Rental office business no longer a good deal

Aerial view of Westlands with view of new upcoming buildings. In the background is Upper Hill buildings as seen from Westlands. [David Gichuru, Standard]

Investing in rental office is increasingly becoming a bad deal for many Kenyans, a new industry report has revealed.

The new Nairobi Metropolitan Area Commercial Office report by Cytonn Real Estate titled Tenant Driven Market focuses on the performance of the sector in Nairobi’s high-end areas while highlighting the demand, supply, and performance of the theme in terms of rents, prices, yields and occupancy rates.

“In 2018, the sector recorded a supply of nine million square feet against a demand of 3.8 million square feet, hence an oversupply of 5.2 million square feet, resulting in an increase of cumulative office stock by 10.4 per cent to 35.5 million square feet in 2018, from 31.5 million square feet in 2017,” says the report.

“The slow rise in rents and prices was attributed to the oversupply of 5.2 million square feet office space as at 2018, which created a bargaining chip for potential tenants, forcing developers and landlords to reduce or maintain prices and rents in order to remain competitive and attract occupants to their office spaces,” said Cytonn research analyst Juster Kendi during the release.

In addition, out of the nine high-end areas surveyed, Thika Road and Mombasa Road were the worst performing nodes, recording rental yields of 6.7 and 5.8 per cent, respectively, due to lack of quality offices and the prevalence of traffic snarl-ups that have made them generally unattractive to firms.

“Given the expected increase in office space supply and expected stagnation in performance in 2019, we have a negative outlook for the commercial office theme in the Nairobi Metropolitan Area, and thus investment in the sector should be geared to the long-term horizon for gains when the market picks up, “said Cytonn senior manager for regional markets Johnson Denge.

The report says the sector still has pockets of value in zones with low supply and high returns owing to differentiated concepts such as serviced offices in areas like Gigiri.