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DWINDLING YIELDS

Office supply glut slows down rental yields

In Summary

•The current office stock is at nine million square feet against a demand of 3.8 million square feet.

•Seven out of the nine office space nodes are buyers market and only two are developers market

Cytonn Invetsment real estate service manager Johnson Denge at the launch of Kenya hospitality Industry and serviced apartments report in Nairobi on October 17,2016
Cytonn Invetsment real estate service manager Johnson Denge at the launch of Kenya hospitality Industry and serviced apartments report in Nairobi on October 17,2016
Image: ENOS TECHE

Rent on commercial office spaces continues to rise in Nairobi even as developers stare at vacant rooms.

The Nairobi Metropolitan Area Commercial Office Report by Cytonn shows real estate developers have focused heavily on the construction of office buildings leading to an office stock of nine million square feet against a demand of 3.8 million square feet.

“We expect the oversupply to increase by 7.6 per cent to 5.6 million square feet in 2019,” the report stated.

 
 

This has forced most landlords to reduce or maintain prices and rents in order to remain competitive and attract occupants.

On the demand side, the bargaining power now rests with tenants who have a wide variety of office spaces to choose from.

 “We have a negative outlook for the commercial office theme in the Nairobi Metropolitan Area, and thus investment in the sector should be geared to the long-term horizon for gains when the market picks up, “Cytonn’s senior manager for regional markets Johnson Denge said.

According to the report, the market is fully a buyers’ market with seven out of the nine nodes being a buyers market and only two being developers market

The CBD, Mombasa road and Thika Road have been identified as bottoming markets characterised by stagnant demand, high vacancies, and very low pricing.

Upperhill, Parklands, Westlands, and Kilimani were also identified as falling markets experiencing heavy supply coupled with low demand and pricing to attract tenants.

The report shows most multinational firms are now moving their business operations to Gigiri and Karen to avoid major traffic snarl-ups witnessed in the CBD and Upperhill.

 
 

The CBD, Upperhill, and Westlands have the largest supply of office space in Nairobi with a market share a cumulative market share of 53.5 per cent, while Gigiri and Thika Road have the lowest commercial office space supply with a cumulative market share of 1.6 per cent.  

Location and quality of office space continue to be the main factors determining office performance in Nairobi with Gigiri and Karen recording the highest yields of 10.5 per cent and 9.2 per cent, respectively.

According to the report, investments should be made in zones with low supply and high returns such as Gigiri and in differentiated concepts such as serviced offices recording a rental yield of up to 13.5 per cent to boost returns.

“Over the next two years, office space completions are expected to decline by a 2-year rate of six per cent due to market correction as the forces of demand and supply come into play,” the report stated.