jll city report nairobi kenya - april 2016
TRANSCRIPT
April 2016
Kenya
Nairobi City Report
GDP Forecast 2016
5.4%
Kenya Bank Lending Rate
18.3%
Government Bond (10 year)14.07%
Real Estate Transparency55/102*
Inflation 6.8%
April 2016Nairobi City Report
*Top Global Improver, JLL Global Real Estate Transparency Index 2014
OfficesCirca 340,000m2
total grade A office stock
US$11-18/m2/month for Grade A Buildings
Retail259,000m2 gross lettable area
US$6-10/m2/month anchor rent
US$12-55/m2/month line store rent
Hotel14 international-graded hotels
US$143 average rate
Rental growth
slowing
Rentalgrowth
accelerating
Rentsfalling
Rentsbottomingout
OfficesHotels
JLL Property Clock
Retail
The JLL Property ClockSM
Market Overview EconomyKenya achieved one of the African continent’s highest year-on-year GDP growth results at 5.8% for 2015. It also became the fifth largest economy in Sub-Saharan Africa after it revised its GDP at the end of 2014. Kenya, and in particular Nairobi, has headlined the East African region as its gateway and preferred destination for the regional headquarters of at least 100 multinationals and corporations.
Unlike many of its commodity-dependent counterparts in West and Central Africa, Kenya is a resource-poor country with GDP well diversified across its agricultural, tourism, construction, retail and telecommunication sectors. This diversification has protected the economy against the negative risk impacts of the fall in global oil prices that began in 2014.
The Nairobi Stock Exchange (NSE), the second oldest on the continent, is Africa’s fourth largest exchange in terms of trading volume, capable of making 10 million trades a day.
Infrastructure In the past, little effort was made by the national goverment in terms of infrastructure and service development to accommodate the influx of people migrating from rural parts of the country to Nairobi. Previous underinvestment in infrastructure development has meant significant dilapidation of the road network – potholes, gravel city roads and narrow lanes have resulted in Nairobi being one of the worst traffic cities in Africa.
In light of these challenges, the government has responded to growing infrastructure demands by launching the development plan section of ‘Vision 2030’ which addresses two key issues. The first is to improve the physical infrastructure of urban cities, and the second is to direct growth away from Nairobi to create decentralised nodes well apart from the congested CBD. Locally this is referred to as the creation of ‘satellite cities’.
The development of a new superhighway, Thika Road, now links the city of Nairobi to the north-east area of Thika, and this has been the catalyst for property developments such as Garden City and Thika Road Mall, as the road provides easy access and good visibility for commuters visiting these centres. Further projects will focus on creating ring roads around the city which, in time, will alleviate Nairobi’s inner-city congestion.
Supporting the improved road network are a proposed metro rail network and the development of a blueprint for a Mass Bus Rapid Transit System.
Source: Trading Economics, Oxford Economics, JLL
Real Estate Dashboard
Real Estate
On the real estate front, Kenya, and specifically Nairobi, is experiencing an unprecedented development boom across all its commercial sectors. The resilience in the property market, thus far, has been underpinned by strong economic growth, stable inflation and the country’s aspiration of becoming a majority middle-income market.
Limited availability of land is causing property prices to rapidly rise. Areas along major arterial routes and in Nairobi’s satellite cities, like Thika and Ngong Road, have reported land value appreciation of 100% and 200% respectively from 2007 to 2014.
Increased supply in the office and retail sectors has redefined the Nairobi skyline, although some skepticism exists around the relative demand for all the new stock coming onto the market.
Activity in the industrial space has been limited to owner-occupied developments located south-east of the CBD that comprise old, inefficient quasi warehouse/office type structures. With the government making strong advances in its infrastructure projects, developers are now exploring light industrial parks along Mombasa Road towards Jomo Kenyatta International Airport.
Investor Sentiment
Investor sentiment remains strong, with commercial activity concentrated around very specific nodes such as Westlands, Upper Hill and the decentralised areas around Thika Road and Gigiri.
To ensure sustained investment, Nairobi will need to embrace much more transparent real estate practices. As the majority of the commercial real estate and hotel property is held privately, access to information on market tracking, rents, vacancy performance measurement and transaction data is currently difficult to obtain.
While REIT (Real Estate Investment Trusts) legislation is in place, only two REIT companies will be trading on the Nairobi Stock Exchange by the end of the year, namely the STANLIB Fahari i-REIT which listed at the end of 2015 and Fusion Capital’s D-REIT, the listing of which is anticipated in the third quarter of this year. In the long run, investors will be able to buy shares in listed property companies based on the quality of properties, with steady income growth on the underlying assets. However, in the short term, transactions in this space remain limited and the small market cap size of these counters does constrain liquidity.
International developers and private equity funds with short-term investment horizons are looking to sell recently completed investment-grade assets, and these potentially unlisted transactions will set a precedent of asset pricing transparency based on property fundamentals.
“Increased supply in the office and retail sectors has redefined the Nairobi skyline, although some skepticism exists around the relative demand for all the new stock coming onto the market.”
By the end of the current development cycle, Nairobi will have an accumulated commercial stock of:
400,000m2 of retail space, including three modern international-standard shopping centres.
Almost620,000m2 of total gross lettable office space - an 80% increase on current A and Prime grade stock levels.
Circa10,700 rooms across 79 hotels. (45 rooms or more per hotel)
MIN MED MAX
Gigiri Grade P 18.3 21.0 23.1Grade A 15.8 15.8 15.8
Karen Grade A 11.2 13.0 14.7
Kilimani Grade A 11.7 11.7 11.7
Thika Road Grade A 7.9 7.9 7.9
Upperhill Grade A 12.0 12.0 12.0
Waiyaki Way Grade A 11.8 12.1 12.4
Westlands Grade A 15.5 16.1 16.6
Offices Total A and Prime grade office stock340,000m2
RentUS$11-18/m²/
month
Overview
On the office front, the large supply of A and, in some instances, Prime grade space in Westlands and Gigiri offers multinational companies more options to choose from when selecting ideal premises to headquarter their regional operations. We expect to see more tenants upgrading to A grade space from B and C grade accommodation, leaving large vacancies in those sectors.
Traditionally, commercial rents have been paid in Kenyan shillings, however there is a trend towards US dollar denominated leases for new office developments, introduced in order to obtain preferential debt financing terms. The result of this trend is as yet unknown, but currency risks may arise for occupiers who have to manage shilling revenue income vs. US dollar rental expenses.
The CBD remains home to mainly government offices; however, the quality of offices in the area has declined due to inadequate parking ratios and ongoing traffic congestion. The decision of international tenants to relocate out of the CBD may well present a good opportunity to embark on an inner-city regeneration to reposition the area.
Rental Performance
Developers may need to be wary of the excessive office supply that will lead to a downward correction in office rents. Current A grade rental space is quoted between US$11-18/m2/month, but it is anticipated that that there will be pressure on rental levels in the short to medium term. Office landlords, in general, will need to compete for tenants by offering discounted rentals, while premier office locations may need to offer additional incentives such as rent-free periods and tenant installation allowances. Service charges or operating costs range from US$2 to US$3/m2/month.
Table 1: Average US$ rental/m2/month
$
“The decision of international tenants to relocate out of the CBD may well present a good opportunity to embark on an inner-city regeneration to reposition the area.”
Demand
Most multinationals who have entered the Nairobi market have established their medium-term space requirements. Pre-lets on office developments in Nairobi are non-existent, and tenants only take up occupancy once a development is complete. The current wave of speculative development was initiated on the anticipated growth emanating from the oil and gas sector and on more multinationals entering the market. Amid the gloomy outlook on the commodity sector, oil companies like Tullow Oil have reconsolidated and even reduced their office space.
We see opportunity in two distinct areas of demand in Nairobi. The first being A grade single-tenanted office buildings in prime locations such as Westlands and Thika Road for large corporations looking to consolidate their dispersed offices into one prime location asset with building naming rights. The second is within the full-service offices sector; a product that Regus and ESBC offer. The full-service offices option gives companies the advantage of entering the market or operating a satellite office without the burden of huge office capital fit-out costs or the need to commit to lengthy five-year lease terms which local legislation dictates.
Figure 1: Nairobi Office Pipeline (m2)
Westlands Upperhill Parklands Kilimani Gigiri
2017 20182016
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0,000
Supply
With the rapid rate of office development, Nairobi may well be oversupplied in the office sector. At least 160,000m² of space is expected to be delivered to the market in 2016 alone, mainly in the Upper Hill and Westlands nodes. Westlands remains attractive to many corporations while Upper Hill looks set to experience vacancies in excess of 40% for the next 6 to 12 months.
Offices
Supply
Garden City Mall, completed at the end of 2015, is now Nairobi’s largest mall at 35,000m². Developed by Actis, the mall is part of the first mixed-use scheme in Kenya that also includes a residential component with further developments underway which will add offices and a hotel. More recently, The Hub, a 29,000m² mall in Karen developed by Azalea Holdings, was delivered to shoppers in the first quarter of 2016.
Future mall developments in the pipeline include the much anticipated 62,000m² Two Rivers, Rosslyn Riviera, an 11,000m2 neighbourhood centre, and a 21,000m² expansion of Village Market. These malls are all concentrated in the same area of Gigiri/Rosslyn. While these malls do cater for different consumer markets, their similar catchment area means that a cannibalisation of market share is imminent.
DEVELOPMENT APPROXIMATE SIZE (m2) NODE YEAR OF COMPLETION
Crystal Rivers Mall 20,000 Athi River 2017
Rosslyn Riviera 10,776 Rosslyn 2016
Southfield Mall 13,657 Embakasi 2017
Two Rivers 62,000 Gigiri/ Limuru Road 2016
Village Market (Phase 2) 21,000 Gigiri 2016
Total 127,434
Overview
Kenya has the second highest formal retail market penetration rate in Sub-Saharan Africa of circa 30%-40%. The expansion of the retail sector in Nairobi has been driven by the redevelopment of existing centres and development of Greenfield sites by a combination of local and international developers.
The retail market is currently dominated by four major anchor players, namely Nakumatt, Tuskys, Navas and Uchumi. These stores, and in particular Nakumatt, have high proportions of clothing, hardware and general merchandise making them ‘one-stop shops’ for consumers. Consumers are aspirational but also very value conscious, so any new retail offering has to address their personal needs and taste.
International brands have recently started trading in Nairobi, namely French multinational Carrefour, Game and the American fast-food chain Domino’s. These retailers need to have a competitive edge to succeed in a market with an already impressive local offering. The performance and experiences of these new entrants will be watched closely by other foreign retailers who have Kenya on their radars.
Rental Performance
The attraction of international retailers to the market and the improving quality of retail stock has allowed landlords to quote substantially higher rents. Average base rental levels for anchor tenants range between US$6-10/m2/month, while asking rents for line stores are anywhere from US$12 to US$55/m2/month with levels being determined by the individual store category and size. Escalations are around 7.5%-10% for leases denominated in shillings, while US dollar rents escalate at around 3%-4%.
Current vacancies across the market remain on average below 5% with older malls expected to maintain low vacancies, while newer, larger retail malls will see higher vacancies until trading matures and tenant demand for these centres increases.
Demand
Demand remains steady for retail space. The influx of international retailers, such as Carrefour, Game and MAC Cosmetics, has widened the offer to consumers allowing new shopping centres to increase their footprints.
Retail
Pipeline
City Population
3,950,000
Gross lettable area
259,000m2
Anchor rent US$6-10/m2/month
GDP per capitaUS$649
Line store rent US$12-55/m2/month
RECENT OPENINGS
Radisson Blu Nairobi 256 rooms, opened 2015
Kempinski Villa200 rooms, opened 2013
Best Western Premier96 rooms, opened 2012
Crowne Plaza762 rooms, opened 2010
PIPELINE
Tune Hotel Nairobi280 rooms, due 2016
Hilton Garden Inn JKIA171 rooms, due 2016
Golden Tulip Grand Sapphire196 rooms, due 2016
Pullman Nairobi Westlands320 rooms, due 2016
The capital of the world’s Safari haven and home to the headquarters of numerous multinationals and major NGOs, Nairobi continues to be an important gateway city to the high-growth East Africa region. As the flag carrier, Kenya Airways is expanding its route network and swiftly gaining recognition as one of the continent’s leading airlines. Aside from business and conference tourism, Nairobi benefits from being the major entry point for leisure travellers coming to the celebrated parks of East Africa and its coastline. With a reduction in terrorism woes, continued stability and anticipated regional economic growth, Nairobi is seeing a significant number of new hotels being developed. As this pipeline comes online over the next 12-36 months, it will likely result in a short-term oversupply.
Tourism
Kenya has both leisure and business tourism appeal through its diverse offering and regional importance. However, during the first half of 2015 arrivals were down 19%, due primarily to security concerns.
Demand
Jomo Kenyatta International Airport (JKIA) received 672,789 international arrivals in 2015. Kenya Airways flies to 65 destinations and is an important regional carrier.
Supply
Current hotel supply in Nairobi is estimated to be more than 170 hotels with a total of c.10,000 rooms. With the recent and continued focus of global brands entering the market, the number of branded rooms is beginning to form a considerable portion of this.
Investment
Nairobi has seen high-quality new supply enter the market during the past five years, including the Kempinski Villa Rosa,
Crowne Plaza, Radisson Blu and Best Western Premier. Funding for hotels is primarily through local promoters with wide interests across numerous economic sectors. Short-term investment returns are likely to be impacted by an oversupply. A reduction in security concerns in Kenya would have a significant positive impact on demand for hotels in Nairobi, boosting investor sentiment in the city.
Outlook
The pipeline of new hotels is sizeable despite the extended development periods. Tourism centric hotels have decreased rates noticeably in response to weaker demand from the more fickle leisure segment. However, the hotel sector continues to flourish and attract new local and foreign investors. There is a risk of short-term oversupply in the market, which is relying on regional economic growth to increase demand. In addition to Upper Hill and Westlands, the airport precinct will see high supply growth. There is likely to be a slowdown on all fronts from the latter part of 2016 through to the 2017 elections. However, Nairobi still presents investors with a gateway into the region and should form part of any Sub-Saharan Africa investment strategy.
International Arrivals in 2015
749,000q-12.7%
Average rate
US$ 143q-0.5%
Occupancy
53.8%q-1.1%
RevPAR
US$ 77q-1.6%
$ $
Hotelpq % change compared to prior year
Southern Bypass
Southern Bypass
Kami
ti Rd
A 104
A2
A 104
A 104
Langata Rd
Killimani
KarenUpper Hill
Jkia
Walyaki Way
Gigiri
Westlands
ABC PlaceGLA 10 513m2
Village MarketGLA 19 509m2
Yaya CentreGLA 13 489m2
Galleria MallGLA 15 000m2
GreenspanGLA 13 489m2
WestgateGLA 33 000m2
The HubGLA 29 000m2
Garden CityGLA 34 828m2
Thika Road MallGLA 26 477m2
Sarit CentreGLA 25 000m2
The JunctionGLA 26 000m2
Karen
Gigiri
Thika Road
Commercial nodes
GLA m2
KEY
>80,00040-80,0000-40,000
A grade office nodes:GigiriKarenKilimaniThika RoadUpper HillWaiyaki WayWestlands
Retail:Existing MallsPipeline Malls
Ewout HolstDirectorCorporate Solutions Sub-Saharan Africatel: +27 11 507 [email protected]
Lucy GithinjiAssociate Director Corporate SolutionsEast Africatel +254 730 112 [email protected]
Mark DunfordVice PresidentHotels & Hospitality GroupSub-Saharan Africatel: +254 0 730 112 024 [email protected]
COPYRIGHT © JONES LANG LASALLE IP, INC. 2016. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.
Craig Hean Managing Director Sub Saharan Africatel: +27 71 860 [email protected]
Xander Nijnens Senior Vice PresidentHotels & Hospitality GroupSub-Saharan Africa tel: +27 11 507 2200 [email protected]
Anthony LewisDirectorCapital MarketsSub-Saharan Africatel: +27 71 860 [email protected]
Fadheelat Noor MohamedAssociateResearchSub-Saharan Africa tel +27 11 507 [email protected]
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