Why recovery of office sector will take longer

By Wahinya Henry
Wednesday, April 7th, 2021
A resident of Kawangware area in Nairobi takes Covid-19 test. Photo/PD/FILE
In summary
    • During the quarter 1 ’2021, the real estate sector recorded moderate activities with the residential sector recording an improvement in performance.
    • The average  year-on-year  total returns to investors during the period under review came  to 5.1 per cent, up from 4.7 per cent recorded in financial year 2020.

The commercial space segment will not recover soon on the back of ongoing Covid-19 pandemic shocks, a quarterly report by Cytonn Investment shows.

This follows a surge in downsizing by firms and an increase in people working from home which is affecting demand.

According to Edwin Dande, Cytonn Investment chief executive, the sector recorded a 0.2 per cent and 1.4 per cent points decline in the average rental yields and occupancy rates to 6.8 per cent and 76.3 per cent in quarter 1, ’2021, from 7.0 per cent and 77.7 per cent, respectively in financial year 2020.

“The declines in the rental yields and the occupancies is attributable to the ongoing Covid-19 pandemic which has led to reduced demand for office spaces as businesses restructure their operations hence the scaling down,” Dande said.

Since the virus hit the country in March last year, many firms opted to work from home, others decided to make the decision permanent urging employees to set up home offices.

This forced developers to reduce their prices so that they can retain and attract occupants for their office spaces.

The report says the asking rent decreased by 0.8 per cent to an average of Sh92 per square feet (SQFT) in Q1’2021, from Sh93 per SQFT in FY’2020 attributed to a surplus in office space hence creating a bargaining chip for tenants.

Reduced demand of commercial office spaces brought about by the Covid-19 pandemic paints a negative outlook especially in Nairobi Metropolitan Area.

Economic environment

“Tough economic environments have only made matters worse as firms continue to downsize due to financial constraints while others embrace the working from home strategy and may make it a permanent measure with the third wave of the pandemic making it worse,” says Dande.

“Landlords are expected to continue adopting strategies to cushion themselves against the impacts of the pandemic such as giving discounts and concessions to attract and retain clients.”

The sector is, however, expected to recover in the long run as the economy picks up.

Investment opportunity lies in Gigiri and Karen which offers relatively good returns compared to the market averages.

Gigiri and Karen were the best performing submarkets in Q1’2021 recording rental yields of 8.3 per cent and 8.0 per cent , respectively.

Thika Road and Mombasa Road were the worst performing commercial office nodes within the Nairobi Metropolitan Area recording rental yields of 5.3 per cent and 4.7 per cent, respectively.

This is because of traffic snarl-ups, low quality office spaces, and zoning regulations as Mombasa Road is mainly considered as an industrial area, while Thika Road is a popular residential hub, thus making the locations unattractive to business firms.

Away from the commercial sector, the performance of the real estate is likely to be constrained by the existing oversupply in the commercial office font and the retail sector.

There is also the reduced consumer purchasing power brought about by the tough economic environment and reduced demand as businesses downsize, especially in the commercial office sector and the retail sector.

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