of the NMA office market at 5.8 mn SQFT, 3.3 mn SQFT in the NMA retail market, and 2.1 mn SQFT in the Kenyan Retail market is expected to weigh down the performance. Karen, Limuru Road, and nodes provide the best investment opportunities, with the areas providing the highest average MUD yields of 9.7%, 9.5%, and 8.8% respectively, compared to the market average of 7.1%.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.