Where to invest in times of declining real estate returns

Kenya’s real estate sector is increasingly becoming a tricky investment option following the ever increasing supply against declining demand, investment management firm Cytonn has said.

Cytonn’s senior investment analyst, Caleb Mugendi, said there is an oversupply of commercial offices of 5.3 million square feet, which is expected to grow to 5.7 million square feet in 2019.

He added the retail segment has an oversupply of two million square feet that is expected to increase with the opening of malls, such as Crystal Rivers in Athi River.

“The residential sector has increased supply in the middle to high-end residential sector, with a decreasing effective demand, hence recording a three per cent decline in occupancy rates in 2018.”

Mr Mugendi said real estate sector is highly unpromising this year, adding that in the residential sector, their projection shows performance will remain flat. However, select markets will continue to post a good performance supported by their appeal to home-buyers based on location and accessibility, availability of affordable land for development, as well as availability of key amenities.

“In the commercial office, we forecast a decline of the average rental yield to eight per cent from 8.1 per cent as a result of oversupply, with the average occupancy rates expected to decrease by 1.3 percentage points from 83.3 per cent to 82 per cent.”

Further, in retail, he said returns are expected to stagnate as a result of increased supply.

“Occupancy rates are expected to decline by 2.9 percentage points to 76.9 per cent from 79.8 per cent, leading to reduced yields of 8.7 per cent from 9 per cent.”

However, even with this bleak picture, Mugendi said mixed-use developments provide a ray of hope.

“The real estate sector is set to embrace the concept of mixed-use developments as investors diversify their real estate portfolios, given the thematic real estate space surplus.”