Nov 21, 2021

In December 2020, we released the Nairobi Metropolitan Area Mixed-Use Developments (MUDs) Report-2020, which highlighted that Mixed-Use Developments (MUDs) recorded an average rental yield of 6.9%, 0.1% points higher than the respective single use Retail, Commercial Office and Residential themes with 6.8% in 2020. The relatively better performance by MUDs compared to single-use developments was attributed to the prime locations mostly serving the high and growing middle income class, coupled with the concept’s convenience that incorporates working, shopping and living spaces. 

This week we update our report with the 2021 market research that was conducted in 7 nodes within the Nairobi Metropolitan Area (NMA), in order to determine the market performance of MUDs against the market performance of the Residential, Commercial Office and Retail sectors. Therefore, this topical will cover the following:  

1. Overview of Mixed-Use Developments  
2. Mixed-Use Developments Performance Summary in 2021   
3. Mixed-Use Developments Investment Opportunity and Outlook  

Section I:  Overview of Mixed-Use Developments  

As a recap, a Mixed-Use Development (MUD) refers to an urban development that incorporates more than one Real Estate theme. This therefore means that a single development project will serve more than one purpose, that is, residential, commercial, retail, and, hospitality purposes, all at the same location. Due to the integration, MUDs offer benefits such as easier access to amenities and services, residential and working spaces all in one location.  

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

1. Convenience: Mixed-Use Developments are more convenient and preferred given that the development mix creates an upscale living environment with easy access to work places, retail stores, and/or, residential areas, 
2. Positive demographics: Kenya’s relatively high urbanization and population growth rates of 4.0% p.a and 2.3% p.a, respectively, against the world’s 1.8% p.a and 1.0% p.a, respectively, as at 2020, has also accelerated the growth and performance of MUDs through increased demand for the spaces,   
3. Relatively High Returns: MUDs offer operational synergies due to incorporation of different Real Estate themes hence enabling investors to maximize returns, either through Rental income or Capital appreciation. In addition to this, most developments are situated in superior locations with the capability to attract prospective clients and in return generate relatively higher returns,
4. Risks Diversification: Overall, investments in MUDs provides diversification to risk of any one asset class that may be negatively affected i.e. by market forces such as low uptake or demand in specific themes, and, 
5. Maximum Use of Land: Due to the scarcity of suitable land particularly in the urban areas as a result of increasing population and urbanization growth rates, MUDs ensure efficient use of the available land due to the incorporation of the different asset classes in one project and location. 

Despite the aforementioned supporting factors, Mixed- Use Developments face various challenges such as:  

1. Project Complexity: The complex nature of MUDs in comparison to the single use developments poses risks such as financial losses. This may lead to losses of returns to investors if not well executed, as they require more critical details and controls in addition to being well-planned and managed in order to be successful, and, 
2. High Development Costs: Due to the need to incorporate the various Real Estate themes, funding of MUD project poses a challenge due to the high development costs required to plan and implement the projects.  

Section II:  Mixed-Use Developments Performance Summary in 2021  

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

Mixed-Use Developments recorded an average rental yield of 7.2% in 2021, 0.7% points higher than the respective single use themes which recorded average rental yield of 6.5% in the similar period. 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. The retail and commercial office theme in the MUDs recorded a 1.3% and 0.2% points increase in the average rental yield to 8.4% and 7.1%, respectively in 2021, from 7.1% and 6.9% in 2020. This was mainly due to an improved business environment leading to increased demand and uptake of spaces. For the Residential theme in the MUDs, the average rental yield declined by 0.3% points to 6.0% in 2021, from 6.3% in 2020, attributed to other landlords still offering discounts in a bid to attract more tenants as well as retaining the existing ones. Additionally, the Retail, Commercial Office and Residential themes in the MUDs performed better in 2021 when compared to single Retail, Commercial Office and Residential themes which realized rental yields of 7.8%, 6.6%% and 5.2%, respectively in 2021. This was attributed to their incorporated live, work and play lifestyle thus more preferred, coupled with the adequate amenities available leading to their increased demand. 

The table below shows the performance of single-use and mixed-use development themes between 2020 and 2021;  

Thematic Performance of MUDs in Key Nodes 2020-2021
	MUD Themes Average			Market Performance Average
	Rental Yield  2021	Rental Yield  2020	∆ in y/y MUD Rental yield	Rental Yield  2021	Rental Yield  2020	∆ in y/y Market Average Rental Yield
Retail	8.4%	7.1%	1.3%	7.8%	7.7%	0.1%
Offices	7.1%	6.9%	0.2%	6.6%	6.8%	(0.2%)
Residential	6.0%	6.3%	(0.3%)	5.2%	5.8%	(0.6%)
Average	7.2%	6.9%	0.3%	6.5%	6.8%	(0.3%)
* Market performance is calculated from nodes where sampled MUDs exist

Source: Cytonn Research 2021  

2. Mixed-Use Developments Performance per Node  

Karen was the best performing node with an average MUD rental yield of 8.7%, 1.5% points higher than the market average of 7.2% in 2021. In terms of respective performance of the MUD themes in Karen; Retail and Office themes recorded average rental yields of 8.8%, and 9.0%, respectively, 0.4%, and 1.9% points higher than the market average of 8.4%, and 7.1%, respectively. The remarkable performance was largely attributed to; i) the prime developments fetching higher rates, and, ii) the adequate amenities and infrastructure servicing the area. 

Eastlands was the worst performing node with the average MUD rental yield coming in at 5.1%, 2.1% points lower than the market average of 7.2%. The respective themes i.e. Retail, commercial office and Residential sectors recorded average rental yield of 5.5%, 5.0% and 4.2%, respectively, 2.9%, 2.1% and 0.8% points lower than the market average of 8.4%, 7.1% and 6.0%, respectively. The poor performance was mainly attributed to low quality developments fetching lower rents thus affecting the overall yields, as well as inadequate amenities and infrastructure servicing the area.  

The table below shows the performance of Mixed-Use Developments by node in 2021;

(All Values in Kshs Unless Stated Otherwise) 

Nairobi’s Mixed-Use Developments Market Performance by Nodes 2021
	Retail Performance				Commercial Office Performance				Residential Performance
Location	Price/SQFT	Rent/SQFT	Occup. (%)	Rental Yield (%)	Price/ SQFT	Rent/SQFT	Occup. %)	Rental Yield (%)	Price/ SQM	Rent/ SQM	Annual Uptake %	Rental Yield %	Average MUD yield
Karen	23,333	196	86.7%	8.8%	13,233	117	85.0%	9.0%					8.7%
Westlands	15,833	173	70.8%	9.5%	12,892	110	71.7%	7.3%	211,525	1,226	15.6%	7.0%	7.8%
Kilimani	18,500	162	79.0%	8.3%	13,713	106	79.0%	6.7%					7.4%
Mombasa Rd	20,000	185	70.0%	8.4%	13,000	100	60.0%	5.5%	156,079	853	13.3%	6.6%	7.4%
Thika Rd	23,750	215	82.5%	9.2%	13,250	105	72.5%	6.9%	128,545	612	17.9%	6.1%	7.0%
Upper Hill	15,485	130	62.5%	6.4%	12,000	102	70.0%	7.0%					6.8%
Eastlands	20,000	124	75.0%	5.5%	12,000	80	62.5%	5.0%	72,072	360	10.0%	4.2%	5.1%
Average	18,759	170	75.9%	8.4%	12,924	106	73.6%	7.1%	142,055	763	15.0%	6.0%	7.2%
*The average MUDs performance is based on areas where sampled projects exist

Source: Cytonn Research 2021  

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 8.4% in 2021, 0.6% points higher than single use retail developments that realized an average rental yield of 7.8%. This was mainly attributed to the higher rental rates that MUDs generated at Kshs 170 per SQFT when compared to Kshs 168 per SQFT recorded for the single-use retail spaces. Moreover, the remarkable performance for the MUDs was attributed to their higher preference and demand resulting from their convenience as one-stop centers for consumers living and working in the area.  

Westlands was the best performing node with the average rental yield at 9.5%, 1.1% points higher than the market average of 8.4%. This was mainly driven by; i) the presence of high and middle income earning residents with greater purchasing power, ii) relatively higher rental rates and prices fetching higher returns, and iii) adequate amenities and infrastructure servicing the developments. Contrary to this, Eastlands was the worst performing node with an average rental yield of 5.5%, 2.9% points lower than the market average of 8.4%, as a result of the higher competition of informal retail spaces, and the low supply of quality spaces which in turn generated lower rental rates.  

The table below provides a summary of the performance of retail spaces in MUDs against market performance in 2021;  

Performance of Retail in MUDs versus Market Performance 2021
	MUD Performance			Market Performance
Location	Rent/SQFT	Occupancy (%)	Rental Yield (%)	Rent/SQFT	Occupancy (%)	Rental Yield (%)	Rental Yield Difference
Westlands	173	70.8%	9.5%	209	80.4%	9.7%	(0.2%)
Thika Rd	215	82.5%	9.2%	158	74.2%	6.7%	2.5%
Karen	196	86.7%	8.8%	214	80.8%	9.4%	(0.5%)
Mombasa Rd	185	70.0%	8.4%	136	70.5%	6.0%	2.4%
Kilimani	162	79.0%	8.3%	172	83.6%	9.0%	(0.7%)
Upper Hill	130	62.5%	6.4%
Eastlands	124	75.0%	5.5%	135	72.5%	5.9%	(0.4%)
Average	170	75.9%	8.4%	168	77.0%	7.8%	0.6%
*Market performance is calculated from nodes where sampled MUDs exist

Cytonn Research 2021 

2. Commercial Office Space  

The average rental yield for commercial office spaces in MUDs came in at 7.1%, 0.5% points higher than the market performance which realized an average rental yield of 6.6% in 2021. The performance by MUDs was largely attributed to; i) the presence of quality spaces generating higher rental rates at Kshs 105 per SQFT compared to the market’s average of Kshs 91 per SQFT, and, ii) higher prices at Kshs 12,924 per SQFT against market’s average of Kshs 12,306 per SQFT generating higher returns. In light of this, Karen was the best performing node with an average rental yield of 9.0% against the market average of 7.1% due to; i) the presence of high-end developments such as the Galleria business park and the Hub that offer higher rental rates and returns, ii) adequate infrastructure and amenities servicing the area, and, iii) prime location targeting clients who are willing to pay premiums for the spaces. Eastlands was the worst performing node with an average rental yield of 5.0% as a result of the availability of low quality office spaces generating lower rents at Kshs 80 per SQFT against the market average of Kshs 105 per SQFT. 

The table below shows the performance of office spaces in MUDs against the single use themed market in 2021;    

All Values in Kshs Unless Stated Otherwise 

Performance of Commercial Offices in MUDs versus Market Performance 2021
	MUD Performance				Market Performance
Location	Price/SQFT	Rent/SQFT	Occupancy (%)	Rental Yield (%)	Price/SQFT	Rent/SQFT	Occupancy (%)	Rental Yield (%)	Rental Yield Difference
Karen	13,233	117	85.0%	9.0%	13,325	104	84.8%	7.5%	1.5%
Westlands	12,892	110	71.7%	7.3%	12,038	104	75.6%	7.9%	(0.6%)
Upper Hill	12,000	102	70.0%	7.0%	12,432	93	77.1%	6.7%	0.3%
Thika Rd	13,250	105	72.5%	6.9%	12,500	79	76.7%	5.6%	1.3%
Kilimani	13,713	106	79.0%	6.7%	12,293	92	79.8%	7.1%	(0.4%)
Mombasa Rd	13,000	100	60.0%	5.5%	11,250	71	61.3%	4.7%	0.8%
Eastlands	12,000	80	62.5%	5.0%
Average	12,924	105	73.6%	7.1%	12,306	91	75.9%	6.6%	0.5%
*Market performance is calculated from nodes where sampled MUDs exist

Cytonn Research 2021 

3. Residential Space  

Residential units within MUDs recorded an average rental yield of 6.0% in 2021, 0.8% points higher than the single-use residential market rental yield of 5.2%. The better performance was largely driven by; i) availability of adequate amenities and infrastructure, and ii) relatively higher prices and rents at Kshs 142,055 per SQFT and Kshs 763 per SQFT, respectively, compared to the Kshs 88,013 and Kshs 459 per SQFT realized for the single use residential theme, respectively. Westlands was the best performing node with an average rental yield of 7.0% due to the presence of affluent developments fetching high rents and prices, and the adequate infrastructure servicing the area such as Redhill and Mwanzi roads. However, Eastlands was the worst performing node with an average rental yield of 4.2% resulting from; i) lower rental prices and rates, ii) inadequate infrastructure to service the developments, and iii) availability of low quality units fetching lower rates that affect returns as well.   

The table below summarizes the performance of residential spaces in MUDs against the single themed market in 2021;  

All Values in Kshs Unless Stated Otherwise 

Performance of Residential Units in MUDs versus Market Performance 2021
	MUD performance				Market performance
Location	Price/SQM	Rent/SQM	Uptake %	Rental Yield %	Price/SQM	Rent/SQM	Uptake %	Rental Yield %	Rental Yield Difference
Westlands	211,525	1,226	15.6%	7.0%	145951	833	27.9%	4.6%	2.4%
Mombasa Rd	156,079	853	13.3%	6.6%	81,578	428	12.6%	5.5%	1.1%
Thika Rd	128,545	612	17.9%	6.1%	83153	413	15.5%	4.8%	1.3%
Eastlands	72,072	360	10.0%	4.2%	71,971	327	13.8%	5.1%	(0.9%)
Average	142,055	763	15%	6.0%	88,013	459	15.1%	5.2%	0.8%
Westlands and Limuru Road recorded the highest prices and rents attributed to the affluent developments with adequate amenities and infrastructure thus fetching higher rates  *The average residential performance is based on areas where sampled MUDs exist

Cytonn Research 2021  

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; 

		Mixed-Use Developments (MUDs) Outlook
Sector		2021 Sentiment and Outlook	2021 Outlook
Retail	The average rental yield of retail spaces in MUDS came in at 8.4% in 2021, 0.6% points higher than single-use retail developments that realized an average rental yield of 7.8%  We mainly attribute this to the higher rental rates that MUDs generated of Kshs 170 per SQFT when compared to the Kshs 168 per SQFT recorded for the single use retail spaces,   Moreover, we expect the performance of the MUD retail market to be further driven by the rapid expansion of local and international retailers, changing consumer tastes and preferences, and positive demographics  However, the performance of the sector is expected to be negatively impacted by the oversupply in the retail market at 3.0 mn SQFT in the Nairobi Metropolitan Area (NMA) and 1.7 mn SQFT in Kenya retail market, and, the continued focus on e-commerce  The investment opportunity lies in Westlands which was the best performing node with average rental yield at 9.5%, 1.1% points higher than the market average of 8.4%		Neutral
Office	The average rental yield for commercial office spaces in MUDs came in at 7.1%, 0.5% points higher than the market average which realized average rental yield of 6.6% in 2021. The average occupancy rates for the office space theme in MUDs also increased to 73.6% in 2021, from 68.0% in 2020 signifying an improved demand amidst the reopening of the economy  We therefore expect performance to gradually improve due to increased demand resulting from the reopening of the economy leading to some firms embarking to working from the offices, coupled with their strategic locations attracting target clients  Despite the improved performance, the sector’s performance is still expected to be weighed down by the existing oversupply at 7.3 mn SQFT of space  The investment opportunity lies in Karen which posted average rental yield of 9.0% against the market average of 7.1% hence being the best performing node due to the presence of high end developments such as the galleria business park and the hub that fetch higher rental rates and returns		Neutral
Residential	Residential units within Mixed-Use Developments recorded an average rental yield of 6.0% in 2021, 0.8% points higher than the single-use residential market rental yield of 5.2%.  Despite this, the uptake of residential units in MUDs came in at 15.0%, 0.1% points lower than the single-use market average of 15.1% in 2021, mainly attributed to a slight decline in demand   The investment opportunity lies in markets such as Westland and Mombasa road which posted average rental yield of 7.0% and 6.6% against market average of 6.0%		Neutral
Outlook	We are NEUTRAL of the Mixed-Use Developments (MUDs) outlook supported by the impressive returns recorded at 7.2% in 2021, from 6.9% in 2020. However, their performance is expected to be weighed down by existing oversupply at 7.3 mn SQFT in the NMA office market, and oversupply in the retail market at 3.0 mn SQFT in the NMA and 1.7 mn SQFT in Kenya retail market. The investment opportunity lies in areas with relatively high returns such as Karen and Westlands which recorded an average MUD rental yield of 8.7%, and, 7.8% respectively, against the market average of 7.2%.

Source: Cytonn Research 2021  

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.