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Architectural Association of Kenya: Virus infect rental yields in Q2

By Noel Wandera
Wednesday, August 5th, 2020
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In summary
    • The report covered a period that saw the hotel and tourism sectors receive a beating with the number of tourist arrivals decreasing which led to cancellation of meetings, conferences and events, the banning of all international flights and reduced local direct flights.
    • Since March 15, when the first coronavirus case was confirmed in Kenya, a number of major hotels closed shop, citing low business and non- occupancy.

Rental yields in Kenya have declined with coronavirus pandemic shocks afflicting key sectors that directly affected the construction industry, with the hospitality and retail sectors the worst hit.

In a new report released yesterday, the Architectural Association of Kenya (AAK) notes that the international lockdown and closure of businesses disrupted the construction industry supply chain, particularly supplies from China.

“The cost of construction inputs including labour and materials recorded a significant increase with the cost of materials for residential and non-residential buildings increasing by 6.5 per cent and 1.8 per cent respectively,” said AAK.

In its June 2020 status report of Kenya’s built environment, average rental yields softened across all sectors at 7.4 per cent, 7.3 per cent and 5.1 per cent, for retail, office and residential sectors.

These was down from 7.7 per cent, 7.8 per cent and 5.2 per cent compared to the first Quarter of 2019.

Rental yields is a measure of how much cash an income generating asset produces each year as a percentage of that asset’s value.

Apartment market

The apartment market recorded declines in price appreciation across all segments, while the upper mid-end market for detached units recorded a positive change of 1.3 per cent, with asking prices in Highridge and Lavington increasing due to their appeal to the growing middle class.

“It is interesting to note that the residential sector remained relatively stable with the upper-mid end market for detached units.

Single family detached homes seemed to generate interest, perhaps now that more people are working from home,” notes the report.

The AAK report which covers the period between January and June 2020 notes that total returns averaged 5.0 per cent and 5.3 per cent for detached units and apartments respectively, up from the 4.1 per cent and 5.2 per cent record the previous year.

However, AAK warns that the sustained positive performance notwithstanding, developers in the residential space should brace themselves for tough economic times ahead, with the National Treasury downgrading the sector’s growth this year to 1.8 per cent, after growing 5.4 per cent last year owing to the economic effects of Covid-19 pandemic.

“Other factors that have affected the sector include a cautious lending environment, record unemployment rates, and financial market volatility which are likely to lead to a continued decline in sales activity and the sector’s overall performance in the near term,” says AAK.

According to the report, AAK anticipates that the growing demand for affordable housing and rapid population growth will continue to sustain the sector in the long-run.

The decline was mostly a result of measures taken by the government to reduce the spread of the corona virus thereby leading to reduced demand for office spaces.

Declining revenues

Organisations have also put on hold expansion plans due to new work-from-home strategies, while others have opted to scale down operations amidst declining revenues and high levels of uncertainty.

Yields in the retail sector declined as retailers moved to cushion themselves against the impact of the Covid-19 pandemic leading to an oversupply of retail space.

This forced landlords to provide concessions and other incentives to attract new clientele and to retain existing tenants, as well as constrained spending power among consumers resulting from a tough financial environment.

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