Real estate market shifts in favour of office space owners
Posted Monday, October 24 2011 at 19:14
Rising demand for retail business space has left commercial property developers with higher returns on investments than their counterparts in the residential market, the latest industry data shows.
Yields — the difference between the value of a property and the rental income — have dropped across the board, but investors in residential property have been hit hardest because of the high rate at which residential property prices rose in the past compared to rents.
Though rents have been equally sticky in the commercial property market peaking at an average of Sh100 per square feet in the past five years, sale price inflation has been much lower, leaving investors with an average yield of nine per cent compared with six per cent for residential properties.
Ben Woodhams, the managing director of Knight Frank — a real estate management firm — said high office space rents had made buying more attractive to many businesses, keeping the pace of yields erosion in check.
“Rents of about Sh100 per square foot translate to a return of about nine per cent – a great saving for small businesses that want to get away from paying rent,” said Mr Woodhams.
A nine per cent rate of return means investors who are buying office space to let can recover their costs in 11 years or sooner if the rental prices rise.
Industry statistics show that 15 million square feet of commercial property space is available in the local market – nearly the same as the level of demand – meaning rents and ultimately yields are likely to remain stable or increase in that segment of the market in the medium term.
Real estate managers expect a build-up of upward pressure on commercial rents as fast-growing medium-sized companies look for bigger space in key towns such a Nairobi and Mombasa.
Mwenda Makathimo, the managing director at Vidmerck, a property management firm, said demand for retail space has outrun supply especially in Nairobi’s Central Business District, a development he attributes to the rapid growth in the number of small businesses that have converted previous office spaces into stalls.
“Retail space is in short supply especially within the city centre and the imbalance is likely to remain because new enterprises are entering the market every day”.
Average monthly rents for such spaces stand at Sh70 per square foot.
Nairobi’s continued growth as East Africa’s commercial hub is also expected to continue, attracting multinational corporations — raising demand for commercial space and pushing up rental prices.
Knight Frank expects rental yields on commercial property, which have dropped from 10 per cent two years ago, to hold steady at current levels because both valuations and rents have stabilised.
Real estate market insiders said the exodus of businesses from the city centre has created an even pricier ring of commercial space in the upcoming business districts of Upper Hill and Westlands.
Peter Kimeu, the head of projects administration at Housing Finance and a supporter of the Kenya Property Index, said location has emerged as the key determinant on pricing in the commercial property market.