Real estate performance low over bad loans, retail space sharing

The rising cost of construction materials, oversupply of space and reduced lending have been named as the key challenges facing real estate in the first quarter of 2022.

According to Cytonn Quarter One (Q1), 2022 Markets Review, the cut in lending is on the back of an increase in the number of non-performing loans (NPLs) in the real estate sector in the financial year 2021.

However, the rise of e-commerce is one of the bigger impediments to the high intake of retail space in Kenya.

Hastened by the Covid-19 pandemic, e-commerce has motivated traders to invest in less space as they try to cut overhead costs.

A recovering real estate sector has had to contend with traders’ new love for shared spaces, and for working from their home offices.

Mr Waweru Nderitu, the founder and chief executive of Notify Logistics says that while there is high uptake in commercial space, e-commerce practitioners are giving up as much space as possible.

“A lot of companies are now happy to have their employees back in the office,” he says.

“But in the retail space, demand has shifted to shared office space. For business people, it is now mostly about flexibility.”

Notify Logistics  is a growth accelerator for small businesses which deals with transportation, logistics and storage. It allows vendors to rent shelves inside their mall.

Customers walk in and identify the goods they want to buy from the shelves, which are properties of the individual vendors who have rented the shelves.

“Many business people now want to share a space. We have people who are now only using Notify as a pick up location because it does not make economic sense for them to rent a shop,” he says.

When Notify started, Mr Waweru and his wife Hellen were solving a problem of storage space and logistics that the two had encountered when they wanted to get into e-commerce.

“Delivering the product to the customer was complicated and tiresome. She (Hellen) also had some trouble with storage. One room in our house had already been converted into a store for the stock. So we decided to look for ways to solve these problems,” he told Real Estate.

“We thought of a cost-sharing space somewhere in town and invited other people we had known through their online selling ventures to share in our dream.

“Everyone stored their wares at home before then. The idea seemed popular with other vendors, and a business was born. We started a rent-a-shelf for online businesses,” he says.

Now, Mr Waweru says the face of the retail space is changing fast. Soon, retailers will be comfortable in the smallest spaces available as retail spaces suffer reduced uptake.

“Shared retail space is now becoming its own thing. People are moving into a flexible space,” says Mr Waweru.

Laban Totona is the founder and owner of Savannah Apparel, a Kenyan clothing brand. Since he started the company, Mr Totona has been promoting his products on Instagram and Facebook.

So, will he need an office for a business like his, and if so, a shared one?

“The need for or lack of an office is dependent on the business one has opened. What many will consider is what offers the most convenience. Some businesses cannot work when space is shared,” he says.

Many of his peers in the online space, he says, do not want to occupy physical spaces where they will be paying rent and cater for other overheads.

Around 60 per cent, he says, will instead opt to operate from their houses to save. Those who want offices are trying to see how they can share space and split the cost.

“Sharing, in the long term, is easy and convenient. It is cheaper but will deny the business person freedom,” Mr Totona says.

The bigger the business the harder the option of sharing. Working from home, and hybrid models of working, have also affected the uptake of retail space.

 High non-perfoming loans, reduced Reits

The real estate sector has also suffered reduced lending.

This is due to the increase in the number of non-performing loans in the real estate sector by 21.6 per cent to Sh74.7 billion in 2021, from Sh61.4 billion in 2020.

The report attributes the increased number of non-performing loans to hard economic times that were enforced by the Covid-19 pandemic.

Ms Faith Mutio, the assistant head of sales at Superior Homes, says banks’ hesitancy to advance loans to the sector is however reducing.

“We have more banks issuing more loans and even lowering the interest rates so that they can attract more takers,” she said.

The report also notes that travel advisories in the country are expected to have “a downturn on the performance of the hospitality sector, such as the travel advisory by the United Kingdom citing the heightened threat of terrorism in Kenya”.

Continued poor performance of the Real Estate Investment Trusts (Reits) market in Kenya due to lack of knowledge and interest in the financing instrument by investors has also been cited as a challenge to the real estate sector.

Reits are companies that own or finance income-producing real estate across a range of property sectors.

The report says that while the first quarter has been a difficult one as economies battle to recover, the sector has fought its way up and showed good resilience. However, the rest of the year is uncertain.

“As 2022 is an election year, we expect a slow-down in market prices and sales volumes since investors and prospective buyers are expected to adopt a wait and see approach,” reads the report.

“The impact is expected to be temporary and the market is likely to stabilise on the back of relatively strong gross domestic product (GDP) growth - at 5.2 per cent as at the third quarter of 2021, and an attractive demographic profile.”