Rents stagnate as global crisis bites

By Morris Aron

The economy’s dismal performance over the last two years is depressing rental yields in the real estate sector, with the office sub-sector being the most affected.

According to a property trend forecast by Stanbic Investment Management Services, rents have stagnated due to prevailing low levels of disposable incomes resulting from reduced purchasing power, which was brought about by high inflation trends.

"Even if property prices have held, and in some cases risen, rents have remained stagnant, and in some cases come down, meaning that the rental yields have been under pressure," said Mohammed Jivanjee, an Investment Analyst with SIMS.

Although the trend is being witnessed across the entire spectrum of property sectors — which include residential, retail, and industrial —the office sub-sector is the worst hit.

Facing slump

Property experts fear that rental yields in the office sector will soon be facing a slump, due to the amount of office space coming up along Mombasa Road, Waiyaki Way, Westlands and other areas of Nairobi. This is in the backdrop of limited, or falling demand for offices in the short to medium term.

"This should outstrip demand, and lead to a decline in the rental yields in these markets. The demand for office space is not as high, and is only expected to catch up much later," said SIMS statement.

It is anticipated that a total of over 25,000 square meters of let-able office space is due to open up Nairobi alone, in the next few months.

Postponing expansion

According to investment experts, with companies postponing expansion plans, and shelving new plans for start-ups, the office sub-sector has not grown as much as it would have grown, if the economic slowdown had not taken place.

"Many companies looking to relocate, or new start ups, have probably postponed their plans, with anticipation the overall business climate to pick up," said the SIMS report.

High-end markets, where rents have stagnated for the better part of the year, have further depressed rentals for the residential market. This is because only a few tenants can afford rents above Sh60, 000.

There have also been instances of tenants moving back to middle-income estates to mitigate the high cost of living.

However, the strained rentals are bound to ease off, as the economy picks up again and assumes a growth path. This however, depends on how much rain falls, and how fast the Sh22 billion stimulus package jumpstarts the economy.