Nairobi Metropolitan Area Mixed Use Developments Outperform Single-Themed Developments With A Rental Yield Of 8.0%

Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their Nairobi Metropolitan Area Mixed Use Development Report, which highlights that MUDs encompassing office, retail and residential themes have an average rental yield of 8.0%, 0.5% higher than the overall real estate market average at 7.5%. For the specific nodes, MUDs in the Limuru Road and Karen nodes are the best performing, recording a rental yield of 9.6% and 9.4%, respectively. The performance is attributable to the fact that these developments are located in high-end neighbourhoods (Karen, Runda, Rosslyn, Kitisuru, among others) hosting Nairobi’s middle-end and high-end population, with higher purchasing power and who are thus willing to pay a premium for class and amenities provided. Mombasa Road and Eastlands are the worst performing nodes, recording a rental yield of 5.7% and 5.4%, respectively attributable to traffic congestion along Mombasa Road and competition from informal real estate developments in Eastlands hence leading to low market prices and rental charges.

“MUDs are a viable investment opportunity subject to the developer striking the right balance between the incorporated uses. With an average weighted rental yield of 8.0%, (8.5% yield for retail space accounting for 30.9% of MUD lettable area on average, 8.2% yield for office space accounting for 58.1% of MUD lettable area on average and 5.6% yield for residential space accounting for 41.3% of MUD lettable area on average) mixed-use developments have higher returns compared to market average at 7.5%. The investment opportunity within the Nairobi Metropolitan Area is in areas such as Limuru road, Karen, Upperhill and Kilimani recording the highest rental yield returns of 9.7%, 9.4%, 8.7%, and 8.6%, respectively.” said Johnson Denge – Cytonn’s Senior Manager, Regional Markets, when speaking about the overall opportunity in mixed use developments in Nairobi.

Speaking on the performance of real estate themes in MUDs versus Single-themed Developments’ Performance, Juster Kendi, Research Analyst at Cytonn, noted that, “Office space and residential units in MUDs have higher rental yields at 8.2% and 5.6% compared to the market average at 7.9% and 5.0% mainly attributed to higher rents and prices charged due to amenities and facilities provided, while retail space in MUDs record an average rental yield of 8.5% ,1.0% points lower than the market average at 9.5% yield attributable to competition from shopping centres and malls, strategically located in residential areas, making them easier to access. We, however, note that in destination mixed-use developments, retail space performs better due to the state-of-the-art facilities provided that attract clientele who are looking for an experience.”
According to the report,  the growing popularity of mixed-use developments is mainly driven by (i) high returns – MUDs perform better, recording an average rental yield of 8.0% compared to a market average of 7.5% for single-themed developments, (ii) operational synergies – the various themes in an MUD can generate operational synergies whereby one’s theme performance complements the others, (iii) risk diversification – having multiple components in the development creates multiple revenue streams that help to diversify the risk of a project, (iv) economies of scale – MUDs enable effective use of space/land hence maximization of returns while shared infrastructure and facilities such as lifts, parking, and lobbies result in savings on construction and operational costs, and, (v) greater efficiency where occupants can live, work, play and invest all in one location, hence reducing time and cost incurred while commuting. By creating convenience, therefore, MUDs attract demand from both prospective homeowners and corporations.
The detailed report is available online: Nairobi Metropolitan Area Mixed-Use Developments (MUDs) Report 2018
APPENDIX: DETAILED TABLES FOR EACH MARKET SEGMENT

All values in Kshs unless stated otherwise

Source: Cytonn Research 2018

All values in Kshs unless stated otherwise

Source: Cytonn Research 2018

All values in Kshs unless stated otherwise

Source: Cytonn Research 2018

All values in Kshs unless stated otherwise

Source: Cytonn Research 2018

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 billion of investments and projects under mandate, mainly in real estate.

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