Nov 10, 2024

In December 2023, we released the Nairobi Metropolitan Area Mixed-Use Developments (MUDs) Report 2023 which highlighted that Mixed-Use Developments recorded an average rental yield of 8.4%, 1.3% points higher than the respective single-use themes which recorded an average rental yield of 7.1% in a similar period in 2023. The relatively better performance was mainly attributed to; i) heightened demand for prime locations attracting clients willing to pay premium rents, ii) strategic and prime locations of the developments with the capability to attract prospective clients, and, iii)) the area’s proximity to amenities such as shopping malls enhancing the desirability.

This week we update our report with 2024 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 2024, 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 integrates various real estate functions, including residential, commercial, retail, and hospitality components. By combining these diverse uses, a single development can fulfill multiple purposes within one location, offering enhanced convenience by bringing living, working, and recreational spaces together. This integration of different functions provides easy access to amenities and services, making MUDs increasingly popular in Kenya as they respond to the evolving lifestyles and demands of clients. For the year 2024;

1. Centum Real Estate completed the handover of over 24 four-bedroom luxury apartment units as part of its phase two Loft residence project at the Two Rivers mixed-use development. The luxury apartment units were sold for between Kshs 36.0 mn and Kshs 52.0 mn. Additionally, Phase 1 of the project was completed in February last year, with 32 units sold at prices starting from Kshs 55.0 mn. For more information, see Cytonn Q3’2024 Markets Review,
2. Madison Life Assurance, in partnership with HF Group, announced the availability of affordable financing options for individuals looking to purchase and build homes at VillaKazi Homes in Athi River, Machakos County. VillaKazi Homes is a master-planned, fully serviced, mixed-use real estate development spanning 100 acres, with a project value of Kshs 3.0 bn featuring over 700 residential units. For more information, see Cytonn Q3’2024 Markets Review,
3. JW Marriott an International luxury hotel brand opened JW Marriott Nairobi, marking its second property in Kenya after JW Marriott Masai Mara Lodge opened in February 2023. The hotel which is located in GTC building Westlands, stands as the tallest hotel in the country with 35 stories. For more information, please see our Cytonn Markets Review – Q1’2024.
4. Two Rivers International Finance & Innovation Centre (TRIFIC) announced that it has secured an investment of Kshs 6.0 bn from Vantage Capital; an African mezzanine finance investor. The funding will be utilized to fit out its first office tower, the TRIFIC North Tower, occupying 14,975 SQM in the Two Rivers. For more information, see Cytonn Weekly #25/2024, and,

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

1. Growing Demand: With relatively high urbanization and population growth rates of 3.7% p.a and 2.0% p.a, respectively, against the global average of 1.7% p.a and 0.9% p.a, respectively, as at 2023. This trend drives a strong demand for development, supporting the expansion and success of Mixed-Use Developments (MUDs). Additionally, the market's need for flexible, integrated spaces that cater to diverse needs has led to the rise of Mixed-Use Developments (MUDs). MUDs offer a comprehensive solution by combining residential, commercial, and recreational components within a single development,
2. Change in Urban lifestyle and Consumer preferences: Shifting urban lifestyles and consumer preferences are driving demand for Mixed-Use Developments (MUDs). These developments offer convenient, integrated living experiences that align with modern lifestyles. As a result, Kenya is witnessing a surge in MUD construction,
3. Relatively Higher Investment Returns: MUDs offer greater financial potential than single-use developments. By combining various real estate uses, investors can diversify income streams from property sales and leases of office, residential, retail, and recreational spaces,
4. Improved Infrastructure: Recent infrastructure developments by the government, such as the Nairobi Expressway and Western Bypass, have facilitated the growth of Mixed-Use Developments. Improved infrastructure enhances connectivity and accessibility, creating favorable conditions for these integrated developments,
5. Optimal Land Utilization: MUDs maximize land utilization by integrating multiple functions into a single development. This is especially beneficial in urban areas with limited land availability and growing populations,
6. Strategic Locations: MUDs are typically situated in well-connected urban areas, attracting a diverse range of residents and businesses, including high-income individuals seeking convenience,
7. Risk Diversification: MUDs offer a diversified investment strategy by combining multiple asset classes. This reduces risk exposure to fluctuations in a single market segment e.g., residential, and,
8. Aspect of Sustainability: Mixed-Use Developments seamlessly integrate different real estate classes in a single project and location, optimizing space usage. This reduces commuting needs 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 Development Costs: Developing and financing Mixed-Use Developments (MUDs) tends to be more expensive than single-use projects, largely due to the complex designs required to ensure smooth integration of varied real estate functions. Balancing appeal with functionality adds challenges for developers seeking funding from banks and other stakeholders. Moreover, construction costs rose in by 6% in H1’2024, driven by inflationary pressures stemming from supply chain disruptions and the depreciation of the Kenyan Shilling. As a result, the cost of importing construction materials has soared, further escalating overall construction expenses,
2. Oversupply in Select Real Estate Sectors: Existing oversupply of physical space in select sectors. With approximately 5.8 mn SQFT in the NMA commercial office market, and approximately 3.0 mn SQFT in the Nairobi Metropolitan Area (NMA) retail market, which in turn hinders optimum performance of the developments, and,
3. Coordinating Diverse Uses: Successfully integrating the varied uses within MUDs can be challenging, as each real estate component has unique needs and requirements. Achieving the right balance requires careful management, ensuring that tenants complement one another and align with the development’s overall objective which can be complex to implement effectively.

Section II:  Mixed-Use Developments Performance Summary in 2024

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

Mixed-Use Developments recorded an average rental yield of 8.6% in 2024,1.5% 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 residential and retail themes in the MUDs recorded 0.6% and 0.3% points increase in average rental yields to 7.4% and 10.1% respectively in 2024, from 6.8% and 9.8% in 2023. This increase was primarily driven by the addition of prime spaces commanding higher rents and yields, such as the Business Bay Square (BBS) Mall, an increase in uptake within the residential theme evidenced by several project handovers, and aggressive expansion efforts by both local and international retailers such as Carrefour, China square and Naivas, contributed to the growth during the period under review. For the Commercial theme in the MUDs, the average rental yield improved by 0.2% to 8.2% in 2024, from 8.0% in 2023 majorly attributable to an increase in occupancy levels by 1.8% to 79.7% from 77.2% the previous year.

The table below shows the performance of single-use and Mixed-Use development themes between 2023 and 2024;

Cytonn Report: Thematic Performance in MUDs Vs. Key Nodes Hosting MUDs Market Performance 2023-2024
	MUD Themes Average		Market Average
	Rental Yield % 2023	Rental Yield % 2024	Rental Yield % 2023	Rental Yield % 2024	∆ in y/y MUD Rental yields	∆ in theme Rental Yields
Retail	9.8%	10.1%	8.5%	8.3%	0.3%	(0.2%)
Offices	8.0%	8.2%	7.3%	7.4%	0.2%	0.1%
Residential	6.8%	7.4%	5.7%	5.9%	0.6%	0.2%
Average	8.4%	8.6%	7.1%	7.2%	0.2%	0.1%
*Market performance is calculated from nodes where sampled MUDs exist

Source: Cytonn Research

2. 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 an average yield of 10.6%, 10.0%, and 9.4% respectively,2.0%, 1.4%, and 0.8% higher than the market average of 8.6% in 2024. The strong performance was mainly attributed to: i) A large base of residents with substantial consumer spending power, ii) robust infrastructure supporting investment opportunities, and iii) the availability of prime retail and office spaces commanding higher rents and yields. On the other hand, Mombasa Road recorded the lowest performance with an average rental yield of 6.8%, 1.8% lower than the market average of 8.6%. This performance can be attributed to; i) heavy traffic on Mombasa Road potentially deterring businesses and residents, reducing demand and rental yields, ii) low rental rates attracted by developments, and iii) the area's perception as an industrial hub reducing appeal for high-rent tenants. The table below shows the performance of Mixed-Use Developments by node in 2024;

Cytonn Report: Nairobi Metropolitan Area Mixed Use Developments Performance by Nodes 2024
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	93.5%	11.7%	127	85.0%	9.5%					10.6%
Limuru Road	325	75.0%	12.4%	112	78.0%	7.8%	200,000	1,724	31.7%	9.9%	10.0%
Westlands	204	71.8%	9.6%	125	78.0%	9.3%	303,071	3,731	12.5%	9.2%	9.4%
Kilimani	180	85.6%	9.7%	118	83.0%	8.8%					9.3%
Upperhill	170	75.0%	9.4%	105	85.0%	8.5%					9.0%
Eastlands	225	85.0%	9.9%	85	73.0%	6.2%					8.1%
Thika Road	197	76.7%	9.1%	115	77.0%	8.3%	123,770	886	14.0%	6.4%	7.9%
Mombasa Road	205	75.0%	8.8%	140	73.0%	7.4%	196,203	760	11.7%	4.3%	6.8%
Average	222	79.70%	10.1%	116	79.0%	8.2%	205,761	1,775	16.80%	7.50%	8.6%
*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 10.1% in 2024, 1.8% points higher than single-use retail developments that realized an average rental yield of 8.3%. This was mainly attributable to the high rental rates that MUDs generated at Kshs 222 per SQFT when compared to the Kshs 192 per SQFT recorded for the single-use retail spaces owing to the availability of prime quality spaces attracting higher rental rates.  

Limuru Road and Karen nodes continued to register the best performance with the average rental yield at 12.4% and 11.7% significantly higher than the market average of 10.1%. This was mainly driven by; i) relatively stable occupancy rates ii) increased and relatively higher rental rates which translates to higher returns, iii) the presence of residents with high incomes and significant purchasing power, and, iv) the availability of sufficient infrastructure and connectivity that effectively supports the MUDs. Conversely, Mombasa Road recorded the lowest rental yields at 8.8%, 1.3% points lower than the market average of 10.1%. This can be attributed to relatively lower rental rates of Kshs 205 in comparison to the market average of Kshs 222 and the popularity of the area as an industrial zone. The table below provides a summary of the performance of retail spaces in MUDs against market performance in 2024;

All values in Kshs Unless Stated Otherwise
Cytonn Report: Performance of Retail in MUDs Vs. Market Performance 2024
Location	MUD Performance			Market Performance
	Rent/SQFT	Occupancy (%)	Rental Yield (%)	Rent/SQFT	Occupancy (%)	Rental Yield (%)
Limuru Road	325	75.0%	12.4%	201	82.2%	8.9%
Karen	270	93.5%	11.7%	218	87.5%	9.7%
Eastlands	225	85.0%	9.9%	161	78.1%	7.3%
Kilimani	180	85.6%	9.7%	198	82.2%	9.8%
Westlands	204	71.8%	9.6%	239	79.4%	7.3%
UpperHill	170	75.0%	9.4%
Thika road	197	76.7%	9.1%	160	79.3%	6.3%
Mombasa road	205	75.0%	8.8%	169	82.9%	8.6%
Average	222	79.7%	10.1%	192	81.7%	8.3%

Source: Cytonn Research

2. Commercial Office Space

The average rental yield for commercial office spaces in MUDs came in at 8.2%, 0.8% points higher than single-use commercial developments which realized an average rental yield of 7.4% in 2024. The performance by MUDs was largely attributed to the high rental rates chargeable per SQM within the developments driven by; i) Strategic locations attracting multinationals and international organizations, boosting demand for these spaces, and, ii) High rental rates for prime Grade A offices are driven by their exceptional quality, and sustainability features.

In terms of submarket performance, Karen, Westlands, and Kilimani were the best-performing nodes posting average rental yields of 9.5%, 9.3%, and 8.8% attributable to; i) the presence of high-end business parks Sarit, GTC, the Hub and Galleria, offering high rental rates and returns, ii) quality and ample infrastructure improving accessibility to the nodes,  iii) quick access to the CBD, and, iv) increasing demand for these spaces. In contrast, Eastlands exhibited the lowest performance among nodes, with an average rental yield of 6.2%, primarily due to: i) lower-quality office spaces with lower rental rates, and, ii) Insufficient infrastructure to adequately support MUDs. The table below shows the performance of office spaces in MUDs against the single-use themed market in 2024;

All Values are in Kshs Unless Stated Otherwise
Cytonn Report: Performance of Commercial Offices in MUDs Vs. Market Performance 2024
Location	MUD Performance			Market Performance
	Rent/SQFT	Occupancy (%)	Rental Yield (%)	Rent/SQFT	Occupancy (%)	Rental Yield (%)
Karen	127	85%	9.5%	115	80.9%	7.8%
Westlands	125	78%	9.3%	119	76.3%	8.6%
Kilimani	118	83%	8.8%	102	82.7%	7.8%
UpperHill	105	85%	8.5%	100	73.4%	6.7%
Thika road	115	77%	8.3%	88	76.6%	6.3%
Limuru Road	112	78%	7.8%	95	81.6%	8.4%
Mombasa road	140	73%	7.4%	80	77.0%	6.1%
Eastlands	85	73%	6.2%
Average	116	79%	8.2%	100	78.4%	7.4%

Source: Cytonn Research

3. Residential Space

In 2024, residential units within MUDs recorded an average rental yield of 7.5%, marking a 1.6% higher compared to the single-use residential market average of 5.9%. The stable performance was primarily influenced by an increase in asking rents to Kshs 1775 per SQM from Kshs 1603 per SQM in 2023. Additionally, there was an improvement in unit uptakes by 0.7% to 17.5% from 16.8%. Notable projects delivered include Centum Real Estate's handover of over 24 four-bedroom luxury apartment units as part of its phase two Loft residence project at the Two Rivers mixed-use development.

Regarding sub-market performance, Limuru Road and Westlands emerged as the top-performing nodes with an average rental yield of 9.9% and 9.2%, respectively, attributed to; i) improved infrastructure easing access to these nodes, ii) availability of amenities enhancing desirability of apartments in the nodes, presence of tenants willing to pay premium rents, and, iii) presence of upscale developments commanding higher rental rates. Conversely, Mombasa Road ranked as the least performing node, registering an average rental yield of 4.3%, mainly due to the lower prices and rental rates associated with developments within the specific area. The table below summarizes the performance of residential spaces in MUDs against the single-themed market in 2024:

All Values are in Kshs Unless Stated Otherwise
Cytonn Report: Performance of Residential Units in MUDs Vs. Market Performance 2024
Location	MUD Performance				Market Performance
	Price/SQM	Rent/SQM	Annual Uptake	Rental Yield %	Price/SQM	Rent/SQM	Annual Uptake	Rental Yield %
Limuru Road	200,000	1,724	31.7%	9.9%	104,309	651	10.1%	5.8%
Westlands	303,071	3,731	12.5%	9.2%	138,590	748	15.4%	6.3%
Thika Road	123,770	760	14.0%	6.4%	82,565	410	12.8%	6.0%
Mombasa Road	196,203	886	11.7%	4.3%	84265	427	12.2%	5.3%
Average	205,761	1,775	17.5%	7.5%	102,432	559	12.6%	5.9%

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 lie in the themes;

Cytonn Report: Mixed-Use Developments (MUDs) Outlook
Sector	2024 Sentiment and Outlook		2024 Outlook
Retail	The average rental yield of retail spaces in Mixed-Use Developments came in at 10.1% in 2024, 1.8% points higher than single-use retail developments that realized an average rental yield of 8.3%. This was mainly attributable to the high rental rates that MUDs generated at Kshs 222 per SQFT when compared to the Kshs 192 per SQFT recorded for the single-use retail spaces owing to the availability of prime quality spaces attracting higher rental rates.  We anticipate retail spaces within MUDs to sustain strong performance, driven by local and international retailers such as Carrefour and China Square's aggressive expansion efforts aimed at establishing market dominance and filling gaps left by exiting brands like Nakumatt and Uchumi. This growth is further supported by favourable population demographics increasing demand for goods and services, along rising foreign capital investments in Kenya’s retail sector amid e-commerce advancements. However, the retail market in the Nairobi Metropolitan Area faces constraints due to an existing oversupply of 3.0 mn SQFT, challenging economic conditions like inflation that reduce consumer purchasing power, and a continued shift toward e-commerce. These factors are likely to dampen the sector's performance. 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 8.2%, 0.8% points higher than single-use commercial developments which realized an average rental yield of 7.4% in 2024. The performance by MUDs was largely attributed to the high rental rates chargeable per SQM within the developments driven by; i) Strategic locations attracting multinationals and international organizations, boosting demand for these spaces, and, ii) High rental rates for prime Grade A offices are driven by their exceptional quality, and sustainability features. A gradual rise in the uptake of commercial office spaces is anticipated, driven by the growing popularity of co-working spaces. However, the sector’s performance is likely to remain constrained by the current oversupply of 5.8 mn SQFT of office space. Notably, fewer projects are in development compared to the previous year, which may help reduce the office space surplus. Westlands, Kilimani, 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, and 3.0 mn SQFT in the NMA retail market, is expected to weigh down the performance. Karen, Limuru Road, and Westlands nodes provide the best investment opportunities, with the areas providing the highest average MUD yields of 10.6%, 10.0%, and 9.4% respectively, compared to the market average of 8.6%.

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.