Nairobi’s prime office, residential prices fall

Real estate developers continue to make losses as prime residential prices fall  from the trends, which have affected it in recent years, including the current Covid-19 pandemic, over supply of commercial spaces, corporate budget cuts by  multi-nationals among others.

Harriet James @harriet86jim

A new report by international reator Knight Frank shows that house prices in Nairobi have been on a sharp decline in the first half of 2020.

The report, dubbed Knight Frank Pan-Africa Residential and Office Dashboards that tracks rental performance in the first half of 2020 said Kenya’s average prime residential prices in Nairobi declined by 2.9 per cent compared to a decline of 1.8 per cent in the first half of 2019, pushing the annual decline to 5.1 per cent in the year to June.

The report also tracked performance and trends in 29 African cities during the Covid–19 pandemic. 

Prime residential rents also declined over the review period by 6.55 per cent compared to 1.67 per cent over a similar period in 2019, taking the annual decline to 7.62 per cent in the year to June.

The decline in both prime residential rents and prices is mainly attributed to the continued oversupply of residential developments, unfavourable economic climate, low liquidity and expatriates returning to their home countries. 

“We expect prime residential rents to decline in the second half of 2020 due to the projected negative economic growth, tighter liquidity, continued relocation of expatriates and less disposable income from potential tenants. Prime residential prices are also expected to decline albeit at a slower rate,” said Tilda Mwai, a researcher for Knight Frank Researcher Africa. 

Quality living space

Lagos, Nigeria recorded the highest increase in prime residential rents a 38 per cent increase from the fourth quater (Q4) of 2019.

This increase was attributed to the need for quality living spaces due to remote working offered by prime residential real estate.

In Kampala Uganda, downward pressure on rents has not been witnessed. However, liquidity pressure on occupiers has in turn led them to request for lease concessions reference to rent repayment or abatement of their contractual obligations.

Landlords have, however, remained reluctant to reduce headline rents and have instead sought to offer short term remedies by way of rental discounts and or deferred payments.

As a result, a 10 per cent to 20 per cent reduction on net annual rent collections is expected.

The Africa Residential Dashboard indicated that residential rents remained relatively stable across the Africa region in the first half of 2020 despite the pandemic and subsequent lockdowns imposed.

Of the 29 African cities tracked by Knight Frank, 60 per cent recorded stable or increased rents over the first half of the year.

Whilst physical viewings were restricted in the majority of the markets, a surge in virtual viewings was observed over the review period.

The Residential Dashboard also forecasts that in the short to medium term, there may be a reduction in residential demand.

“There has been a surge in the exit of expatriates from the continent due to pre-existing economic challenges, but enforced by the Covid-19 pandemic, which has resulted in subdued demand in the prime residential sector,” notes Tilda. 

The dashboard also highlights that affordable housing demand persists, owing to the increasing number of young professionals in African cities and the need for space in the wake of the pandemic.

As a result, renewed government interventions towards ensuring affordable housing delivery have been observed in countries, such as Kenya and Nigeria.

In the Africa Office Dashboard, 29 of the cities tracked by Knight Frank recorded a decline in rents attributed to the ongoing pandemic and as a result, the office market performance remained subdued for the first half of the year. 

For instance, in Nairobi, occupancy rates on average were recorded at approximately 73 per cent at the end of the first half of the year with higher levels recorded in certain prime areas such as Westlands.

Anthony Havelock, Head of Agency at Knight Frank  attributes this decline to the continued oversupply of commercial space in most locations and a drop in demand/requirements.

“The current economic slowdown has resulted in a significant number of organisations and specifically multi-nationals putting on hold office space requirements.

The heightened safety regulations and increased focus on flexible working is causing a shift in operations as occupiers focus on operational rather than capital expenditure,” he says 

Earlier in the year, Knight Frank noted that the majority of landlords across the continent had been pressed into granting their tenants rent deferrals/concessions while others have undertaken lease renegotiations to ensure tenant retention and attract new ones. These trends are expected to continue in the second half of 2020.