Cytonn Real Estate, the development affiliate of Cytonn Investments, today released its Nairobi Commercial Office Report – 2018. The report themed “Nairobi Commercial Office Report: Constrained Performance as a Result of Oversupply” focuses on the performance of the Commercial Office Theme in Nairobi in 2017 in terms of demand, supply, and performance of the theme in terms of rents, prices, yields and occupancy rates. The 2017 report compares the performance to 2016 to identify trends and hence the opportunity and outlook for the commercial office zone in 2018. The report is based on research conducted on 8 office nodes in Nairobi and 4 selected cities in Sub Saharan Africa, these are; Accra- Ghana, Kampala- Uganda, Dar Es Salaam- Tanzania, and Kigali- Rwanda
According to the report, Nairobi had a total supply of 31.8 mn square feet (SQFT) of office space, and 3.5 mn SQFT of office space were delivered in 2017 according to, Nairobi City Council Completions data, with an average occupancy level of 83.2%, 4.8% points decline from 88.0% in 2016. This resulted in a supply of 6.3 mn SQFT in 2017 against a demand of 1.6 mn SQFT and thus an oversupply of 4.7 mn SQFT. The oversupply is 62.1% higher than in 2016 at 2.9 mn SQFT and 46.9% higher than our projection of 3.2 mn SQFT. Speaking during the release of the report, Research Analyst Nancy Murule noted that, “ the increase in the oversupply was as a result of increased supply with 3.5mn SQFT of offices being added to the market, reduced demand due to the protracted electioneering period that led to investors adopting a wait and see attitude and tough operating environment characterized by low credit supply as a result of the implementation of the Banking Amendment Act, 2015.” The report further notes that if current occupancy levels in the market persist, the Oversupply in Nairobi is expected to increase by 12.8% in 2018 to 5.3mn SQFT.
In terms of performance, the office sector softened in 2017 with rental yields declining by 0.1% points to 9.2% from 9.3% in 2016. The best performing submarkets were Parklands and Karen with average rental yields of 9.7% and 9.5%, respectively. The high yields are as a result of prime locations that enable the areas charge premium on rents. CBD, Mombasa Road and Thika Road were the worst performers with average rental yields of 8.7% and 8.5%, respectively. According to grades, Grade A offices recorded the highest yields that stood at 9.8% compared to Grade B and C that had yields of 9.3% and 8.4%, respectively. According to the report, combining analysis of node and class performance, the office opportunity for Grade A spaces exists in Kilimani with yields of 9.9%. For Grade B, the opportunity exists in Parklands with yields of 9.9%, while for Grade C the opportunity is mainly in Kilimani with average yields of 9.1%
The report compared the Nairobi region to selected Sub Saharan cities of Accra- Ghana, Kampala- Uganda, Dar Es Salaam- Tanzania, and Kigali- Rwanda where it was noted that Nairobi outperforms only Dar Es Salaam generating an average dollarized rental yield of 8.5%, against an average of 6.4% in Dar Es Salaam. Kampala – Uganda has the highest yields for commercial offices at 10.6%.
The report noted that the key drivers to the office sector remain: i) Nairobi as a regional hub, ii) Devolution, with the emergence of devolved governments leading to increased need for office spaces in counties to cater for County Governments and businesses that are expanding to county headquarters, iii) Growth of Small and Medium Sized Enterprises with SMEs contributing to approximately 45% of Kenya’s GDP, 80% of employment in Kenya and constitute 98% of businesses locally according to a CNBC News Report 2014, and iv) International Players who will lead to increased investments leading to an increase in demand for offices.
The report noted that with the expected increase in oversupply and a decline in performance, the commercial office market in Nairobi had a negative outlook that investments in the office sector, should hence be biased towards the long term, for gains when the market finally picks up in 3-5 years. According to Cytonn Real Estate Research, “pockets of value still existed in the sector in zones such as Karen which have low supply and high returns as well as differentiated concepts such as green buildings and serviced offices.”
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.
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. Collectively, Cytonn Investments and Cytonn Real Estate manage over Kshs. 82 billion of real estate projects.