Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their Annual Real Estate Market Review for 2019. The report highlights the current state of the real estate sector in terms of uptake, rental yields, capital appreciation, and hence, total investor returns. According to the report, the real estate sector average total returns came in at 9.0% with commercial office, retail, residential, mixed-use developments, and serviced apartments sectors posting average rental yields of 7.5%, 7.8%, 5.0%, 7.3%, and 7.6%, respectively, while capital appreciation for existing properties came in at 2.0%. The report also notes that in comparison to 2018, the sector recorded subdued growth attributed to sluggish demand for property during the year owing to the prevailing tough operating environment that has resulted in constrained access to funding for both developers and off-takers, and other factors such as delayed issuance of construction permits and oversupply in select sectors namely, commercial office and retail with a surplus of 5.2mn SQFT and 2.0mn SQFT, respectively.
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Annual Real Estate Returns Summary Table, for Existing Properties |
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2017 |
2018 |
2019 |
Y/Y Change (% Points) |
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Average Rental Yield |
7.6% |
7.4% |
7.0% |
(0.4%) |
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Average Capital Appreciation |
6.5% |
3.8% |
2.0% |
(1.8%) |
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Total |
14.1% |
11.2% |
9.0% |
(2.2%) |
Source: Cytonn Research 2019
According to the report, however, residential and serviced apartment sectors continued to perform well in terms of rental yield, recording y/y increase of 0.3% points and 0.2% points, respectively, to 5.0% and 7.6% as at 2019 from 4.7% and 7.4%, in 2018.
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Residential Annual Performance Summary 2016-2019 |
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2016 |
2017 |
2018 |
2019 |
Y/Y Change (% Points) |
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Annual Uptake |
25.5% |
26.3% |
22.8% |
19.4% |
(3.4%) |
|
Occupancy |
83.2% |
84.0% |
81.0% |
85.7% |
4.7% |
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Rental Yield |
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5.2% |
4.7% |
5.0% |
0.3% |
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Price Appreciation |
7.9% |
5.1% |
4.2% |
1.1% |
(3.1%) |
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Total Returns |
12.9% |
10.3% |
8.9% |
6.1% |
(2.8%) |
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All values in Kshs unless stated otherwise |
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Serviced Apartments Performance in 2019 |
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Node |
Occupancy 2018 |
Occupancy 2019 |
Monthly Charge per SM 2019 |
Rental Yield 2018 |
Rental Yield 2019 |
% Rental Yield ∆ |
|
Westlands& Parklands |
76.4% |
80.8% |
3,884 |
10.6% |
10.8% |
0.2% |
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|
86.0% |
80.0% |
3,353 |
10.9% |
9.5% |
(1.4%) |
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Limuru Road/Gigiri |
84.4% |
88.2% |
3,430 |
9.7% |
9.4% |
(0.3%) |
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Kileleshwa& Lavington |
82.9% |
82.4% |
2,869 |
7.8% |
8.2% |
0.4% |
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Upperhill |
60.0% |
67.8% |
2,577 |
5.3% |
6.0% |
0.7% |
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Nairobi CBD |
74.4% |
72.0% |
2,230 |
5.7% |
5.1% |
(0.5%) |
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Thika Road |
90.0% |
84.4% |
1,321 |
4.4% |
4.0% |
(0.4%) |
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Msa Road |
85.0% |
|
5.0% |
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Average |
79.9% |
79.4% |
2,806 |
7.4% |
7.6% |
0.2% |
“We retain a NEUTRAL outlook for the real estate sector mainly constrained by increased supply in the market and continued limited access to financing for both developers and off-takers. We, however, expect the market to improve as the interest rate cap regime comes to an end. The sector has pockets of value in themes such as housing for lower-middle to low-income earners in Satellite Towns such as Ruiru, Athi River and Ruaka, and differentiated concepts that have continued to deliver above-market rental yields such as serviced offices and serviced apartments with 13.4% and 7.6%, respectively, as well as mixed-use developments where office and retail spaces recorded average rental yields of 7.9% and 8.1%, respectively, 0.4% points and 0.3% points higher than their respective single-use market averages of 7.5% and 7.8%.
Below is a Summary of the 2019 sectorial performance:
Key: Green – POSITIVE, Grey – NEUTRAL, Red – NEGATIVE highlights sectorial outlook
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Asset Class |
Real Estate Sector Performance 2019 |
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Residential Sector |
Apartments performed better with average total returns to investors of 6.8% compared to detached units at 5.3%. Overall, apartments also recorded higher uptake and occupancy rates at 20.2% and 88.7%, in comparison to the residential market averages of 19.4% and 85.7%, respectively. Lower mid-end detached units recorded the highest average price appreciation in the market at 2.0%, in comparison to the residential market average of 1.2%. |
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Opportunity is in Satellite Towns such as Athi River, Ruaka, and Ruiru that continue to attract homebuyers owing to improvement in relatively good infrastructure and provision of social amenities while still remaining affordable to majority of Kenya’s lower middle class. |
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Commercial Office Sector |
The commercial office sector performance softened in 2019 recording a 0.6% points and 3.1% point’s y/y decline in average rental yields and occupancy rates, to 7.5% and 80.2% in 2019, from 8.1% and 83.3%, respectively, in 2018. The subdued performance was largely driven by a decline in uptake of office space attributed to minimal growth in private sector credit. |
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Pockets of value remain in differentiated concepts such as serviced offices in Gigiri and Karen, and offices in mixed-use developments (MUDs) that attract yields of 13.4% and 9.2%, respectively. |
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Retail Sector |
In 2019, the retail sector performance softened with yields declining by 1.2% points to 7.8% in 2019 from 9.0% in 2018 attributed to a tough economic environment that continued to hinder consumer’s spending power as well as the growing mall space glut following an introduction of 0.4 mn SQFT of retail space into the Nairobi Metropolitan Area (NMA) market. |
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Our outlook for the sector is neutral as the sector continues to attract both local and international retailers to cushion the retail real estate sector performance through increased occupancy rates. The investment opportunity is in County Headquarters in markets such as Mombasa and Mt. Kenya Regions that have retail space demand of 0.3 mn and 0.2 mn SQFT, attractive yields at 8.3% and 9.9% and occupancy rates at 96.3% and 84.5%, respectively. |
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Hospitality Sector |
Serviced apartments recorded a slight improvement in performance in 2019 with the average rental yield coming in at 7.6%, which is 0.2% points higher than 7.4% recorded in 2018, attributable to increased demand for serviced apartments by both guests on business and leisure travels, thus triggering an increase in charge rates, as well as a stable political environment and improved security, making Nairobi an ideal destination for both business and holiday travellers. |
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The investment opportunity in the sector lies in; i) serviced apartments in areas such as Westlands and Kilimani markets with rental yields of above 10.0%, and ii) conference centres situated in and away from Nairobi, given the growing number of local conferences and delegates. |
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Land Sector |
Land prices within the Nairobi Metropolitan Area recorded an 8-year CAGR of 11.9% and a 2.0% y/y price change in 2019 driven mainly by the growing demand for development land especially in satellite towns. |
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The investment opportunity is in satellite towns such as Ruiru, Athi River, and Syokimau as developers strive to drive the Kenyan Government’s Big agenda on the provision of affordable housing as well as improving infrastructure with projects such as the expansion of Waiyaki Way and the dualling of the Northern by-pass. |
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Listed Real Estate |
The Stanlib Fahari I-REIT continued to drop in value closing the year 2019 at a unit price of Kshs 9.4, 6.9% lower than its opening price of Kshs 10.1. Overall, the REIT’s value declined by 16.0% y/y trading at an average of Kshs 8.9 per share in comparison to Kshs 10.6 in 2018. The REIT has been performing poorly mainly due to minimal acceptance by real estate investors and a general poor institutional framework inhibiting its growth. |
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Our outlook for Stanlib’s listed real estate is neutral supported by the improved dividend yield of 8.1% as at 2018, in line with the real estate performance. |
Notes to the Editor:
Cytonn Investments is an independent investment management firm, with offices in Nairobi - Kenya and D.C. Metro - U.S. We are primarily focused on offering alternative investment solutions to individual high net-worth investors, global and institutional investors and Kenyans in the diaspora interested in the high-growth East-African region. We currently have over Kshs 82.0 billion of investments and projects under mandate, primarily in real estate.
Cytonn Real Estate is Cytonn’s development affiliate, which is focused on developing institutional grade real estate targeted at specific institutional, high net-worth and Diaspora investors. Collective, Cytonn Investments and Cytonn Real Estate manage over Kshs. 82 billion of real estate projects.
