While real estate remains the investment option of choice, recent global and local socio-economic-politico developments have ushered in an era of re-evaluation that is bound to result in the repositioning of units in the various investment classes of the sector.
The advent of Covid-19, the rise of working-from-home arrangements, ageing and diminishing returns on capital investments are just some of the many reasons real estate finance experts say are driving the new awakening in the sector.
“Hilton Hotel, which was a key destination in Nairobi, has closed down. Who will be the new tenants, and what will be the investment drive for the new tenants to take up space there?” posed Arthur Ombati, a real estate finance expert.
“In the last couple of years, we have seen anchor tenants exit legacy buildings in Nairobi CBD. Most of those spaces are yet to be taken up, and this is having a negative effect on the fair value gains in the books of accounts of companies holding these properties."
From the office to residential sub-sectors, the effects of the changing investment climate are taking professionals back to the boardroom to craft new ways to remain or increase profitability in the business.
A report by professional services firm PwC, Emerging Trends in Real Estate 2023, approximates that globally, 10 to 20 percent of office space will have to be repositioned following the effects of Covid-19 on travel and the rise of working-from-home plans.
Repositioning means that the owners of the spaces have to re-think use and lease as currently structured with a view of adjusting terms of occupancy to fit in with the new realities.
While locally, no conclusive research has been done on office space repositioning, the last survey done by Knight Frank indicated that office occupancy rates fell by five percent in the second half of 2021 and stood at 72.8 percent at the end of the first half of 2022 while the absorption rate of certain grades of office decreased by as much as 30 percent in the same period.
Evidence of low occupancy rates in many CBDs, including Nairobi, is quite telling. Real estate finance experts say that apart from Covid and the rise of working from home, locally, the higher education bubble burst that has seen a number of universities close down their satellite branches that occupied swathes of office space in Nairobi, for example, the increased uptake of e-learning where the student does not have to be physically present in the brick and mortar classes of the universities has had a big impact on rental returns.
The rise of e-commerce, and the relocation of key retailers to residential neighbourhoods has also greatly affected rental returns for the sector.
“Many supermarkets have relocated their shopping units from the CBD. Banks are also actively closing down branches in preference of mobile and agency banking,” said Ombati.
And it is not only the office sub-sector that is hurting. The residential subsector is also taking a hit and re-adjusting.
Martha Mbote, a realtor with Offshore Properties, said that the residential sector is witnessing a trend where older individual members of the society who form part of the high net worth individuals are either passing over inheritance to their children who are opting to liquidate the units or they themselves selling their stand-alone units.
Instead, they are opting to move into gated communities or classy apartment blocks. “The reason they give is that after their children moved out, the houses are big and lonely,” said Mbote.
“There are also concerns about the costs of servicing the units as the lawns have to be watered, and electricity has to be paid. In addition, cleaners, cooks and security agencies have to be employed. For buildings that sit on half an acre upwards, the service costs can be huge.”
According to the realtor, there is also a trend where children of ageing parents are choosing to house them closer the where they work to take care of them.
“Aging comes with its share of challenges, especially with health and mobility. Frequent and sudden medical challenges require that such aged parents are housed close to health facilities. In addition, due to challenges with mobility, a housing complex that has basic amenities within a complex is a favourite of such as class.”
Michael Otieno, a real estate expert, also agreed: “Such things as service charge costs, insecurity and proximity has seen the rise in demand for gated communities.”
So what does this mean going forward for investors? According to Ombati, investors should look at the shared serviced office concept as they don’t attract lengthy set-up costs or rigid contracts; as they are now a favourite of many who are increasingly opting for the mobile offices concept.
“Still, the kind of spaces that are housed in the central business will change. It’s time to rethink rental licensing.”