RESIDENTIAL MARKET SHOWS RESILIENCE AS RENTAL YIELDS DECLINES

  • “WESTLANDS, RIDGEWAYS, AND DAGORETTI RECORD THE HIGHEST RETURNS TO INVESTORS IN H1’2020.
  • RESIDENTIAL MARKET SHOWS RESILIENCE WITH RENTAL YIELDS DECLINING BY 0.1% POINTS TO 5.1% IN H1’2020 FROM 5.2% IN Q1’2020.
  • WHILE OFFICE AND RETAIL SECTORS DECLINE BY 0.5% POINTS AND 0.3% POINTS, TO 7.3% AND 7.4%, RESPECTIVELY”

Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their H1’2020 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, average rental yields softened across all sectors coming in at 7.4%, 7.3% and 5.1%, for retail, office and residential sectors, respectively, from 7.7%, 7.8% and 5.2% in Q1’2020. 

The land sector recorded an overall annualized capital appreciation of 1.4%, with asking land prices in low rise residential areas recording the highest annual growth at 3.8% driven by the increased demand for affordable land.

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According to the report, constrained financing, supply chain constraints, and reduced revenues arising from slow market uptake and downward pressure on prices and rents due to the ongoing COVID-19 pandemic are expected to remain as the main challenges facing the real estate sector.

 “The residential sector remained relatively stable with most sectors softening in performance, albeit marginally. Dagoretti, Ridgeways and Westlands recorded the highest annual price appreciation at 3.1%, 3.0% and 1.6%, respectively”, said Wacu Mbugua, Research Analyst at Cytonn.

 (All Values in Kshs Unless Stated Otherwise)

Apartments Market Performance: Top 5 Markets

Area

Average  Price per SQM

Average  Rent per SQM

Average  Occupancy

Average  Annual Uptake

Average  Rental Yield

Average  Annual Price Appreciation

Annual Total Returns

Dagoretti

101,335

500

85.0%

21.9%

5.8%

3.1%

8.8%

Thindigua

111,444

555

88.2%

22.0%

5.9%

1.2%

7.1%

Westlands

129,667

688

89.6%

23.9%

5.2%

1.6%

6.8%

Parklands

114,031

611

95.7%

17.1%

5.8%

0.3%

6.1%

South C

110,644

589

96.9%

22.7%

6.0%

0.1%

6.1%

 

(All Values in Kshs Unless Stated Otherwise)

Detached Units Market Performance H1’2020: Top 5 Markets

Area

Average  Price per SQM

Average  Rent per SQM

Average  Occupancy

Average  Annual Uptake

Average  Rental Yield

Average  Annual Price Appreciation

Annual Total Returns

Ridgeways

      143,915

          682

90.0%

17.8%

5.5%

3.0%

8.5%

Ruiru

        86,160

          392

67.3%

20.6%

5.5%

0.3%

5.8%

South B/C

      120,061

          556

94.9%

18.6%

5.2%

0.6%

5.8%

Langata

      144,991

          659

87.4%

17.8%

4.9%

0.9%

5.8%

Lavington

      179,656

          720

80.2%

18.8%

4.0%

1.6%

5.6%

 Source: Cytonn Research

In commercial real estate, Gigiri, Karen and Westlands were the best performing office nodes in H1’2020 recording rental yields of 8.9%, 8.3%, and, 8.2%, respectively due to their superior locations and availability of top-quality offices, enabling them to charge a premium on rental prices, while in the retail sector, Westlands and Karen were the best performing retail nodes with average rental yields of 9.8% and 9.2%.

Below is a summary of the H1’2020 sectorial performance:

Of the six sectors, our outlook is positive for one; land; neutral for three residential, retail and hospitality; and negative for two office and listed real estate. Thus, our outlook for the real estate sector remains neutral.

Going forward, we expect the industrial sector, residential, land, and select office markets to continue holding up well in terms of performance, while retail and hospitality remain the most affected.

The sector’s performance should improve significantly towards the end of 2020 once economic activity regains momentum.

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

Theme

Thematic Performance and Outlook H1’2020

Residential

The detached units’ market recorded an average annual price appreciation of 0.3% compared to the apartment market’s (0.2%) attributable to less supply of standalone units coupled by growing demand by homebuyers.

We expect uptake to remain suppressed in 2020 as cash flows for investors and homebuyers come under pressure in light of the ongoing pandemic.

As such, the opportunity is in low-cost housing in Satellite Towns such as Thindigua and Ruaka which continue to exhibit high demand attributable to their proximity the key commercial nodes, and suburbs such as Westlands and South C for investors seeking attractive rental yields.

Office

The sector recorded a 0.5% and 1.7% points decline in average rental yields and occupancy rates, to 7.3% and 80.0% in H1’2020, from 7.8% and 81.7%, respectively in FY’2019, attributable to the ongoing COVID-19 pandemic which has led to reduced demand for office spaces as firms have put on hold expansion plans as they adopt a wait and see approach while others opt to scale down operations amidst declining revenues.

Our outlook for the commercial office sector is negative owing to the current market oversupply and the impact of COVID-19 on economic activities. We expect asking rental prices to continue dropping due to increased vacancy rates and downward pressure arising from the existing oversupply in the market. The investment opportunity is in differentiated concepts such as serviced offices that attract yields of up to 12.3%.

Retail

Performance softened recording a 0.3% points decline in rental yield to 7.4% in H1’ 2020 from 7.8% in Q1’2020 owing to an increase in vacancy rates in malls and constrained purchasing power.

The investment opportunity is in mixed-use concepts in areas such as Westlands and Karen, with attractive yields of 9.8% and 9.2%, respectively, as well as prime located retail developments which attract high footfall

Hospitality

The hospitality sector was significantly affected by the COVID- 19 pandemic which led to a slowdown of operations following the cancelling of meetings, conferences and events, the banning of all international flights and reduced local direct flights. However, we expect the sector’s recovery to commence in the near term on the back of government policies such as the budget allocation towards tourism marketing and support for hotel refurbishment through soft loans.

The sector has pockets of value in the serviced apartments in areas such as Westlands & Parklands, and Kilimani markets with rental yields of above 10.8% and 9.5%, respectively

Land

The land sector recorded an overall annualized capital appreciation of 1.4%, with asking land prices in low rise residential areas recording the highest annualized capital appreciation at 3.8%.

The investment opportunity lies in sub-markets such as Karen, Spring Valley and Kasarani which recorded relatively high annualized capital appreciation of 5.6%, 5.4% and 5.7%, respectively, and satellite towns such as Ruaka for un-serviced land, and Ruiru for site and service schemes, with average annualized capital appreciation of 5.2%, and 5.8%, respectively.

Listed Real Estate

The I-REIT continued to perform poorly during the period with the price per share dropping to lows of Kshs 5.5, the lowest since the I-REIT’s inception in 2015.

We expect listed real estate to continue performing poorly attributed to continued lack of investor interest in the instruments and the continued subdued performance of the real estate sector as it continues to grapple with the effects of the COVID-19 pandemic.

 

Elves Delz
Author: Elves Delz

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