Property developers and mall landlords with empty spaces in Nairobi are increasingly turning to the revenue-sharing model with tenants to counter low uptake of property.
Industry experts say the arrangement where stores pay a percentage of their sales turnover as rent is picking up since advent of Covid-19 menace even as they battle an oversupply of spaces and lower footfall.
Others are opting for a hybrid deal where they agree on a fixed base rent and a percentage of turnover.
“It is specifically in malls where tenants are struggling to pay rent which is significantly taking up their revenues hence it is not sustainable,” said Shadrack Mella, Valuation Advisory East Africa, JLL, a global commercial real estate services company.
Mr Mella says developments in prime areas have, however, offered landlords leverage over the businesses competing to be in those spaces, pocketing fixed monthly rentals.
“Tenants and the landlords may agree to pay let's say 10 percent of their turnover instead of Sh500 or Sh1,000 per square foot (sq ft). Well-established developments can charge fixed base rent per square foot compared to malls that only record footfall during weekends,” he adds.
Retail stores adopting this model include supermarkets, food and beverage, clothing and electronic businesses.
The model which has not been common in Kenya comes after a cycle of rising demand for space that later led to mushrooming of new development followed by four years of oversupply.
On the international scene, the revenue-sharing model started over a decade ago and is practised widely in sports, manufacturing, advertising, private companies and malls or retail shopping centres.
Mr Mella said the trend has been going on but picked up during Covid-19 amid depressed consumer spending and orders.
However, the arrangement would mean that stores would keep books of accounts and be willing to share so that property owners are assured of revenues.
“It is something you sign in a lease agreement where the landlord can audit your books and verify the turnover,” he added.
Low occupancy levels in the retail sector have pushed down rent from a high at Sh6,529 ($55) per square meter per month in the first half of 2018 to an estimated Sh4,748 ($40) for the same space per month in the first half of this year.
The strategy to ensure uptake of spaces comes amid an increased expansion of supermarkets including Naivas, Carrefour and Quickmart driving retail outlets growth.
In the 2022/2023 Knight Frank's Africa report released in June, the three top retailers have grown the number of stores in Kenya, having increased their branches by 30 percent over the past two years, equating to an expansion of estimated 100,000 square meters.
‘’The expansion may not be because of the revenue sharing model but because of better fundamentals and better negotiations terms,” added Mella.
Knight Frank says prime rents are set to climb again in the second half-year period on the back of improving occupancy rates and renewed interest from global tenants looking to either set up or expand their operations in Nairobi.
“We also expect to see more co-working operators taking advantage of low mall lease rates and establishing bases in shopping centres,” the report stated.
The oversupply has led to a shift in the retail sector with fewer new malls being put up and replaced by small convenient centres coming up.
Supermarkets are setting up in those convenient stores, cutting demand for anchor space in developments and hurting rental price growth.
Many retail stores across the city are also moving to subdivision to create smaller spaces and counter high rentals.
“The market is reacting to available demand. If there are no people taking large spaces and cannot afford, the thing to do is subdivide for either electronics or clothing stores," said Mella.
JLL states that the gradual return in business confidence is expected to drive increased occupier activity throughout 2022.
Despite setbacks presented by the Covid pandemic, strong performance of asset classes such as data centres, industrial and logistics facilities, and affordable homes and student housing along with the recovery of the hotel sector, present a positive growth for the property market.
Knight Frank adds that a continued recovery momentum since 2021 has led to an increased demand for prime retail shops in strategically located developments.
This has been evidenced by the slight increase in prime rents from Sh474.9 ($4) per sq ft per month to Sh486.7 ($4.10) per sq ft per month and an increase in retailer activity in acquiring new units.