Today Cytonn Real
Estate the development arm of Cytonn Investments released their commercial
office report. The
report was themed “In Transition to a
Buyers’ Market” the report looked at both the demand and the supply and
performance of the commercial office subsector in Nairobi in 2016. The
commercial office space market is transitioning to a buyers’ market following
increased supply with completions growing at a 5 year CAGR of 52.6% from 2.1mn
square feet in 2012 to 7.4mn square feet in 2016. From last year the average rental yields
remained unchanged at 9.3% in 2016 from 2015 driven by stable average occupancy
rates averaging 88%. Speaking during the release, Cytonn Chief Investments Officer
Elizabeth Nkukuu indicated that despite slight softening in the sector, the
asset class continues to offer above average returns to investors. In 2016 the
average returns from the sector were over 20% looking at both the rental yields
and the capital appreciation compared to the stock market that returned negative
8.5%, the FTSE index that was down 0.2% and the average yield on the 364-day
treasury bill was at 11.6%.
According to the report, increases in office space supply in the sector is
constraining performance with occupancy rates and prices declining as rents and
yields experience slower growth rates. The occupancy rates have remained fairly stable with a 1% decline between
2015 and 2016 while the asking prices declined by 5.8% with the average price
per square foot in 2016 at Kshs 12,031 compared to Kshs 12,776 in 2015. Based
on the supply pipeline the trend may continue before the market picks up.
Despite this the sector offers attractive returns in selected markets with
rental yields of up to 10.0% and occupancy rates of 90%.
For submarket analysis, the report noted that in 2016, Parklands had the
highest returns as it is a prime location and with premium rents realising an
average rental yield of yield of 10% while Mombasa Road had the lowest average
rental yields at 8.5% mainly as a result of traffic congestions and zoning
regulations for industrial use in the area. Overall the market had an average
yield of 9.2%.
Speaking during
the report release, Real Estate Services Manager Johnson Denge the transition
to a buyers’ market is due to the oversupply. “We expect market performance
stagnation constrained by the oversupply, slow-down in growth of financial
services and SME sectors as well as upcoming election which will slow down
demand. Reduced development activity is
expected as the market reacts to the stagnating prices and returns. For 2017 we
also expect the prices to remain stable. The opportunity in the sector thus
lies in specific pockets of value such as in office zones with low supply like
Gigiri, office grades with low supply and high returns such as grade A offices
with only a 10% market share and a 10% rental yield on average. Differentiation will also give an investor an
edge, this can be achieved through mixed-use developments, investing in
serviced offices and green buildings which are gaining traction in the
market,’’ he added
In terms of
grades, the report says that grade B offices have the highest supply with a 60%
market share and grade A offices
accounting for only 10%. Key to note is that there is a short supply of purely
grade A office space in the market. In terms of performance, grade A offices
have the highest rents the yields are also high at an average of 10.0%, Grade B offices have the highest
occupancy levels at 90.6% and Grade C are the worst performing with average
rental yields of 8.6%.
The report says that it is a good time to invest in the commercial office theme for long term gains when the market picks in 3-4 years adding that investments should be geared towards zones with low supply, high returns and differentiated concepts. “Devolution has created opportunity for development of office space in county headquarters most of which have low quality office spaces and in short supply. Relaxation of zoning regulations is also paving way for development of office spaces in previously residential zones such as Parklands and Gigiri.”
Table: Performance of the
commercial office theme over time
|
Performance of
Commercial Office Space Overtime |
||||||||
|
Year |
2011 |
2013 |
2015 |
2016 |
∆ (2013) |
∆ (2015) |
∆ (2016) |
|
|
Occupancy (%) |
91.0% |
90.0% |
89.0% |
88.0% |
(1.0%) |
(1.0%) |
(1.0%) |
|
|
Completions (Sqft) |
1.7 mn |
2.1 mn |
7.6 mn |
6.5mn |
23.5% |
261.9% |
(14.5%) |
|
|
Asking Rents (Kshs/Sqft) |
78 |
95 |
97 |
97 |
21.8% |
2.1% |
0.0% |
|
|
Average Prices (Kshs/Sqft) |
10,557 |
12,433 |
12,776 |
12,031 |
17.8% |
2.8% |
(5.8%) |
|
|
Average Rental Yields (%) |
9.8% |
10.0% |
9.3% |
9.3% |
2.0% |
(7.0%) |
(0.0%) |
|
|
·
The occupancy rates have remained fairly stable with a 1.0% decline
between 2013 and 2016 as a result of increased supply ·
The average price per square foot in 2016 was Kshs 12,031, a decline of
6.0% from Kshs 12,776 in 2015 also as a result of supply increasing at a
faster rate than demand |
||||||||
Table:
Summary of Office Market Performance in 2016 by Nodes
|
Summary of Office
Market Performance in 2016 by Nodes |
|||||
|
Area |
Price (Kshs/Sqft) |
Rents (Kshs/Sqft) |
Occupancy (%) |
Rental Yields 2015 (%) |
Rental Yields 2016(%) |
|
Parklands |
11,771 |
102 |
80.0% |
10.0% |
10.0% |
|
Karen |
13,500 |
107 |
90.0% |
10.1% |
9.7% |
|
Kilimani |
12,667 |
99 |
90.5% |
9.5% |
9.3% |
|
Westlands |
12,482 |
102 |
92.1% |
9.3% |
9.2% |
|
UpperHill |
12,529 |
102 |
89.8% |
9.0% |
9.0% |
|
Nairobi CBD |
11,750 |
92 |
92.7% |
9.3% |
9.0% |
|
Thika Road |
11,700 |
91 |
80.3% |
8.3% |
8.8% |
|
Mombasa Road |
10,720 |
80 |
86.1% |
8.3% |
8.5% |
|
Average |
12,053 |
100 |
88.9% |
9.2% |
9.2% |
|
|||||
Table: Performance of Office Space by Grades
|
Performance of Office Space by
Grades |
||||
|
Grade |
Price( Kshs/Sqft) |
Rents( Kshs/Sqft) |
Occupancy (%) |
Rental Yields (%) |
|
Grade
A |
12,889 |
112 |
85.7% |
10.0% |
|
Grade
B |
11,959 |
98 |
90.6% |
9.2% |
|
Grade
C |
11,245 |
82 |
87.5% |
8.6% |
|
Average |
12,031 |
97 |
88.0% |
9.3% |
|
|
||||
|
·
Grade
A offices offer the highest yields at 10.0%, Grade B offer 9.2% yields while
Grade C offices yield the lowest returns at 8.6%. Grade A offices offer a
premium on services that enable them to charge higher rents hence higher
yields ·
Occupancy
rates still remain high with Grade B offices with the highest occupancy at
90.6% they are fairly cost effective and offer good services |
||||
Table: Office Performance by Nodes and Grades
|
Office Performance by Nodes and
Grades |
|||||||||
|
|
GRADE A |
GRADE B |
GRADE C |
||||||
|
Area |
Yield |
Occupancy |
Yield |
Occupancy |
Yield |
Occupancy |
|||
|
Kilimani |
9.2% |
81.2% |
9.4% |
93.2% |
9.0% |
95.3% |
|||
|
Upperhill |
9.3% |
60.0% |
8.8% |
94.0% |
7.7% |
81.7% |
|||
|
Parklands |
9.8% |
80.0% |
10.2% |
83.3% |
9.1% |
60.0% |
|||
|
Westlands |
10.3% |
94.2% |
8.8% |
94.0% |
91.5% |
||||
|
Karen |
10.4% |
90.0% |
9.6% |
90.0% |
- |
- |
|||
|
Mombasa
Rd |
8.2% |
85.3% |
9.0% |
87.6% |
|||||
|
Thika
Rd |
9.0% |
91.5% |
8.7% |
58.0% |
|||||
|
CBD |
|
|
9.0% |
93.0% |
8.5% |
90.0% |
|||
|
·
Kilimani has the
highest occupancy and yield at 9.0% for Grade C offices while Parklands has
the highest occupancy for Grade B offices at 83.35 with a yield of 10.2%.
Kilimani is easily accessible from the CBD while Parklands is located in a
prime location ·
For Grade A
offices, Karen and Westlands offer the best returns with a yield of 10.4% and
occupancy rates of 90.0% and 94.2% respectively mainly because they are
located in prime locations and can charge a premium on rents. |
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