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Cytonn Report Shows Retail Space Opportunities Shifting to Counties

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Cytonn Real Estate, the development affiliate of Cytonn Investments, has released the Kenya Retail Real Estate Sector Report 2019 highlighting the performance of the retail real estate sector in Kenya in 2019.

The report, “Increased Market Activity to Promote Retail Growth”, shows investment opportunities county headquarters in some markets such as Mombasa, Kiambu, and Mt Kenya regions that have retail space demand of 200,000, 800,000 and 200,000 square feet, respectively.

The report focused on the performance of the retail real estate in Kenya based on rental yields, occupancy rates, as well as demand and supply, to identify the trends, with the research conducted on 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.

According to the report, the retail sector recorded an additional 1.1 million square feet of mall space into the market in 2018, leading to a supply of 12.5 mn square feet in 2019, from 11.4 million square feet in 2018.

Performance in key urban cities softened, recording average rental yields of 7.0% in 2019, 1.6% points lower than the 8.6% recorded in 2018. The reduced performance is largely attributed to a 10.6% reduction in rental rates to Ksh118 per square foot (SQFT) in 2019, from Ksh132 per SQFT in 2018.

There was a surplus in retail space coupled with stiff competition between malls in some nodes such as Nairobi, which recorded an oversupply of 2.8 million SQFT.

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Cytonn Real Estate’s Research Analyst Joseph Wanga, noted that “despite the decline in yields, we remain upbeat about performance of the sector as it is still cushioned by increased market activity driven by the entry of international retailers into the Kenyan market and the expansion efforts by local retailers such as Naivas and Tuskys as they take advantage of the attractive rental rates.”

The main drivers for the sector include positive demographics such as:

  • Kenya’s urban population continues to expand at an annual rate of 4.3%
  • Continued change in tastes and preferences by a growing middle class towards international products, thus creating a niche for international retailers
  • Infrastructure has encouraged a growth in mall space as this encourages tenancy and footfall
  • Growth of Small and Medium-Sized Enterprises (SMEs).

Mr Wanga, however, notes that the sector faces several challenges due to a tough financial environment, pushing property managers to employ prudent methods to retain tenants as well as target international anchor tenants.

Nairobi Metropolitan Area

The Nairobi Metropolitan Area (NMA) Retail Performance declined by 1.0% points to 8.0%, from 9.0% in 2018 attributed to an increase in retail space supply of 800,000 SQFT within the past year with the addition of malls such as Waterfront, The Well, Mountain View and the expansion of Westgate and Sarit Centre malls.

Kilimani, Ngong Road and Westlands were the best-performing retail nodes within the Nairobi Metropolitan recording rental yields of 9.9%, 9.2% and 9.2%, respectively, in 2019 attributed to the nodes serving the upper middle income and high-end population.

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According to the report, the key cities covered have a total mall space supply of 16.1 million SQFT against a demand of 14.4 million SQFT, resulting in an oversupply of 1.7 million SQFT. Nairobi, Uasin Gishu, Kisumu and Nakuru counties were the most over-supplied areas by 2.8 mn, 0.2 mn, 0.2 mn and 0.1 mn SQFT, respectively.

Kiambu County was the highest under-supplied area by 0.8 mn SQFT while Machakos, Kajiado, Mt.Kenya and Mombasa were under-supplied by 0.2 mn SQFT each.

“The outlook for the sector is neutral and we expect to witness reduced development activity in Nairobi, with developers shifting to county headquarters in some markets such as Kiambu and Mt. Kenya that have retail space demand of 0.8mn and 0.2mn SQFT, respectively,” said Wacu Mbugua, a Research Analyst at Cytonn.

The report is available online: (Link here) 

Retail Space Opportunity in Kenya

Retail Space Opportunity 2019
Region/Weight Retail Yield Score Retail Space Score Household expenditure (per adult) score    
  30% 30% 40% Weighted score Rank
Mombasa 5 8 8 7.1 1
Mt. Kenya 9 6 5 6.5 2
Kiambu 3 9 7 6.4 3
Nairobi 8 1 9 6.3 4
Kajiado 6 7 2 4.7 5
Kisumu 4 3 6 4.5 6
Machakos 2 5 3 3.3 7
Uasin Gishu 7 2 1 3.1 8
Nakuru 1 4 4 3.1 8

Source: Cytonn Research 2019

Performance by Nodes

Summary of NMA’s Retail Market Performance 2018-2019
Location Rent Per SQFT 2019 Occupancy Rate 2019 Rental Yield 2019 Rent Per SQFT 2018 Occupancy Rate 2018 Rental Yield 2018 Change in Rents Change in Occupancy Change in Rental Yields
Kilimani 170.4 87.2% 9.9% 167.1 97.0% 10.7% 2.0% (9.8%) (0.9%)
Ngong Road 179.4 83.1% 9.2% 175.4 88.8% 9.7% 2.3% (5.7%) (0.5%)
Westlands 203.6 84.6% 9.2% 219.2 88.2% 12.2% (7.1%) (3.6%) (3.0%)
Karen 207.9 77.0% 9.1% 224.9 88.8% 11.0% (7.6%) (11.8%) (1.9%)
Eastlands 145.0 74.5% 7.5% 153.3 64.8% 6.8% (5.4%) 9.7% 0.7%
Thika road 165.4 73.5% 7.5% 177.3 75.5% 8.3% (6.7%) (2.0%) (0.8%)
Kiambu Road 166.0 61.7% 6.8% 182.8 69.5% 8.1% (9.2%) (7.8%) (1.4%)
Mombasa Road 148.1 64.0% 6.3% 161.5 72.4% 7.9% (8.3%) (8.4%) (1.6%)
Satellite Towns 131.4 70.3% 6.0% 142.1 73.7% 6.7% (7.5%) (3.3%) (0.7%)
Average 168.6 75.1% 8.0% 178.2 79.8% 9.0% (5.4%) (4.7%) (1.0%)

Source: Cytonn Research 2019

Performance by Regions

Summary of 2019 Retail Performance in Key Urban Cities in Kenya
Region Rent 2019 Occupancy Rate 2019 Rental Yield 2019 Rent 2018 Occupancy Rate 2018 Rental Yield 2018 Change in Occupancy Y/Y Change in Yield Y/Y
Mt. Kenya 129.8 80.0% 8.6% 130.1 84.5% 9.9% (4.5%) (1.3%)
Nairobi 168.6 75.1% 8.0% 178.9 83.7% 9.4% (8.6%) (1.4%)
Eldoret 131.0 82.3% 7.9% 134.1 78.5% 7.6% 3.8% 0.3%
Mombasa 122.8 73.3% 7.3% 135.8 96.3% 8.3% (22.9%) (0.9%)
Kisumu 96.9 75.8% 5.6% 106.3 88.0% 9.7% (12.2%) (4.1%)
Nakuru 59.2 77.5% 4.5% 63.0 85.0% 6.9% (7.5%) (2.4%)
Average 118.0 77.3% 7.0% 124.7 86.0% 8.6% (8.7%) (1.6%)

Source: Cytonn Research 2019

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