13 September 2018

Kenya: Oversupply of Mall Space in Kenya - Report

Kenyan cities are faced with an oversupply of retail space, a real estate report has revealed. And many real estate developers, especially of malls, are already feeling the effect as slow uptake gradually becomes the norm.

The Kenya Retail Sector Report 2018 released on Monday this week, showed that the key cities covered have a total mall space supply of 15.3 million square feet, against a demand of 14.1 million square feet, resulting in an oversupply of 1.2 million square feet. Nairobi, Eldoret, Kisumu and Nakuru are oversupplied by 2.0 million, 0.3 million, 0.2 million and 0.1 million square feet, respectively.

However, Kiambu, Mombasa, Kajiado, Mt Kenya and Machakos are undersupplied by 0.6 million, 0.3 million, 0.2 million, 0.2 million and 0.1 million square feet, respectively.

According to the report, in 2018, Kenya's retail sector performance improved, recording average rental yields of 8.6 per cent, 0.3 per cent points higher than the 8.3 per cent recorded in 2017, and average occupancy rates of 86.0 per cent, 5.8 per cent points higher than the 80.2percent recorded in 2017.

The report, Retail Sector Recovers in Key Urban Cities except Nairobi by Cytonn Real Estate, said that Mombasa and Mt Kenya are the new best regions for retail real estate development because of high demand for retail space of 0.3 million and 0.2 million square feet, and anticipated attractive yields of 8.3 per cent and 9.9 per cent, with occupancy rates at 96.3 per cent and 84.5 per cent, respectively.

The investment opportunity in the sector is in county headquarters, which have low retail space supply, with a market share of just 11 per cent and 9.6 per cent, compared to Nairobi with 52.1 per cent, retail space demand of 0.3 million and 0.2 million square feet, attractive rental yields of 8.3 per cent and 9.9 per cent and occupancy rates at 96.3 per cent and 84.5 per cent, respectively.

The report focused on the performance of the real estate retail sector in Kenya in 2018, based on rental yields, occupancy rates, demand and supply, which was compared to 2017's performance to gauge the trends, hence finally give an outlook.

It was based on research conducted in eight retail nodes in Nairobi (Westlands, Kilimani, Karen, Ngong Road, Thika Road, Kiambu & Limuru Road, Mombasa Road and Eastlands), Nairobi Satellite Towns and the key urban cities of Eldoret, Mombasa, Kisumu and the Mt Kenya region, which include Nyeri, Meru and Nanyuki Towns.

INCREASE IN SUPPLY

According to the report, there has been an increase in the supply of retail space, especially in Nairobi, where retail space supply increased by 4.8 per cent per year from 6.2 million square feet in 2017 to 6.5 million square feet in 2018, based on malls in the pipeline.

The supply of formal retail space will increase in Nairobi by a further 1.3 million square feet to 7.8 million by 2020, growing with a two-year compound annual growth rate (CAGR) of 9.5 per cent.

Speaking during the release of the report, Cytonn Real Estate's Research Analyst, Juster Kendi noted that, "The increase in supply is as a result of increased development activity by mall developers seeking to tap into the supposed widening middle class, whose purchasing power has been on the rise, and have an appetite for sophisticated lifestyles, as well as the continued infrastructural development."

In terms of performance over time, in 2018, the retail sector's performance improved, recording average rental yields of 8.6 per cent, 0.3 per cent points higher than the 8.3 per cent recorded in 2017. Occupancy rates increased by 5.8 per cent points year-over-year from 80.2 per cent in 2017 to 86.0 per cent in 2018.

Senior research analyst Nancy Murule, noted that, "The improvement in performance is attributed to the recovery of the market from the tough economic environment in 2017, characterised by prolonged electioneering and reduced private sector credit growth, prudent methods employed by developers to attract clientele, and enhanced footfall such as targeting international anchor tenants to attract clientele and enhance footfall, entry and expansion of international retailers, supported by a widening middle class and the provision of high-quality spaces in line with international standards, and increasing purchasing power, with GDP per capita growing at a rate of 7.9 per cent per annum over the last five years, from Sh113,539 in 2013 to Sh166,314 in 2017, hence the sustained demand for retail products."

The report further noted that the key drivers for the retail sector in Kenya were mainly: high population growth rate and urbanisation rate at 2.6 per cent per annum and 4.3 per cent per annum, respectively, against a global average of 1.2 per cent and 2.1 per cent, for population and urbanisation rates, respectively; increased foreign investment in the country, with international developers such as Actis, Avic and CATIC, being behind the country's largest malls such as Garden City, The Hub and Two Rivers Mall respectively; increased infrastructural development opening up new areas for development, and e-Commerce diversifying retailer products offering and customers experience.

CHALLENGES

However, the sector faces several challenges such as increased competition, fragmented markets, mainly concentrated in urban areas such as Nairobi, and inadequate financing.

"The outlook for the sector remains cautiously positive and we expect to witness reduced development activity in Nairobi, with developers shifting to county headquarters in some markets such as Mombasa and Mt Kenya regions that have low retail space supply, attractive yields and high occupancy rates," said Ms Kendi.

In a subsidiary report, Mombasa Real Estate Investment Opportunity Report 2018, Cytonn Real Estate highlights that the investment opportunity in the county lies in the retail sector in areas with low retail space such as Kizingo and Tudor, and in site-and-service schemes in areas earmarked for infrastructural developments such as those along the Mombasa-Mariakani Highway, and Port Reitz.

The report analyses the current state of the real estate sector in Mombasa County in terms of uptake, rental yields, capital appreciation, and hence total investor returns. It notes that the residential sector recorded average total returns to investors of 7.2 per cent (rental yields of 5.1 per cent and price appreciation of 2.1 per cent).

REDUCED RENTAL RATES

The retail and office sectors attained yields of 8.3 per cent and 5.1 per cent, respectively, and the land sector recorded an average capital appreciation of 12.6 per cent.

Overall, the market recorded average rental yields of 6.2 per cent, which is a decline of 0.9 per cent points from the 7.1 per cent registered in 2016.

The decline is attributable to reduced rental rates in the commercial office and retail sectors as developers seek to attract tenants, while factors such as (i) the sluggish growth of the financial services industry, (ii) inadequate infrastructure, and (iii) fears of insecurity have caused the reluctance of investors to relocate their businesses to Mombasa, thus hampering the office sector's performance.

Speaking during the release, Cytonn's Senior Manager Regional Markets, Johnson Denge noted that, "Our outlook for the performance of the real estate sector in Mombasa County is neutral. However, there exists an opportunity for investment in the retail sector in undersupplied areas such as Tudor on account of an expanding middle class and continued interest from retailers such as Shoprite, restaurants such as Coldstone, Domino's Pizza as well as LC Waikiki, who have recently taken up mall space in Mombasa County."

The residential sector also recorded slow uptake, with an annualised uptake rate of 17.5 per cent on average, attributable to increased supply of products for the upper-middle and high-end markets, whose prices are out of reach for most of the population, which mostly comprises low- to lower-middle income earners. However, the report noted that the Mombasa market has potential for growth, especially with the ongoing infrastructural developments, improved security and the return of political calm.

Speaking on the performance of various real estate themes, Ms Wacu Mbugua, a research assistant at Cytonn Real Estate, noted that "The opportunity in the residential sector is in three-bedroom and four-bedroom apartments in the upper mid-end segment in areas such as Nyali, Kizingo, and Shanzu, with the units recording returns of 7.8 per cent and 9.8 per cent, respectively, higher than the market average of 7.2 per cent.

"Meanwhile, the commercial sector is set to continue on a decline due to investors' reluctance to relocate business to the region, and the local population's limited ability to occupy investment-grade office developments.

"For land, the opportunity lies in site-and-service schemes in areas earmarked for infrastructural developments such as areas along the Mombasa-Mariakani and Port Reitz roads, with the land sector generally attaining a capital appreciation of 12.6 per cent on average."

The drivers of real estate performance in Mombasa, according to the report, include: i) A positive demographic dividend -- with the population growing with an eight-year CAGR of 3.9 per cent, which is 1.3 per cent points higher than the national average population growth of 2.6 per cent per annum, ii) Infrastructural improvements -- such as the Standard Gauge Railway (SGR), which began operations in June last year, which has improved the ease of doing business in the county and thus attracted investment, iii) Tourism -- since Mombasa is recognised as one of the major tourist destinations in the country, partly due to its rich cultural heritage as well as its proximity to the Indian Ocean, creating demand for retail facilities, luxury dwellings and accommodation facilities; and iv) Strong economic growth -- recording an average GDP per capita of $935, which is 34.7 per cent higher than the national average of $694, according to a 2015 study by the World Bank.

Out of the four real estate themes under evaluation in Mombasa County, one theme that is land, has a positive outlook. Two themes, namely the retail and the residential sectors, have a neutral outlook. And the last theme, namely office space, has a negative outlook.

Thus the outlook for the Mombasa real estate market is neutral.

Land, the residential sector and the retail sector recorded growth, while commercial office space recorded a relatively low performance.

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