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16 April, 2021

Gigiri and Karen were the best performing submarkets in Q1’2021 recording rental yields of 8.3% and 8.0%, respectively compared to a market average of 6.8%

    I. Commercial Office Sector

In Q1’2020, the commercial office sector recorded subdued performance attributed to; i) reduced demand of office spaces as businesses restructure their operations hence scaling down, ii)oversupply in the commercial office sector which has created a bargaining chip for tenders forcing developers to reduce their prices and give discounts and concessions to attract and retain clients, iii) tough economic environment which has resulted to firms scaling down, iv) declines in occupancy spaces as businesses continue to embrace the working from home strategy.

Source: Cytonn Research

The commercial office sector recorded a 0.2% and 1.4% points decline in the average rental yields and occupancy rates to 6.8% and 76.3% in Q1’2021, from 7.0% and 77.7%, respectively in FY’2020. The declines in the rental yields and the occupancies is attributable to the ongoing COVID-19 pandemic which has led to reduced demand for office spaces as businesses restructure their operations hence scaling down. The asking rents also decreased by 0.8% to an average of Kshs 92 per SQFT in Q1’2021, from Kshs 93 per SQFT in FY’2020, while the asking prices declined by 0.4% to an average of Kshs 12,228 per SQFT in Q1’2021 from Kshs 12,280 per SQFT in FY’2020. The decline in the asking prices and rents is attributed to a surplus of office space which stood at 6.3mn SQFT as at 2020 which has created a bargaining chip for tenants forcing developers to reduce their prices so that they can retain and attract occupants for their office spaces.

The table below highlights the performance of the Nairobi Metropolitan Area (NMA) Commercial Office sector over time:

(All values in Kshs unless stated otherwise)

Nairobi Metropolitan Area (NMA) Commercial Office Returns Over Time

Year

 

Q1'2020

 

H1’2020

Q3' 2020

 

FY'2020

Q1’2021

FY'2020/

Q1’2021

Occupancy %

81.7%

80.0%

79.9%

77.7%

76.3%

(1.4%) points

Asking Rents

 (Kshs) /SQFT

97

95

94

93

92

(0.8%)

Average Prices

(Kshs) /SQFT

12,535

12,516

12,479

12,280

12,228

(0.4%)

Average

Rental Yields (%)

7.8%

7.3%

7.2%

7.0%

6.8%

(0.2%) points

Source: Cytonn Research 2021

Gigiri and Karen were the best performing submarkets in Q1’2021 recording rental yields of 8.3% and 8.0%, respectively attributed to their superior locations, availability of high quality office spaces charging prime rental prices, relatively good infrastructure, and low supply of commercial office spaces within the markets.

Thika Road and Mombasa Road were the worst performing commercial office nodes within the Nairobi Metropolitan Area recording rental yields of 5.3% and 4.7%, respectively attributed to the effect of traffic snarl-ups, low quality office spaces, and zoning regulations as Mombasa Road is mainly considered as an industrial area, while Thika Road is a popular residential hub, thus making the locations unattractive to business firms.

The table below shows the Nairobi Metropolitan Area (NMA) sub-market performance:

(All values in Kshs Unless Stated Otherwise)

Nairobi Metropolitan Area Commercial Office Submarket Performance Q1’2021

Area

Price (Kshs) /SQFT Q1'2021

Rent (Kshs) /SQFT Q1'2021

Occupancy (%) Q1'2021

Rental Yield

(%) Q1'2021

Price (Kshs) /SQFT FY’2020

Rent Kshs/ SQFT FY 2020

Occupancy (%) FY’2020

Rental Yield (%) FY'2020

∆ in Rent

∆ in Occupancy (% points)

∆ in Rental Yields (% points)

Gigiri

13,400

116

81.0%

8.3%

13,400

116

82.5%

8.5%

0.0%

(1.5%

(0.2%)

Karen

13,511

107

83.8%

8.0%

13,567

106

83.6%

7.8%

0.5%

0.2%

0.1%

Westlands

11,974

101

74.0%

7.6%

11,975

104

74.4%

7.8%

(2.4%)

(0.3%)

(0.2%)

Parklands

10,763

92

77.2%

7.4%

10,958

93

79.9%

8.2%

(0.8%)

(2.7%)

(0.8%)

Kilimani

12,187

92

78.6%

6.7%

12,233

93

79.1%

6.8%

(0.4%)

(0.5%)

(0.1%)

Upperhill

12,524

95

74.8%

6.8%

12,684

92

78.5%

6.9%

2.5%

(3.7%)

(0.1%)

Nairobi CBD

12,110

81

80.9%

6.6%

11,889

82

82.4%

6.8%

(1.0%)

(1.5%)

(0.2%)

Thika Road

12,417

76

74.4%

5.3%

12,500

80

76.1%

5.8%

(4.7%)

(1.7%)

(0.4%)

Mombasa road

11,167

72

61.6%

4.7%

11,313

73

63.0%

4.8%

(1.8%)

(1.4%)

(0.1%)

Average

12,228

92

76.3%

6.8%

12,280

93

77.7%

7.0%

(0.9%)

(1.4%)

(0.2%)

Source: Cytonn Research 2021

We have a NEGATIVE outlook for the NMA commercial office sector attributed to the reduced demand of commercial office spaces brought about by the COVID-19 pandemic amid tough economic environments as firms continue to downsize due to financial constrains while others embrace the working from home strategy and may make it a permanent measure with the third wave of the pandemic making it worse. Landlords are expected to continue adopting strategies to cushion themselves against the impacts of the pandemic such as giving discounts and concessions to attract and retain clients. The sector is however expected to recover in the long run as the economy picks up. Investment opportunity lies in Gigiri and Karen which offer relatively good returns compared to the market averages.

For more information, please see our Cytonn Q1’2021 Markets Review.

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