High land prices lock investors out of industrial property sector

What you need to know:

BAM estimates that to get a desired 12 per cent return at current market rates of Sh45 per square foot of industrial space, a developer has to acquire land at Sh15 million an acre.
Land prices along Mombasa Road and the Eastern Bypass, where huge tracts of land are available to set up such property, are currently above Sh40 million an acre.
The asset managers identified industrial property as one of the areas whose rental growth was accelerating largely due to low supply.

High land prices are locking out investors from developing industrial properties according to Britam Asset Management (BAM).

BAM estimates that to get a desired 12 per cent return at current market rates of Sh45 per square foot of industrial space, a developer has to acquire land at Sh15 million an acre.

Land prices along Mombasa Road and the Eastern Bypass, where huge tracts of land are available to set up such property, are currently above Sh40 million an acre.

“In as much as there is demand in this space developers are unable to get suitable land to develop, when they do their analysis they see it’s not viable,” said BAM.

The asset managers identified industrial property as one of the areas whose rental growth was accelerating largely due to low supply.

Residential, office and retail rental prices were growing at a slower pace as supply catches up with demand. Office rent increased by seven per cent last year compared to 10 per cent in 2013-2014.

Grade A offices in Gigiri fetch the highest average rent at Sh150 per square foot a month while Karen has the cheapest high-end office space at Sh110 per square foot.

Mombasa Road, which has no grade A offices mainly due to traffic congestion, has the cheapest office space around Nairobi at Sh60 per square foot for grade B offices.

The central business district (CBD) also doesn’t have grade A offices which are classified based on parking space, road network and building structure.

Corporates have been exiting the CBD due to traffic congestion in preference for Upper Hill, Westlands, Waiyaki Way, Kilimani and Ngong Road. Rents in CBD average Sh90 per square foot.

READ: Heavy traffic takes glamour off central Nairobi offices

Development of office property picked up in the last five year with BAM estimating 3.8 million square feet will be put on the market this year up from two million square feet last year.

Office space expected into the market this year include Britam and UAP Towers each with 300,000 square feet and Two Rivers’ 230,000 square feet.

The uptake of the office space has however been lagging behind supply, signalling the market could be headed for a peak. Last year uptake was at 1.33 million square feet against a supply of two million compared to 2014 when the uptake was 1.3 million square feet in a market of 1.7 million square feet.

Occupancy levels in grade A offices was found to be higher than in other categories as corporates push to attract the rising middle class with posh layout.

“The high supply of office space is expected to peak in 2016 before bottoming out in 2017 and rising again in 2018, with Westlands and Upper Hill leading in the supply,” said BAM.

Kenya will be conducting its general elections next year, a period in which most investors take a wait-and-see stance. Westlands charges the highest parking fees at an average of Sh9,600 monthly.