Investors are getting good returns from their real estate investments, says Cytonn Real Estate

Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their FY’2020 Markets Review. The report highlights the current state of the real estate sector in terms of uptake, rental yields, capital appreciation, and hence, total investor returns. According to the report; in the residential sector, apartments recorded average total returns of 5.2% in comparison to the detached average of 4.2%: the retail and commercial office sectors recorded declines in rental yields to 7.5% and 7.0% in FY’2020, from 7.8% and 7.5%, respectively in FY’2019. The land sector recorded an overall annualized capital appreciation of 2.3%, indicating that investors still consider land as a good investment asset in the long term.

“The main challenges facing the sector during the period under review were; i) reduced revenue due to slow market uptake and downward pressure on prices and rents, ii) decrease in the value of building approvals for the first nine months of the year to Kshs 120.8 bn compared to Kshs 176.5 bn recorded over a similar period in 2019, iii) business restructuring with some firms downsizing, iv) constrained financing for developers, and, v) the existing oversupply in the commercial office and retail sectors, with a surplus of 6.3 mn SQFT and 3.1 mn SQFT, respectively,” stated Fidelis Wanalwenge, a Research Assistant at Cytonn.

Nevertheless, the performance of the real estate sector was cushioned by; (i) the government’s continued focus on affordable housing projects to serve the middle and low income earners with the aim of increasing home ownership, (ii) operationalization and licensing of the Kenya Mortgage and Refinance Company, (iii) introduction of the Land Information Management System (LIMS) in April 2020 aimed at eliminating fraud and enabling digitization of processes at the lands ministry, (iv) improvement of infrastructure with ongoing select projects such as construction of the Nairobi Expressway, and, (v) easing of travel bans and restrictions in Q3’2020 coupled with the government’s stimulus package such as post-COVID recovery funds, intended to enhance the recovery of the hospitality sector.

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The residential sector recorded a decline in performance with average total returns coming in at 4.7% from 6.1% recorded in 2019 with the price of units correcting by (0.2%). Detached units in Rossyln and Ridgeways recorded the highest returns at 6.3% and 6.1%, respectively, while apartments in Thindigua and Syokimau recorded the highest returns at 7.5% and 6.9%, respectively.

(All Values in Kshs unless stated otherwise)
Detached Units Performance: Top 5 markets
AreaAverage Price per SQM FY’2020Average Rent per SQM FY’2020Average Occupancy FY’2020Average Uptake FY’2020AverageAnnual Uptake FY’2020AverageRental Yield FY’2020Average Y/Y Price Appreciation FY’2020Total Returns FY’2020
Rosslyn184,11179586.2%91.7%13.9%4.6%1.7%6.3%
Ridgeways144,02674283.0%85.0%14.5%5.2%0.9%6.1%
Ruiru79,66630386.2%90.5%22.0%3.8%2.2%6.0%
Kitisuru215,35573189.1%88.1%18.5%3.9%1.9%5.8%
Syokimau/Mlolongo71,83628775.3%74.7%15.9%4.2%1.5%5.7%

Cytonn Research 2020

(All Values in Kshs unless stated otherwise)
 Apartments Market performance: Top 5 Markets
AreaAverage  Price Per SQM FY’2020Average  Rent per SQM FY’2020Average Occupancy FY’2020Average Uptake FY’2020AverageAnnual Uptake FY’2020AverageRental Yield FY’2020Average Y/YPrice Appreciation FY’2020Total Returns FY’2020
Thindigua99,71854183.9%84.4%19.7%8.2%(0.7%)7.5%
Syokimau68,83536183.4%79.3%16.8%5.1%1.8%6.9%
Kilimani108,69681889.0%90.4%34.0%6.0%0.2%6.2%
Kileleshwa124,05763784.3%83.4%20.4%5.2%0.6%5.8%
South C114,10467596.8%69.8%26.8%6.4%(0.6%)5.8%
Westlands145,47978378.5%83.0%26.4%5.3%0.2%5.5%

Cytonn Research 2020

According to the report, Gigiri was the best performing office node in FY’2020, followed by Westlands and Karen recording rental yields 7.8% each, attributed to relatively high returns compared to the market averages in addition to availability of high quality spaces suitable for the high-end and middle income clients.

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In the retail sector, Westlands and Karen were the best performing nodes recording average rental yields of 9.9% and 9.8%, respectively, attributed to presence of affluent residents who have a high consumer purchasing power with the areas hosting high end income earners, the ease of access to the areas, and, relatively high occupancy rates of above 81% against the market average of 75.2%.

In hospitality, serviced apartments recorded subdued performance in 2020 with the average rental yields declining by 3.6% points to 4.0% in 2020 from 7.6% in 2019. Westlands-Parklands was the best performing node recording an average rental yield of 6.1%.

Out of the seven sectors, the outlook is positive for one sector-land; neutral for four sectors-residential, retail, mixed-use developments, and hospitality sector; and, negative for two sectors-commercial offices and listed real estate. Therefore, the overall outlook for the real estate sector is NEUTRAL, supported by; launch of affordable housing projects, the operationalization of KMRC, expansion of local and international retailers, the government’s post- COVID stimulus package set to boost performance of the hospitality sector, and, improvement of infrastructure opening up areas for investment. The sector will however continue to experience constraints such as oversupply of 6.3mn SQFT of office space 3.1mn SQFT of retail space and sluggish performance of the REIT market

Below is a summary of the FY’2020 sectorial performance:

Key: Green – POSITIVE, Grey – NEUTRAL, Red – NEGATIVE highlights sectorial outlook

ThemeThematic Performance and outlook FY’2020Outlook
ResidentialApartments registered relatively higher average total returns to investors at 5.2% compared to detached markets at 4.2%, attributed to the higher rental yield averaging 5.7% in comparison to 4.1% for the detached units.  However, in terms of prices, apartments recorded higher price decline compared to detached units owing to slow uptakes as potential buyers face liquidity pressures amid reduced disposable income.Neutral
We expect total returns to investors to improve in 2021 following gradual recovery of the economy which will see improved rental rates and capital appreciation of existing properties.The investment opportunity for apartments in satellite towns such as Thindigua and Syokimau, as well as the upper mid-end segment in areas such as Kilimani. For detached units, opportunity lies in investment opportunity lies in areas such as Rosslyn, Ridgeways and Ruiru
OfficeThe sector recorded an average rental yield and occupancy rate of 7.0%, and 77.7%, lower than the 7.5% and 80.3% recorded in 2019, respectively. The decline in the rental yields and occupancy rates is attributable to reduced demand of commercial spaces brought about by the ongoing COVID-19 pandemic as some businesses restructured their operations hence scaled down while other organizations adopted work from home strategies..Negative
We retain a negative outlook for the sector attributed to the existing oversupply and dwindling demand for office spaces.The investment opportunity lies in Gigiri, Westlands and Karen supported by relatively high returns with yields of 8.5%, 7.8% and 7.8%, respectively, compared to the market average of 7.0%, in addition to the existing undersupply of quality space in the areas.
RetailThe retail sector performance recorded a 0.3% decline in rental yields to 7.5% in 2020 from 7.8% in 2019. The average occupancy dropped by 0.7% points from 75.9% in 2019 to 75.2% in 2020, while the average monthly rental rates declined by 4.1% to Kshs 169 per SQFT from Kshs 176 per SQFT in 2019., attributed to ; i) shifting focus to e-commerce, and, ii)reduced disposable income among consumers amid the COVID-19 pandemic.Neutral
We expect the sector to continue witnessing the entry of local and international retailers taking up space exited by struggling retailers thus cushioning the performance of sector.Investment opportunity lies in Westlands and Karen which recorded high rental yields of 9.9% and 9.8%, respectively, compared to the market average of 7.8%, attributed to high consumer purchasing power and ease of access to the areas.
Mixed-Use DevelopmentsMUDs recorded average rental yields of 7.1%, 0.3% points higher than the respective single use retail, commercial office and residential themes with 6.8%. retail, offices and residential spaces in MUDs recorded rental yields of 7.8%, 7.3% and 6.2%, respectively, compared to the single-use average of 7.5%, 7.2%, and 5.6%, respectively.Neutral
Investment opportunity within the Nairobi Metropolitan Area lies in areas with relatively high returns such as Westlands which recorded an average MUD rental yield of 8.5%, and, Limuru Road and Karen recording average MUD yields of 7.3% each.
HospitalityServiced apartments recorded subdued performance in 2020 with the average rental yields declining by 3.6% points to 4.0% in 2020 from 7.6% in 2019. The decline in performance is attributed to the COVID-19 pandemic which has brought about reduced demand for services offered in the hospitality industry due to decline in the number of tourist arrivals and the tough economic environment.Neutral
We expect the recovery to be supported by the Ministry of Tourism’s post-corona recovery strategy funds, the government’s stimulus package and, the tourism sector’s plan to repackage their products to appeal to a wider scope of domestic tourists.The investment opportunity lies in Westlands/Parklands, and Kilimani which recorded average rental yields of 6.1% and 4.8%, respectively against a market average of 4.0%.
LandThe land sector recorded an overall annualized capital appreciation of 2.3%, indicating that investors still consider land a good investment asset in the long term.Positive
The investment opportunity lies in Limuru and Ongata Rongai for unserviced land in satellite towns, which recorded an annualized capital appreciation of 10.8%% and 9.7%, respectively. For site and service schemes, Thika and Athi River with the highest annualized capital appreciation at 13.5% and 11.1%, respectively.
Listed Real estateThe Fahari I-REIT continued to perform poorly trading at an average of Kshs 6.7 during 2020, compared to Kshs 8.9 in 2019, a 66.5% decline from its initial price of Kshs 20.0 with lows of up to Kshs 5.0 in Q3’2020, the lowest since the I-REIT’s inception in 2015.Negative
We expect listed real estate to continue performing poorly as a result of subdued performance of the office and retail sectors and lack of investor appetite in the instrument coupled with negative investor sentiments
Odipo Riaga
Managing Editor at KachTech Media
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