Varsities take CBDs by storm

Universities have occupied prime office spaces in Central Business Districts, in major towns at the expense of Small and Medium Enterprises, writes GABRIEL KAMAU

Beatrice Kimani works as a personal assistant to the managing director of a leading real estate firm in Nairobi. In January 2010, the mother of two girls aged six-and-a-half and four, decided to go back to school to advance her career. In about a month’s time (July), she will be graduating with a degree in Business Administration, Human Resource option, from the Kenya Methodist University (Kemu), after three years of study.

?? Beatrice is happy that over the past three years, she has been able to work and continue with her studies.

?? “With a husband, two children and a full-time job, I could only manage evening classes. Once I was through with my office work for the day, I would dash for classes and then commute back home to Pangani to be with my family,” Beatrice, who has been taking her course at the university’s Nairobi campus, says.

?? “They (Kemu) have made my life easy by having a campus in the city,” she adds.

?? As demand for further education by Nairobi’s working class increases, universities have made inroads into the central business district(CBD), setting up campuses at strategic locations to tap into this demand. Other major towns like Mombasa, Nakuru, Kisumu, Thika, Nyeri, Kisii, Homa Bay and Eldoret are not spared either.

?? Kemu, for instance, says on its website that it started re-engineering its academic programmes in 2005/2006 “to meet market and customer needs”. To effect this, it opened satellite campuses in Nairobi, Nakuru, Nyeri and Mombasa “to increase access to higher education in (these) regions”.

?? Beatrice has been attending classes at Kemu’s Nairobi campus located on University Way, a walking distance from her workplace in the central business district.

?? St Paul’s University’s Nairobi campus, on the other hand, is located in Church House on Moi Avenue, whereas Kenyatta University city campus is in Autorama House on Haile Selassie Avenue. Jomo Kenyatta University of Agriculture and Technology has a branch at Pension Towers on Loita Street, while Africa Nazarene University’s city campus is located in Stanbank Building on Moi Avenue, adjacent to the Kenya National Archives.

Also not to be left out is Mount Kenya University, which is located at MKU Towers, a building it bought recently on Moi Avenue, Nairobi.

spiral effects

?? But what impact is this influx of institutions of higher learning into the CBD having on real estate in cities like Nairobi? How does this trend affect commercial rental levels and management of buildings in the city centre?

?? Mwenda Makathimo, a former chairman of the Institution of Surveyors of Kenya (ISK), says the trend is partly responsible for the sharp increase in office rents in Nairobi in the last few years.

?? Learning institutions, he says, usually take up huge office space, hence causing “shortage” in the supply of good office space.

“It follows the simple economic rule of demand and supply,” Mr Makathimo, who is also the executive director of the Land Development and Governance Institute, says.

?? He notes that whereas a typical small and medium enterprise would require anything between 300 and 3,000 square feet of office space, a campus would occupy over half of a standard commercial building with a total space of between 40,000 and 100,000 square feet.

?? “Should a campus move into such a commercial building, it would naturally take up a big chunk, if not all, of the available floor space. This translates into a sharp increase in demand for office space within the CBD. Thus, currently, we are seeing a high office space demand against a low supply. Why then wouldn’t the rental levels surge upwards?” he asks.

?? Although he did not give the rental rate increases within the CBD over the last few years, he noted that the only saving grace is that new commercial buildings are still coming up within the CBD and some squat old ones are being redeveloped to increase the number of floors as well as give them a modern touch.

higher demands

?? Charles Peter Mwangi, a valuer and the chief executive of Nairobi-based Rubyland Ltd, notes that universities and other institutions of higher learning are setting up branches in cities and major towns in response to the sharp increase in demand for post-graduate education, especially when the number of middle-class Kenyans started growing in around 2003.

?? “Nairobi’s CBD is the heart of the nation and the country’s knowledge-seekers are based here. For many years, many working city dwellers who wanted to access education found themselves geographically disadvantaged as almost all universities (except the University of Nairobi) were located far away from the city,” Mwangi says, noting that many executives with the thirst for knowledge are based in Nairobi.

?? He adds: “What makes these campuses popular is their convenience and accessibility. Most people only have to walk a few metres from their places of work to attend evening classes.”

Mwangi, who has been involved in a number of transactions between campuses and landlords in the CBD, as well as managing some buildings occupied by colleges and campuses, notes that most learning institutions take no less than 10,000 square feet of office space, an equivalent of three to four floors of an average commercial building in the CBD.

?? This huge uptake of office space by learning institutions, he says, has partly contributed to the sharp increase in the rental levels to an average of Sh50 per square metre (exclusive of service charge), up from Sh35-40 per square foot barely four years ago.

landlords’ dilemma

?? But Mwangi has come to this conclusion: “If you want quality tenants as a landlord, I don’t think you would want to go for learning institutions.”

?? Having a campus in a large commercial building in the city centre, he says, ‘cheapens’ it (the building) as a business address since people stop associating the building with “quality”. He gives the example of an international company located at View Park Towers, which threatened to move out after a learning institution moved in. The landlord ‘sacrificed’ the learning institution to retain the ‘prominent’ client.

?? “Some companies or businesses give a building status,” says Mwangi.

?? On the other hand, the fact that learning institutions take huge space also gives them bargaining power, hence forcing the landlord to give ‘huge’ discounts on rent. Some landlords give as much as 15 per cent discount, according to Mwangi.

?? But Makathimo explains that there are also landlords who prefer renting out to campuses.

“Campuses are attractive for two major reasons: One is the kind of money they make, and two is that it is easier and more convenient for a landlord to manage one big or lucrative tenant as opposed to dealing with several tenants. Also throw in the consideration that these campuses take long-term leases and, in the event there is a need to raise the rentals, they simply transfer the burden to the students.”

Mwangi of Rubyland concurs: “For the landlord, it should be a question of balancing different interests. Many of them find it easier to manage one tenant occupying four floors than 20 individual tenants.”

huge traffic

?? A major reason often cited by some landlords who refuse to give space to learning institutions is the high degree of wear and tear due to the high human traffic students bring with them.

?? According to Paul Mwangi, a valuer and property manager with Prestige Management Valuers, high level of tear and wear not only inconveniences other tenants but also increases the service charge. This, he says, ends up increasing the cost of managing and maintaining the building.

?? “The service charge is based on the number of times repairs are done on lifts and the water and electricity supply. In commercial buildings, a flat rate of Sh15 to Sh20 service charge is levied per square foot. This is usually revised every financial year and anything above this charge is shouldered by the campus, which simply transfers the burden to the students,” he says.

?? Another issue is co-existence between campuses and other tenants. Some companies are usually scared of taking up office space in buildings hosting campuses because of ‘risks’ associated with students such as riots. Lack of ‘serenity and privacy’ is also an issue in such buildings.

?? On the issue of privacy, Mwangi of Rubyland gives the example of a middle level college, which used to be situated at Co-operative House (popularly known as “Bomb Blast”) on Nairobi’s Haile Selassie Avenue, that wanted to renew the lease after operating from the building for eight years.

tenancy disputes

?? “We declined to consider their request because at that time government ministries — Justice ministry and the Ministry of East African Community — had moved into the building. Security and privacy within the building became a more paramount concern,” Mwangi, who was managing the building (he was working with a different company then), says.

?? They were forced to get a court order in 2008 to eject the college from the building. He explains that such drawn out transactional tussles between campuses and landlords make buying a building an attractive option for learning institutions.

?? “Many learning institutions are now opting to buy their own buildings within the CBD. This is the best way to satisfy the institutional demand for office space by campuses in the city,” he says, giving the example of St Paul’s University, which has bought Church House on Moi Avenue. Kemu also has its own building in the city centre.

?? The standard six-year lease, he says, does not allow a learning institution to plan and implement long-term strategies.

?? A number of Small and Medium Enterprises(SMEs) have been affected — positively and negatively — by the influx of universities into the CBD.

“Small businesses that offer complementary services such as typing, printing and photocopying services thrive when a campus moves in next door,” explains Mwangi of Rubyland. “However, many others have had to be evicted to make room for the campuses currently in the CBD.”

?? But all in all, Mwangi says, the trend is healthy as it has helped reduce voids (vacancy rate) in the city centre. “In the long-term, property investors will benefit,” he says.

?? And so will knowledge seekers like Beatrice Kimani.