Office space investors told to prepare for tough times
Thursday, October 15th, 2020
- Local real estate market is stable because it is highly unleveraged and that the pandemic was a test to the robustness of the market.
- Hass Consult CEO Farana Hassanali said people will readjust how they work and because of that, commercial real estate will take longer to adjust.
Investors in the country’s commercial real estate segment are bracing themselves for tough times with firm mulling consolidation of office space.
A panel of property analysts from Hass Consult, Cytonn Investment and Kenya Bankers Association (KBA) said office space investors will suffer in the short run.
“We expect a slight decline in yield from the current 7 per cent as people try to reconsider the role of their offices, since they might not need all that space as some people work from home,” said the chief investment officer at Cytonn Elizabeth Nkuku.
Hass Consult CEO Farana Hassanali said people will readjust how they work and because of that, commercial real estate will take longer to adjust.
“In the short term we shall have a bit of a problem but in the long term it will stabilise,” said Hassanali.
Hassanali said the real estate market in Kenya is very stable because it is highly unleveraged and that the pandemic was test to the robustness of the market.
In the first three months of Covid-19, all investors paused decisions to see where all this was going but they started coming back from June.
According to the director of research at KBA, Jared Osoro, the real estate market had started suffering from 2018 due to the weaknesses in the economy.
He said there is more demand in the lower segment of the market but needs proper risk balancing.
The real estate market is expected to grow at 4.3 per cent this year down from 5.3 per cent the previous year according to Cytonn.
Real estate contributes 8.3 per cent to the economy. Rental yield are expected to be 5 per cent but capital appreciation will drop to -0.1 from 2 per cent in 2019 and 4.2 percent in 2018.
Among the challenges that developers faced due to Covid-19 is weakening of the currency by 7 per cent increasing the cost of importing materials.
There was a reduction in the supply of labour force during the pandemic thereby slowing down construction projects.
This was coupled with a slow down in building plans approvals by City Hall that halted some projects from taking off.
The land registry was also closed for sometime, making it hard to make purchases and hence halting projects.
The mass layoffs and salary cuts reduced collection of off plan payments for residential real estate leading to cash crunch.
Poor collection of funds from offplan purchases saw developers run into cashflow traps.
The retail sector especially in major towns is expected to see reduced demand due to oversupply of space in malls and a shift towards e-commerce.
The cost of rentals in the residential sector is, however, expected to remain the same due to high demand, especially in the middle class segment and due to the fact that many of the buildings are not built using loans.
“However in the middle of the pandemic fifty percent of our tenants were asking for discounts of between 25 to 50 percent on rentals,” said Sakina.
The rental prices however have not changed. It shows that landlords are not under pressure.