Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their Nairobi Metropolitan Area Serviced Apartments Report, which highlights the performance of serviced apartments in 2018. According to the report, serviced apartments recorded improved performance during the year with the average rental yield coming in at 7.4%, compared to the 5.3% recorded in 2017.
This was driven by increased demand, which triggered an increase in charge rates, as well as increased occupancy rates with an average of 80.0% in 2018, compared to 72.0% in 2017. The improved performance is attributable to the stable political environment and improved security, making Nairobi an ideal destination for both business and holiday travelers. Kilimani area was the best performing node recording high occupancy rates of 86.0%, and rental yields of 10.9%, owing to its easy access from Jomo Kenyatta International Airport (JKIA), proximity to business nodes such as Westlands and Upperhill, and a good transport network, thus ease of accessibility. Developments in the Thika Road node (Muthaiga North, Mirema and Garden Estate) recorded the lowest rental yield of 4.4%, attributed to its unpopularity, given the distance from main commercial zones, the lack of modern and quality serviced apartments, in addition to not being within the UN Blue Zone, thus not attractive to expatriates due to security concerns.
Serviced apartments are becoming popular for use by holiday guests who are travelling as families and for business travelers looking for mid to long-term accommodation. According to the report, the demand has been supported by benefits that come with serviced apartments such as: i) bigger spaces compared to hotel rooms. For instance, in Nairobi, while the standard hotel room size is 30-50 SQM, the average size of serviced apartments is 75 SQM for 1-bedroom units, 110 SQM for 2-bedroom units, and 140 SQM for 3-bedroom units. ii) They are considered more affordable given their relatively lower charges compared to hotels. For instance, a standard 3-star hotel in Nairobi charges on average Kshs 14,000 per night for a suite, while a studio serviced apartments charges on average Kshs 8,000 per night and a 1-bedroom apartment charges on average Kshs 11,000 per night. iii) Unlike a hotel, a serviced apartment can easily accommodate a family, in addition to allowing one to cook and hence creating the home away from home experience that is sought after by many long-term travelers, and iv) they are located within or in close proximity to other residential developments, hence guests are able to integrate with the community.
Speaking on the supply of serviced apartments, Beatrice Mwangi, Assistant Research Analyst at Cytonn noted that, “There has been a growing supply of serviced apartments with approximately 1,189 additional units expected into the market by 2020, mainly in Westlands and Kilimani. The investment in the theme is fueled by i) the higher demand with firms aiming to optimize their travel budgets, thus more firms are opting for serviced apartments, as they are less expensive in the end, ii) the lower operating expenses as compared to hotels, as they require less number of staff and lower ancillary costs for amenities and foodstuffs, and are thus cheaper to run compared to hotels, iii) they can be easily converted to normal apartments, in the case where the former is not performing well, and, iv) the relatively longer tenancy compared to hotels as the clientele for serviced apartments are mainly on long-term stays as compared to those who prefer hotel rooms, and thus the guarantee of a more stable income.’’
In the Nairobi Metropolitan Area, the investment opportunity lies in Kilimani and Westlands, which are the best performing areas with average rental yields of above 10.0%. This is attributed to the good transport network in these areas making them easily accessible, proximity to business nodes such as Upperhill, good security given that the areas are mapped as UN blue zone areas, and availability of key amenities such as Yaya Centre, The Westgate Mall and Jomo Kenyatta International Airport (JKIA).
APPENDIX: DETAILED TABLES FOR EACH MARKET SEGMENT
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.