OFFICE SPACE

Treasury's budget position on office lease likely to disrupt market

In Summary

• Demand for office market space is likely to dip further following  the government's announcement that it would negotiate rents for its  leases.

• National Treasury  Cabinet Secretary Henry Rotich said beginning July, all procurement of office accommodation by government will be standardised with uniform cost leases and existing contracts will be renegotiated to ensure a standard rate.

Treasury CS Henry Rotich displays the budget before heading to parliament
Treasury CS Henry Rotich displays the budget before heading to parliament
Image: ENOS TECHE

Demand for office market space is likely to dip further following  the government's announcement that it would negotiate rents for its  leases.

According to National Treasury  Cabinet Secretary Henry Rotich,  beginning July, all procurement of office accommodation by government will be standardised with uniform cost leases and existing contracts will be renegotiated to ensure a standard rate.

This, he said is expected to contain the rise in expenditure in leasing working space.

“The government has been leasing office space at higher prices than market rates resulting in huge costs,” Rotich said in the 2019/2020 budget statement.

According to property research analyst Wacu Mbugua, the government has the option to negotiate, build or settle in their own offices.

“This will affect the market which has been tough for developers in the past years due to a glut,” Mbugua said

The revelations comes at a time when prime rents in the commercial office market are expected to continue stagnating to the end of June 2019 due to the current oversupply and upcoming developments.

A report released by Knight Frank in February showed that monthly asking rents in Nairobi stagnated over the six months to December 2018 at $1.3 per square feet (Sh132.7) as a result of continued oversupply in specific locations.

Even though it is unclear on how much the government spends on rent, it has said it is pushing to improve its spending and reduce the budget deficit that currently stands  Sh607.8 billion. 

Most commercial leases are for six years and above.

Mbugua said the effect on yields if the state corporations and agencies choose to vacate, may therefore not necessarily be felt now.

The effect may be a pullback to developers to trying to increase returns from slow growth in the past.

A report by Cytonn Investment on supply showed that total office stock in Nairobi increased by 4.3 million sqft in 2018, 23.9 per cent higher than in 2017. The average occupancy level was at 83.3 per cent, increasing slightly by 0.7 per cent from previous year.

Rental yields to developers increased by 0.2 per cent to 8.1 per cent in 2018. This translated to increase in rents by 1.6 per cent to an average of Sh103 per sqft from Shs101 while average asking prices increased by 0.6 per cent to Sh12,719 from Sh12,649 across different areas.

This resulted in a supply of 9.0 million sqft against a demand of 3.8 million sqft, with the oversupply being 10.8 per cent higher than in 2017.

This was due to completion of office complexes such as Prism Towers in UpperHill, One Africa Place and The Promenade in Westlands and Victoria Towers in Two Rivers along Limuru road.

CBD, Upperhill and Westlands had the largest supply, with market shares of 18 per cent, 17.9 per cent and 17.6 per cent, respectively with a cumulative market share of 53.5 per cent.

This was also attributed to growing SMEs and multinationals setting up operations in the country being the regional hub for East Africa.