Oversupply dims yields in office space as vacancy rises

Is the local market saturated with retail and office space?

The massive investments witnessed in recent times may suggest that we are at the peak of development in the two segments. In three years’ time, the tallest man-made structure in Africa will sit at the junction of Upper Hill Road and Haile Selassie Avenue.

Pinnacle Towers by Hass Petroleum will rise 70 floors into the sky and might be the best location in the city to take a peek at Mount Kilimanjaro.

But the office segment forecast is everything but rosy.

A Cytonn Investments report titled, Nairobi Commercial Office Report: Constrained Performance as a Result of Oversupply released this week, says that if current occupancy levels in the market persist, the oversupply in Nairobi is expected to increase by 12.8 per cent in 2018 to 5.3 million square feet.

Low demand

Nairobi had a total supply of 31.8 million square feet of office space, and 3.5 million square feet of office space were delivered in 2017.

This is according to Nairobi City County completions data, with an average occupancy level of 83.2 per cent, with occupancy declining from 88 per cent in 2016. The increase in vacancy rates resulted in a supply of 6.3 million square feet against a demand of 1.6 million square feet.

“The increase in the oversupply was as a result of increased supply with 3.5 million square feet of offices being added to the market, reduced demand due to the protracted electioneering period that led to investors adopting a wait-and-see attitude and tough operating environment characterised by low credit supply as a result of the implementation of the Banking Amendment Act, 2015,” said Cytonn Investments research analyst Nancy Murule during the report’s release.

On a positive note, Broll Property Group, one of Africa’s leading commercial property services companies, says in a report that occupancy levels for newly completed office developments in the last two years remained high in several city nodes. But others have not done so well.

“Upper Hill and Westlands continue to have the lowest occupancy rates with regard to developments completed within the last two years. This can be attributed to a poor pre-let uptake, additional stock available and delays in development,” says the report.

On the retail front, recent decline of the once mighty Nakumatt Supermarket may have cast a dark shadow on investments in this segment.

Twenty-seventeen was punctuated by the closure of one store after another, leaving behind thousands of floor space. But some players in the industry say the fate of one player should not be used as a yardstick to measure the business case of the retail segment.

Malls still hot

“Retail is not down,” says Johnson Denge, Cytonn Investments senior manager for regional markets. “Look, almost all the space left by Nakumatt is being snapped up by new entrants. The problem was the retailer’s business model, not the market.”

Foreign retail outlets such as French giant Carrefour, Shoprite and Choppies from Southern Africa have increased their presence in the country.

According to Denge, developers need to rethink the issue of anchor tenants.

“Must we have a supermarket as the anchor tenant in a mall? If we have to keep a supermarket, why not restructure the rental regime and charge as per the footfall in the supermarket?” he asks.

Denge says we are yet to scratch the surface in the retail business, adding that we only have a 30 per cent penetration rate with the rest being informal. For aspiring developers who fear that they will be stuck with empty office and retail buildings, Denge has a word of advice: “Do extensive market research before developing.”

[Additional reporting by James Wanzala]

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