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Cytonn Real Estate has released its 2018 Kenya Retail Sector Report themed “Retail Sector Recovers in Key Urban Cities except Nairobi.”
The findings indicates that Mombasa and Mt. Kenya are the best regions for retail real estate development due to high retail space demand of 0.3mn and 0.2mn SQFT, with an attractive yields at 8.3% to 9.9% and occupancy rates of 96.3% and 84.5%, respectively.
The report focused on the performance of the real estate retail sector in Kenya in 2018, based on the rental yields, occupancy rates, demand and supply in comparison to 2017’s performance. Major findings were based on research conducted on 8 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.
Conferring to the outcomes, there has been an increase in the supply of retail space, especially in Nairobi, where retail space supply increased by 4.8% y/y from 6.2 mn SQFT in 2017 to 6.5mn SQFT in 2018, based on malls in the pipeline.
Supply of formal retail space is expected to increase in Nairobi by a further 1.3mn SQFT to 7.8mn by 2020, growing with a 2-year CAGR of 9.5%. The key cities covered have a total mall space supply of 15.3mn SQFT against a demand of 14.1mn SQFT, resulting in an oversupply of 1.2mn SQFT. Nairobi, Eldoret, Kisumu and Nakuru regions are oversupplied by 2.0 mn, 0.3 mn, 0.2 mn and 0.1 mn SQFT, respectively. However, Kiambu, Mombasa, Kajiado, Mt. Kenya and Machakos are undersupplied by 0.6 mn, 0.3 mn, 0.2 mn, 0.2 mn and 0.1 mn SQFT, respectively.
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 widening middle class whose purchasing power has been on a 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%, 0.3% points higher than the 8.3% recorded in 2017. Occupancy rates increased by 5.8% points y/y from 80.2% in 2017 to 86.0% in 2018.
Adding during the release of the report, Cytonn Real Estate’s, 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, characterized by prolonged electioneering period and reduced private sector credit growth, prudent methods employed by developers to attract clientele, and enhance footfall such as targeting international anchor tenants, entry and expansion of international retailers, supported by a widening middle class and 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% p.a over the last 5-years, from Kshs 113,539 in 2013 to Kshs 166,314 in 2017, hence sustained demand for retail products.”
The report further noted that the key drivers for the retail sector in Kenya were mainly: i) high population growth rate and urbanization rate at 2.6% p.a and 4.3% p.a, respectively, against a global average of 1.2% and 2.1%, for population and urbanization rates, respectively,
- ii) 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 Malls, respectively,
iii) Increased infrastructural development opening up new areas for development, and iv) E- Commerce diversifying retailers product offering and customers experience. The sector however 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 Cytonn Real Estate’s Research Analyst, Juster Kendi.