Long-term office leases hurt landlords’ earnings


Recently built 9 West building in Nairobi’s Westlands. Office space in Westlands and Gigiri is the most expensive while Mombasa Road and the CBD are rated lowest. FILE


  • Demand for commercial rental space has outpaced supply since 2008 fuelling annual rental increases of more than double the maximum rate at which long-term leases rise.

Landlords who have signed long-term leases with office space tenants in Nairobi are losing out on rent increases enjoyed by property owners who sign annual rental contracts, a survey by real estate firm Mentor Management has showed.

Demand for commercial rental space has outpaced supply since 2008 fuelling annual rental increases of more than double the maximum rate at which long-term leases rise, the survey shows.

But the demand and supply of office space in key commercial hubs in the city is expected to even out by 2015, Mentor Management predicted.

“Commercial office rental rates have been on an upward growth trend over the past five years resulting in a compound annual growth rate of 14.1 per cent from 2008 to 2012.

“This growth rate, combined with annual contractual rent escalations of no more than 7.5 per cent, means that landlords with longer leases are consistently finding that their assets are under-performing the market,” says the report.

The report indicates that the average rate recorded for new lettings in various nodes in the city range from Sh60 to Sh94 per square foot. The most expensive space is in Westlands and Gigiri, at Sh94 ($1.12).

Office space in Upper Hill goes for Sh89 ($1.06) per square foot and in Kilimani at Sh84 ($1).

The Central Business District (CBD) and Mombasa Road are rated the lowest in rent at Sh60 ($0.71) per square foot. The rates in Gigiri, however, relate to a small selection of new buildings, with the limited commercial development of the area caused by the difficulty of obtaining commercial zoning consent.

Relaxation of regulations and the opening up of new areas along Limuru and Red Hill Roads, however, mean the commercial space in the area will develop substantially over the next few years, the report concludes.

(Read: City Hall opens up Nairobi's top estates to high-rise office blocks)

Relying on a review of active construction projects, Mentor Management deduces that new office supply is scheduled to be steady at around 1.7 million square feet per annum from 2012 to 2015 following a peak delivery of slightly more than 2.1 million square feet in 2011.

In the period 2013-2014, new office space supply is expected to reduce in Westlands and increase in Upper Hill, going by the estimates from the number of buildings due for completion next year.

Uptake of office space grew steadily from 2009 to 2011 when it peaked at 1.8 million square feet, after which it dropped to 1.1 million square feet in 2012.

The main drivers of demand for office space include the rapidly growing professional services sector, the banking and insurance industry, international firms using Nairobi as a regional hub, the public sector and government.

Recently, companies such as Barclays, Standard Chartered, PWC, CFC Stanbic, Equity Bank, ICEA Lion and Commercial Bank of Africa have relocated to Westlands and Upper hill in pursuit of easier vehicle access, better car parking and a more secure environment.

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