Rising demand for student accommodation and growth in retail activities are set to dictate Kenya’s real estate performance in the coming years.
This is according to real estate consultancy firm Knight Frank, which cited a booming young population and the recovery of footfall to malls and retail centres which had been stalled by the Covid-19 pandemic.
In The Africa Report 2022/23, Knight Frank noted that with the Covid-19 pandemic that led many transactions to go online growing the e-commerce sector, there is an expectation for traditional retail to grow hence more space for malls.
While major retailers such as Naivas and Quickmart have been expanding all through the pandemic Knight Frank also sees demand for spaces for smaller malls.
The report, which covers 22 countries in Africa, among them Kenya, notes that Covid helped fast-track e-commerce adoption in the country.
It adds that an increase in online purchasing and retailers focusing on developing their platforms, particularly in the food and beverage space has been witnessed.
Traditional retail, the report says, especially convenience-led schemes, has also seen a strong rebound in the last six to nine months off the back of easing restrictions and people’s eagerness to get back to life as normal.
“We also expect to see more co-working operators taking advantage of low mall lease rates and establishing bases in shopping centres,” says the report.
According to the report, supermarkets have emerged as star performers. “Increased sales and store expansion activity from both domestic and international players means supermarkets will remain a robust asset class over the short to medium term,” it says.
Boom of local retail
Knight Frank opines that despite Carrefour being the most dominant name in the retail sector, local retailers Quickmart and Naivas are the largest supermarket chains in Kenya by the number of stores, having increased their branches by 30 per cent over the past two years, equating to an expansion of 100,000 cubic square metres.
The report cites the country’s young demographic as the sustenance growth in the affordable homes and co-living segments of the residential market, noting that a young population, combined with a strong middle class is also helping the office and retail sectors to recover.
This has seen Nairobi remain the strategic capital of East Africa and the first-place international investors list as a preferred entry point into Africa.
The report mentions the growing number of undergraduates, a youthful population and an undersupply of formal student housing have resulted in the increased development of purpose-built student accommodation (PBSA) as well as co-living schemes.
This, the report says, is an asset class to watch out for. “In Kenya, we have seen an increase in PBSA due to the young population leading to growth in the requirement for quality student accommodation in close proximity to an educational institution,” said Knight Frank Kenya Managing Director Mark Dunford.
Despite Covid-19 restrictions, notes the report, investment in the affordable residential sector continues to improve. This is being underpinned by the government’s commitment to delivering 500,000 homes to address the well-publicised deficit of two million homes.
“In contrast, the prime residential market continues to soften, with transaction volumes, sale prices and lease rates continuing to trend downwards as buyers and tenants become increasingly cost-conscious in the wake of the rising cost of living,” reads the report.
On the industrial sector, the report says it is highly active and remains full of opportunity as one of the asset classes which has benefitted most from the pandemic globally.
This, it says, has been primarily fueled by the increase in e-commerce, local storage and data centre requirements as well as home markets looking to reduce their reliance on internationally manufactured goods. “We are optimistic for the sector which remains the least mature in the region,” says the report.
The office sector slowed down during the pandemic due to some firms closing or downsizing and others opting to adopt a work-from-home model.
Knight Frank says it has started to see the oversupply of office space developed in the lead-up to the Covid 19 pandemic being absorbed by the market.
“We have seen some rental growth over the last quarter and our view is that we will see prime rents begin to climb again off the back of improving occupancy rates and renewed interest from global tenants looking to either set up or expand their operations in Nairobi,” says the consultant.
The demand for these spaces is centred on best-in-class space, with investors and occupiers zeroing in on schemes that satisfy their environmental, social and governance (ESG) criteria - a theme we believe will continue to intensify, raising questions about the future of older, more secondary, non ESG compliant stock.
“Despite this, the number of green-certified developments remains low,” the report adds.
The report also observes that attracting meaningful volumes of institutional capital into the continent continues to prove challenging and recent global macroeconomic events appear to be hampering matters further.
“Indeed, total cross-border investment in the African commercial real estate stood at Sh31.8 billion ($274 million) in 2021, down 49 per cent from 2020 and 54 per cent lower than 2019 figures,” reads the report.
Though the traditional office sector globally is expected to account for just over half of all cross-border investment transactions, the report notes that in Africa, we expect to see a rotation of assets by investors, particularly private equity, into the industrial, residential, life sciences and data centre sectors.
“Investment managers and institutional investors are expected to lead the demand for these alternative sectors, while high net worth investors will demonstrate strong interest too, particularly into the more stable markets, such as South Africa and Kenya,” it concludes.