Stagnant rental prices point to cooling market

Rents for prime residential areas, retail commercial properties and offices stagnated during the first half of this year, pointing to a cooling of the previously red-hot market, real estate consultancy Knight Frank said in an update.

In the report for the first six months of 2015, Knight Frank said the property segments recorded marginal or no increase in rents over the period.

For some commercial properties such as offices, the stagnation in rent came as the take-up of vacant space fell. The most affected was Grade A (top of the range) office space whose take-up fell by 45 per cent in the first half of the year compared to the same period last year.

“This decline is attributed to the drop in the supply of prime Grade A offices coupled with the fact that many multinationals are downsizing their operations in Kenya.

In addition, government agencies, which were major takers of the space, are devolving their functions to the counties,” said the report.

The UK and US embassies are other major tenants that scaled down operations in 2014.

Last year the UK said it had transferred some of the functions such as visa handling to South Africa as part of austerity measures. The US embassy relocated some of its staff to other countries following a spate of terrorist attacks in 2014.

Another major reason for the stagnation was the rising prices in the previous years that put the property out of reach for many prospective tenants.

“Nairobi has enjoyed rental increments over the past years with annual escalations in the region of 10 per cent, which built up rents in prime properties beyond affordable levels. The result is low occupancy levels and longer letting periods,” said the report.

Knight Frank managing director Ben Woodhams also said that prime rents could not continue rising since multinational corporations and NGOs had reached their budget limits.

Security concerns in the same year also saw multinational corporations, NGOs and other agencies limit their foreign workforce to essential staff only.

The report adds that, on average, residential rents in the high-end of the market have not changed since late 2014.

READ: Knight Frank says attacks slowed down property market

Rents for high-grade office space have also not increased while vacancies are becoming longer as prime tenants cut back on their operations.

Despite the slow increase in rents, real estate developers are still churning out properties targeting this market including putting up hotels.

KenGen Staff Retirement Scheme, Centum, Actis, Cytonn and China Avic are firms putting up high-end office, hotel and residential developments.
Knight Frank also sees an increase in the number of hotels catering for business travellers.

“In the hotel and tourism segment, higher occupancy levels in Nairobi compared to the rest of the country triggered a surge in new developments. Subsequently, the number of hotel rooms in the capital is expected to rise by a fifth by the end of 2016,” said the report.

Hilton Garden Inn, Golden Tulip and the Tamarind Tree Hotel are some of the hotels that are expected to come through in 2016.

Some companies that serve expatriates are still expanding on the bet that foreign staff will continue to come to the region whose general economies are expected to maintain their strong growth.

“This trend makes it an attractive expansion target for us. With our existing infrastructure and experience in Africa, we are in a good position to give regional expats and key nationals premium service,” said Bart Jordens, the general manager for international organisations and Africa at Cigna.

Cigna is a US-based healthcare management company that has expanded the number of healthcare products targeting expatriates.