NAIROBI, KENYA, APRIL 2nd, 2019
Cytonn Real Estate, the development affiliate of Cytonn Investments, have released their Q1’2019 real estate market review, highlighting the current state of the real estate sector in terms of uptake, rental yields, capital appreciation, and hence, total investor returns. According to the report, the real estate sector softened in Q1’2019, with sectors such as office and retail registering a decline in rental yields by 0.1% points and 0.5% points, to 8.0% and 8.5% from 8.1% and 9.0%, respectively in FY’2018, while the residential sector recorded 0.5% annualized price appreciation, 3.7% points lower than 4.2% in FY’2018. The performance was constrained by (i) limited access to financing by developers and end users, with private sector credit growth coming in at 3.4% in February 2019, compared to a 5-year (2014-2019) average of 12.4%, (ii) high land and construction costs, especially in the Nairobi Metropolitan Area, and (iii) increased supply in selected sectors such as the commercial office and retail sectors with a surplus of 5.2mn SQFT and 2.0mn SQFT, respectively, as at 2018.
In addition, the report noted that there was activity across all real estate themes, supported by (i) continued demand for investment property from multinational individuals, firms and the growing middle class, (ii) the Kenyan Government’s efforts towards provision of affordable housing as part of its Big 4 Agenda, and (iii) continued infrastructural improvement, which is opening up new areas for development.
“We retain a NEUTRAL outlook for the real estate sector mainly constrained by increased supply in the market and limited access to financing for both developers and off-takers. The real estate sector, however has pockets of value in themes such as housing for lower-middle to low-income earners in the residential sector, differentiated concepts such as serviced offices that attract yields of 13.4% such as Westlands, as well as areas with low supply of office space such as Gigiri and county headquarters driven by positive demographics, devolution and sustained infrastructural development.” said Juster Kendi, Research Analyst at Cytonn.
Below is a Summary of the Q1’2019 sectoral performance:
Key: Green – POSITIVE, Grey – NEUTRAL, Red – NEGATIVE highlights sectorial outlook
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Asset Class |
Real Estate Sector Performance and Investment opportunities Q1’ 2019 |
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Residential Sector |
Detached units registered subdued performance with an annual price depreciation of 1.5%, 2.4% and 1.4% for high-end, upper mid-end, and, lower mid-end markets, respectively. This is in comparison to apartments that posted average annual appreciation of 4.9%, 1.2% and 2.2% for upper mid-end suburbs, lower mid-end suburbs, and, Satellite Towns, respectively |
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The opportunity is in lower middle to low-end housing in leading markets such as Athi River and Ruiru whereas upmarket investment opportunity in apartments is in areas like Riverside and Kilimani, which have consistently delivered double-digit returns of up to 14.8% as at Q1 2019. The investment opportunity in detached units is in areas like Karen for high-end investments and Runda Mumwe due to relatively high uptake averaging at 23.1%, |
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Commercial Office Sector |
The commercial office sector recorded a marginal decline in performance recording 0.1% and 0.9% points decline in average rental yields and occupancy rates, to 8.0% and 82.4% in Q1’2019, from 8.1% and 83.3%, respectively, in FY’2018. Asking rents decreased by 1.7% to an average of Kshs 100 per SQFT, from Kshs 102 per SQFT in 2018, while asking prices remained stable at Kshs 12,574 per SQFT, |
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Pockets of value remain, in differentiated concepts such as serviced offices that attract yields of up to 13.4% in markets such as Westlands, as well as areas with low office space supply such as Gigiri with a rental yield of 9.6% |
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Retail Sector |
The retail sector’s performance softened, recording 0.5% points decline in rental yield to 8.5% in Q1’2019, from 9.0% in FY’2018. This is attributed to an increase in supply, which saw average occupancies drop by 3.0% points from 79.8% in FY’2018 to 76.8% in Q1’2019, and average rents declined by 3.9% to Kshs 174.3 per SQFT/month from Kshs 178.2 per SQFT/month in 2018, as property managers and owners reduced rental charges to attract tenants, |
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The opportunity is in County Headquarters in markets such as Mombasa and Mt. Kenya Regions that have retail space demand of 0.3 mn and 0.2 mn SQFT, attractive yields at 8.3% and 9.9% and occupancy rates at 96.3% and 84.5%, respectively |
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Hospitality Sector |
The sector continues to be attractive driven by i) the improving air transport operations, ii) continued marketing of Kenya as an experience destination, iii) improved security, and iv) political stability, which have continued to boost tourists’ confidence in the country and thus making it a preferred travel destination for both business and holiday travellers |
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The investment opportunity in the sector lies in; i) serviced apartments in areas such as Kilimani and Westlands markets with rental yields of above 10.0%, and ii) conference centres situated in and away from Nairobi, given the growing number of local conferences and delegates |
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Land Sector |
The land sector recorded an overall annualized capital appreciation of 0.5%, in Q1’2019 fuelled by the demand for development land, improving infrastructure and positive demographics |
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The investment opportunity in land lies in markets such as Karen and Kileleshwa which recorded a relatively high annualized capital appreciation of 5.0% and 3.0%, respectively, and satellite town such as Athi River and Limuru for Unserviced land and Thika and Ruai for site and service schemes which were the best performing with an average annualized capital appreciation of 6.3%, 6.2%, 6.9% and 6.6%, respectively |
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Listed Real Estate |
Stanlib Fahari I-REIT released their FY’2018 earnings, registering a 13.1% growth in earnings to Kshs 1.07 per unit from Kshs 0.95 per unit in FY’2017, attributable to a 10.9% growth in rental income to Kshs 309.8 mn from Kshs 279.4 mn in FY’2017. The REIT manager recommended a Kshs 135.7 mn dividend to its unitholders at Kshs 0.75 per unit, realizing an 8.1% yield on its market price as at 29th March 2019. The REIT recorded 1.6% points increase in dividend yield to 8.1% in 2018 from 6.5 % in 2017. The I-REIT is however, trading at 55.1% discount to its net asset value of Kshs 20.6 as per FY’2018 reporting as the performance is constrained by the continued lack of investor appetite for the instrument |
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We expect the REITs rental revenues to increase driven by; (i) increased diversification of the portfolio, with the purchase of 67 Gitanga Road building, (ii) construction and operation of a 3-screen cinema with 100 seats each, at Greenspan Mall, which is intended to increase foot traffic and boost existing tenant customers, and (iii) the expected legislation to exempt REIT owned subsidiaries from withholding tax |
