Rental returns from prime offices in Nairobi continue to lag those in peer African cities, despite a recent rise in occupancy levels, reflecting the lingering effect of oversupply of office space that has forced developers to cut asking rents to keep and attract tenants.
An analysis of the office space market in 10 African economies by real estate firm Knight Frank shows that in Nairobi, the average prime rental rate per square metre stands at $13 (Sh1,679), while the average yield on these offices stands at 8.5 percent.
The highest rental rates among the markets surveyed were in Lagos at $56 (Sh7,234) per square metre, Cairo at $35 (Sh4,521) per square metre and Lusaka at $18 (Sh2,325) per square metre.
Harare was tied with Nairobi at $13 per square metre of prime office space, with Gaborone in Botswana at $11 (Sh1,420) and Lilongwe in Malawi at $8.6 (Sh1,110) per square metre. Other cities surveyed included Johannesburg at $15 (Sh1,935), Kampala at $16 (Sh2,064) and Dar es Salaam at $15 (Sh1,935).
In terms of prime rental yields, Nairobi beats only Harare and Lilongwe’s eight percent, with Cairo and Lusaka offering the best returns at 10 percent each. The other cities have yields of between 8.75 and 9.5 percent.
“Despite the overall rental stability, several markets are grappling with oversupply challenges, particularly in lower-grade offices,” said Knight Frank in its Africa office market dashboard for the first half of 2024.
Overall occupancy across the markets has increased to an average of 75 percent by the end of June 2024 from about 60 percent a year earlier, reflecting increased return by workers to physical offices in the post Covid-19 pandemic period.
Nairobi demand
In Kenya, the average occupancy rate at the top end of the market stood at 77.2 percent, up from 71.5 percent in June 2023.
The country had seen a steady increase in the supply of Grade A office space since 2010, after establishing itself as a regional hub for international investors, governments, diplomatic missions and multinational corporations.
This led to the rapid expansion of the Upper Hill and Westlands commercial hubs, attracting businesses away from the Nairobi Central Business District, where accessibility and supply of Grade A offices was limited.
The Covid-19 pandemic, however, upended the commercial property market as many firms adopted remote working arrangements, with the subsequent economic difficulties further eating into demand for space.
Other companies in Nairobi also shifted to smaller fitted out office spaces as flexible working patterns became the new normal. This saw landlords grant concessions on lease renewals, which included lowering asking rents.
The relative stagnation in asking rents for prime office space has therefore resulted in higher yields of 9.5 percent for retail and industrial developers.
In the industrial property segment, there has been an increase in demand for Grade A warehousing space in the country, driven by e-commerce firms, manufacturing and logistics companies that have entered the country under Special Economic Zone (SEZ) and Export Processing Zone (EPZ) licences.
However, the residential market remains the least lucrative in terms of returns, offering an average yield of 4.5 percent in the first half of the year on slow rental price growth amid surging home prices.
