Why the super-rich are ditching commercial property investments

Less than 10 per cent of HNWIs plan to put their money into commercial properties this year. [iStockphoto]

High net-worth individuals (HNWIs) are shunning away from commercial property investments.

This is attributed to the high cost of development and rising interest rates according to the latest report by Knight Frank.

The Wealth Report by the real estate advisory firm with a global footprint notes that only less than 10 per cent of HNWIs in the country invested in commercial property in 2023.

More so, less than 10 per cent of HNWIs plan to put their money into commercial properties this year.

Even so, these individuals purchase residential homes in the country to diversify their investments.

The report cites stagnated yields, shifts in working patterns, and development costs as some of the key factors that have made this sub-sector of real estate unattractive.

Stagnated yield and rental growth, the report says, is a key contributing factor in the subdued interest in commercial property investment.

The sector, it adds, has experienced lower yields and slow rental growth and as such, HNWIs are approaching it cautiously.

“Over the past few years, the office sector has grappled with an oversupply situation, leading to stagnating rental growth,” the report states.

“The diminished potential for lucrative returns may have deterred HNWIs from allocating a significant portion of their investment portfolios to commercial properties.”

Potential investors

The working-from-home model, that many businesses have adopted since the Covid pandemic has also played a role.

The flexible and hybrid work arrangements have suppressed the appetite for commercial spaces.

“We have an oversupply situation like when you look at office space that in a way scares away potential investors in commercial property investment. They fear is that they are going to have vacancies in their properties,” said Boniface Abudho, research analyst, at Knight Frank Kenya.

With the advent of these changes, some businesses downsized their office spaces. “This change in the office landscape has likely influenced HNWI to re-evaluate the attractiveness of commercial real estate as a viable investment avenue,” the report says.

But, the key to the current operating environment has to do with costs.

The cost of putting up a commercial property is higher when compared to a residential one.

“The scale, complexity, and specialised systems required in commercial projects contribute to larger budgets,” the report explains.

Knight Frank references a report by Utilities One which states that the cost of materials, labour, and engineering for commercial projects tend to surpass that of residential projects.

“This financial barrier may deter HNWIs and their clients, especially in an environment where obtaining financing has become more expensive,” says the report.

Access financing

While green loans in the real estate sector have emerged as an alternative avenue to access financing for investment, Knight Frank Kenya Chief Executive Mark Dunford noted that this has not yet become easy money for HNWIs to access.

This is even as the report indicated that when HNWIs were asked about the Environmental, Social, and Governance (ESG) criteria they assess when considering property acquisition, they mentioned renewable energy as a major consideration meaning they are aware of the green debate.

However, accessing green loans in the country, said Mr Dunford, is not easy.

“We have not cracked it in this market. There isn’t access to a lot of easy money in green financing,” he said. “And if you go to Development Finance Institutions (DFIs), the hoops you have to jump through to satisfy them are not necessarily easy.”

Mr Abudho, a research analyst at Knight Frank pointed out that the decision for HNWIs to shun away from commercial property is not necessarily a connotation of weakness in the economy.

“It is not a weakness in the market per se,” Abudho said, explaining that the phenomenon stems from the Covid pandemic.

“The offices are there to stay and, in  future, were are going to have occupancies like we used to have before Covid.”

Mr Dunford’s view, which is linked to the high costs of development, is that the market has become big and so it is an expensive affair for a single HNWI to satisfy it.

“The reality is that we are at a point in time where we have become a market that is starting to attract institution money,” he noted.

He said that before, investors used to put up the commercial spaces they needed for their businesses.

“Traditionally, we had private investors developing assets because they need them. If you were in manufacturing, you would build a factory that you would then occupy and make your products. If it is agriculture or horticulture, you would build the facilities that you require,” he said.

As the population grows, the demand for such assets in the commercial space has also grown.

He referenced the increased population today as compared to 15 years ago as well as the increase in the number of expatriates in the country.

This is in addition to the growing middle class.  

“The demand for those facilities like retail shopping malls is much higher, so investment out there is so much greater that it is difficult for independent investors,” Mr Dunford explained.

“While there are those HNWIs who can make it that big, the risk associated is so much higher, so it is more likely for an institutional investor to come in who has a bigger portfolio and make those investments.”