BUSINESS FOCUS: Commercial Office Spaces & Developments in Kenya.

Real Estate has been on the upward growing curve for a reasonable period of time in Kenya. A clear sign of the booming real estate industry is evident in the many projects; proposed, under  construction and completed ready for occupation all over Nairobi, and other major cities in Kenya. Although Nairobi is leading in terms of developments scale and value, other cities such as Kisumu, Nakuru, Mombasa and Eldoret are quickly catching up. Personal residential houses,  vast estates, apartments and commercial establishments tell a good story of where Kenya is headed in a decade or two to come.

Driving along the Waiyaki Way towards Westlands, within Westlands and past to surrounding areas reveal quite fascinating commercial office developments. Upperhill and Kilimani also are a highlight of modern day developments, most of which are changing the city’s and countries sky lines and business orientation. A survey report provided on Business Daily revealed that CBD, Upperhill and Westlands account for the largest commercial space supply in the country. Whereas Nairobi accounts for 18.0%, Upperhill accounts for 17.9%. Mombasa supplies 14.1% of the total office space supply in Kenya.

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FCB Mihrab Tower, Kilimani.

In Kilimani, there is the almost complete Arabic inspired FCB Mihrab, next to Sifa Towers. Cytonn, an investment firm reported that the heavy investment in construction of commercial offices led to over-supply in 2017. In Nairobi, this the office space supply increased by over 50% counting from the last 5 years, with an increase by a further 21% projected this 2018.

Upperhill scenario

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Upperhill growing impressive skyline.

It is definitely the financial hub of Nairobi, with new high end massive projects taking shape, even as finished skyscrapers reshape the Nairobi skyline. The robust constructive going on in Upperhill is fascinating, and new buildings coming up a sure sign that things are changing over the hill. Dubbed the new financial centre, Upperhill has all top companies one can name. Top banks and financial institutions like CBA, Equity Bank, Kenya Commercial Bank have their headquarters at developed in Upperhill. Britam, Radisson Blu, Crowne Plaza, UAP all have a stamp there.

International firms are locating their headquarters and base of operations at Upperhill, with good infrastructure, well developed high end office spaces and ample parking made available. However, all may not be well, with many developments exceeding the demand, especially for the prime spaces. With increased demand for land to develop, the cost of land shot up, and all these need to be factored in by the investors, even as the commercial development is put up and tenants occupy. How do you cut your costs to get tenants to occupy a space you had bought? Rent rates have to come down to get occupancy or else everyone will be panicking when loans go unpaid.

 

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UAP Tower, Upperhill

The UAP Tower and Britam Towers are currently struggling to fill their empty office spaces. They have employed the services of Knight Frank, Axis, Regent, Pam Golding and Broll to market the space and get tenants but it would take a while. KCB Towers, which is already 90% let is facing another challenge, which may be characteristic of most properties in Upperhill. The requirement to have 1 client taking the whole floor makes it hard, with the financial implication and lease period of 6 years minimum.

The Pinnacle.

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The Pinnacle Archi. impression

A new Ksh. 20 billion development, deemed to become Africa’s tallest building is quickly taking shape with excavations underway. It is reported that it would as high as 70 storeys. The Pinnacle, being developed by Hass Petroleum will house the iconic Hilton Hotel (45 storeys), with residential apartments across its 42 floors. The development will also have 3 floors for retail space and high end luxury mall. 20 floors will be constructed as Grade A Offices.

Grade A office spaces

According to a survey conducted by Knight Frank indicated that more investors (specifically) the top rich are now more attracted towards investing in the commercial properties. Whereas more preferred in investing in residential properties last year, most no prefer investing in commercial office spaces. In investing in commercial spaces, grades also influence the decision and volume of investment. Grade A commercial properties are:

  • Green Buildings, newly constructed;
  • Impressive lobby
  • high rises
  • High end fittings, amenities and systems
  • high visibility location
  • Raised floors
  • Higher than average rental rate
  • parking of at least 4 single parking slots for every 100 sqm
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Vienna Court

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Vienna Court (Courtyard)

A good example of such space is Vienna Court, which is currently leasing at Ksh.154 per sqf. It is well documented that few developments reach international standards for the Grade A in Kenya.

Grade B Office spaces on the other hand  may range from 50,000-100,000 sqf. they are less prestigious than Grade A developments, but still provide ample parking and other technical services, which may not be available in Grade C office developments. These buildings in category C are usually older, needing renovations, poor or no lifts, and parking may be a challenge. To attract tenants, they charge lower rates. They are mostly suitable for start-ups. Within the Kenya office space scenario, Grade B commercial properties are the most popular due to affordability, location, convenience and financial implications to the tenants. To investors, all these factor matter in their decision making. One would want to invest where they are sure good returns are guaranteed.

As developers put more commercial properties, it is reported that the supply has exceeded demand. According to Cytonn, the market could have a whole 5.3 million sqf oversupply in 2018, compared to 4.7 million sqf in 2017. It was estimated at 2.8 million sqf in 2016. In terms of occupancy, there was a 4.8% decline year-on year-decline, from 88% in 2016 and 83% in 2017. This decline in occupancy rates could be attributed to the long period the country was involved in elections, that was characterized with violence and uncertainties. also, the credit terms in the country are not favorable.

With these market realities affecting all stakeholders involved real estate stakeholders, a balance needs to work out between supply and demand of office space. Supply is expected to be stagnant for sometime in the forthcoming years. As supply decreases, demand is expected to increase, with a robust economy burst and increased demand for Grade A office spaces for tenancy by local and international companies. An increase in demand would stabilize and rise occupancy rates and enable property investors recover lost revenues. Meanwhile, it is recommended that any investments in commercial office to be long-term oriented with a return to investment period of 3-5 years. This would be particularly ideal for Grade A  commercial properties, which have low supply and are characterized by differentiated concepts such as the serviced offices which have 13.5% rental yield.

 

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