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Frank
Kenya
Knight
Knight Frank’s Attitudes Survey
Nairobi Commercial Office

Super-rich brush off glut fears to invest in offices

By mid-2017 a boom in office construction had generated an oversupply of around 3.2 million square feet, a report by investment management firm Cytonn showed, leaving some tower blocks nearly empty and pushing developers to seek out new marketing strategies in a now fiercely competitive market. In Nairobi alone overall office space supply is projected to have grown by more than 50 per cent over the past five years and is forecast to increase by a further 21 per cent this year, according to a report by investment firm Cytonn.The super-rich, however, see untapped opportunity in high-end Grade A commercial office property. And to strategically position themselves, they are investing more in this segment.A separate survey by property firm, Knight Frank showed that the super-rich are more drawn to office development in 2018, bucking a trend from 2017 where their preference was on residential property.

Empty office spaces have become a common sight today across Nairobi and other major towns in Kenya, amid a frenzy of investment in new blocks over the past few years. By mid-2017 a boom in office construction had generated an oversupply of around 3.2 million square feet, a report by investment management firm Cytonn showed, leaving some tower blocks nearly empty and pushing developers to seek out new marketing strategies in a now fiercely competitive market.In Nairobi alone overall office space supply is projected to have grown by more than 50 per cent over the past five years and is forecast to increase by a further 21 per cent this year, according to a report by investment firm Cytonn.The super-rich, however, see untapped opportunity in high-end Grade A commercial office property. And to strategically position themselves, they are investing more in this segment.A separate survey by property firm, Knight Frank showed that the super-rich are more drawn to office development in 2018, bucking a trend from 2017 where their preference was on residential property.The majority of respondents (39 per cent) said they intent to sink their money in office developments, residential and agricultural property (28 per cent), student accommodation and warehouses at 22 per cent, infrastructure (17 per cent), industrial (11 per cent) and healthcare and retirement housing (six per cent).In last year’s Knight Frank’s Attitudes Survey their preference were (63 per cent) in residential property, offices (56 per cent), retail (31 per cent), leisure (25 per cent) and industrial at 13 per cent.

Grade A office buildings have total area ranging from 100,001 – 300,000 square feet and generally have ample natural good lighting, good views, prestigious finishing and on-site undercover parking, and a parking ratio of 3:1000 square feet, according to Cytonn.Grade B office buildings are lower ranked than the former and have a total area ranging from 50,000 to 100,000 square feet and offer technical services and ample parking space while Grade C offices are buildings of any size, usually older and in need of renovation, they lack lobbies and may not have on-site parking space. They charge below average rental rates.In its Nairobi Commercial Office report for 2018, Cytonn said Grade A outperformed other classes recording yields of 9.8 per cent as the offices are in prime business districts with superior amenities and are thus able to charge prime rents, which are on average Sh112 per square foot per month, against a market average of Sh99.“Despite the high returns, the increase in supply in the market constrained the performance of Grade A offices, leading to a 0.2 per cent points decline in yields from the 10 per cent recorded in 2016. Grade B offices are the most popular with the highest average occupancy of 85.1 per cent. This is because they are of a better quality than Grade C offices and are more affordable than Grade A offices,” the firm said.

Grade B rents are 11.4 times cheaper per square feet compared to Grade A offices. They therefore bucked the downward trend of returns recording a 0.1 per cent -point increase in yields from 9.3 per cent in 2016 to 9.2 per cent in 2017, Cytonn said.The Cytonn report released last week painted a bleak outlook for the real estate sector this year, citing high cost of funds, increased supply and competition, as well as a lack of affordable development-class land.Its annual market report for 2018 said mortgages had fallen due to the interest-rate capping, with the number of active accounts plummeting by 1.5 per cent to 24,085 at the end of December.

In the commercial office segment, Cytonn particularly predicted chances of lower returns as a result of oversupply in the sector.“Supply is expected to be 3.9 million square feet in 2018. With the entry of international retailers, we expect high competition in the retail sector, which is likely to constrain the performance of small operators,” Cytonn said.The firm said the office market in Nairobi registered a 4.8 per cent year-on-year decline in occupancy rates from 88 per cent in 2016 to 83.2 per cent in 2017, with rental yields also falling by a marginal 0.1 points year-on-year from 9.3 per cent in 2016 to 9.2 per cent in 2017.“The market had an oversupply of 4.7 million square feet in 2017, an increase of 62.1 per cent from the oversupply of 2.9 million square feet recorded in 2016 and this is expected to grow by 12.8 per cent to 5.3 million in 2018. The significant increase in oversupply was mainly due to a decrease in occupancy levels of 4.8 per cent year-on-year as a result of reduced demand constrained by the protracted electioneering period and low credit supply in the market,” Cytonn said.“We therefore recommend that any investments in the commercial office sector to be purely long-term with expected returns in 3-5 years and be limited to more resilient segments such as Grade A offices in markets with low supply and differentiated concepts such as serviced offices with rental yields of 13.4 per cent.”

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