Nairobi — The rapid development of commercial buildings in Nairobi over the recent past has seen an oversupply of office space with available space in 2017 standing at 6.3 million square feet against a demand of 1.6 million square feet.
A report by Cytonn Real Estate reveals the oversupply is 62 percent higher compared to 2016 with analysts at the company expecting the demand-supply mismatch to continue in 2018 with the gap growing by 12.8 percent.
"The increase in the oversupply was as a result of increased supply with 3 Million square feet of offices 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," Cytonn Research Analyst Nancy Murule noted.
As a result, rental yields and occupancy rates declined 0.1 percent points and 4.6 percent points, respectively to 9.2 percent and 83.2 percent, from 9.3 percent and 88.0 percent, respectively due to the increase in supply.
The best performing submarkets were Parklands and Karen with average rental yields of 9.7 percent and 9.5 percent, respectively.
The high yields are as a result of prime locations that enable the areas to charge a premium on rents. CBD, Mombasa Road and Thika Road were the worst performers with average rental yields of 8.7 percent and 8.5 percent, respectively.
Grade A offices recorded the highest yields that stood at 9.8 percent compared to Grade B and C that had yields of 9.3 percent and 8.4 percent, 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 percent. For Grade B, the opportunity exists in Parklands with yields of 9.9 percent, while for Grade C the opportunity is mainly in Kilimani with average yields of 9.1 percent.
As a result, rental yields have declined by 0.1 percent which has led to reduced development activity with office properties in Karen and Parklands fetching higher yields
Analysts at Cytonn recommend a long-term view on commercial space investment and in specific pockets of value such as serviced offices and green buildings.