Nairobi Metropolitan Area Mixed-Use Developments (MUDs) Report 2021

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  

  1. 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  

  1. 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 

  1. 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 

  1. 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.