The Office space supply in Nairobi has been growing at 23.6 percent Compound Annual Growth Rate (CAGR) between 2012 and 2018.
This has been driven by high rental yields in the commercial office sector of 8.1 percent in 2018, compared to the real estate market average of 7.4 percent.
The Cytonn Real Estate and Investment Company Research Analyst, Juster Kendi, said the positive performance was largely driven by political stability that led to an improved macroeconomic environment.
Kendi said the demand has been from growing small and Medium Enterprises (SMEs) and multinationals setting up operations in Nairobi.
Releasing the Nairobi Metropolitan Area Commercial Office Report 2019 on Monday, Kendi said the GDP grew to 6.0 percent in quarter 3 of 2018, higher than the 4.7 percent recorded in quarter 3of 2017.
“The positioning of Nairobi Metropolitan Area as a regional hub further increased entrance of multinationals creating demand for commercial offices,” Kendi noted.
According to the report, last year the sector recorded a supply of 9.0 million square feet ( mn SQFT), against a demand of 3.8 mn SQFT, hence an oversupply of 5.2 mn SQFT. This resulted to an increase of cumulative office stock by 10.4 percent, to 35.5 mn SQFT in 2018, from 31.5 mn SQFT in 2017.
The report themed, “Tenant Driven Market” focuses on the performance of the Commercial Office Sector in 2018, highlighting the demand, supply, and performance of the theme in terms of rents, prices, yields and occupancy rates.
Gigiri, Karen and Westlands were the best performing nodes in 2018, recording rental yields of 10.5 per cent, 9.2 per cent, and 9.0 percent, respectively, attributed to increased demand by businesses and multinational companies due to their proximity to the Central Business District (CBD).
Kendi further explained that the slow rise in rents and prices was attributed to the oversupply of 5.2 mn SQFT office space as at 2018, which created a bargaining chip for potential tenants, forcing developers and landlords to reduce or maintain prices and rents in order to remain competitive and attract occupants to their office spaces.
According to the report, Thika Road and Mombasa Road were the worst performing nodes recording rental yields of 6.7 percent and 5.8 per cent respectively, due to the lack of quality offices and traffic snarl-ups that have made them generally unattractive to firms.
Johnson Denge, Senior Manager for Regional Markets, at Cytonn said given the expected increase in office space supply and expected stagnation in performance in 2019, there is a negative outlook for commercial office theme in Nairobi Metropolitan area thus investments in the sector should be geared to the long-term horizon for gains when the market picks up.
According to the report, the sector has pockets of value 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.
The Cytonn Investments is an independent investment management firm, with offices in Nairobi and Washington DC focused on offering alternative investment solutions to individual high net-worth investors, global and institutional investors
By Wangari Ndirangu