Retail space prices dip as demand falls

As economies continue to battle the ravaging Covid-19 pandemic, Kenya’s real estate retail sector has recorded a dip in prices as battered landlords offered reduced rental rates in a bid to attract tenants.

Prices have so far declined by 2.1 per cent to Sh115.1 per square foot from Sh118.0 in 2019, a new report reveals.

The report by investment firm Cytonn also shows that the year experienced reduced occupancy rates, which declined by 0.7 per cent from 77.3 per cent in 2019 to 76.6 per cent.

“This is attributable to reduced demand for physical retail space due to growing focus on e-commerce and scaling down of retailers in the wake of reduced revenue inflows,” said Cytonn in the Kenya Retail Sector Report, 2020 released on November 22.

Further, Mt Kenya region now offers the best investment opportunity to retail space developers, with high rental yields of 7.7  per cent, 0.1 per cent higher compared to market averages of 6.7 per cent.

The region currently has an existing retail space deficit of 0.7 million square feet with the undersupply signalling high demand.

Rental yields within the Nairobi Metropolitan Area (NMA) declined by 0.5 per cent to 7.5 per cent from eight per cent in 2020 attributed to decline in demand for space evidenced by a drop in occupancies by 0.6 per cent from 75.1 per cent in 2019 to 74.5 per cent in 2020.

There was also a “marginal” decline in rent by 0.1 per cent to Sh168.5 from Sh168.6 per square foot.

Cytonn also attributed the subdued performance to an oversupply of retail report space by 3.1 million square foot and shifting focus to e-commerce that had lead to decline in demand for physical retail spaces.

Constrained consumer spending has given the tough economic environment and exit by some retailers to cushion themselves against the negative effects of the coronavirus pandemic also hurt occupancy.

“Within the NMA, the opportunity (now) lies in Westlands and Karen, which were the best performing retail nodes with rental yields of 9.8 per cent and 9.2 per cent respectively,” Cytonn said.

This can be attributed to relatively high demand as the neighbourhoods host affluent residents with high consumer purchasing power, and ability to charge a premium on rates, among other factors.

An earlier report by the Kenya Bankers Association (KBA) for the third quarter showed that house prices contracted by 0.08 per cent, a marginal improvement from the 0.20 per cent contraction in the second quarter of 2020. 

“Housing price fundamentals, just like prices of non-house goods, substantially depend on the state of the economy,” said the KBA House Price Index.