Invest to Buy, Paying Your Landlord is Money You Will Never See Again

Why it may be the time for your company to buy office space in Nairobi. Reports in the dailies indicate that there’s an oversupply of office space in Upperhill and Westlands, and for the past two years the smart money has been busy negotiating new leases with lower rent.

But the EVEN smarter money has been waiting and watching the Real Estate market cycle and in the last 6 months, has been starting to buy their office space. Here is why:

Economies and markets are self-correcting! In the Real estate market, we have a four-stage self-correcting cycle. These stages are Expansion, Hyper Supply, Recession, and Recovery. The Expansion phase is when the market is on the up. Supply is initially static but Demand and occupancy rates and rents are increasing.

At some point in this phase, rent rates reach a level which justifies new developments and we see investors becoming interested and starting to fund new projects. Due to the long duration of development projects, there is a period here where people holding assets do extremely well.

Then comes the Hyper Supply stage. At some point, the equilibrium between supply and demand flattens out and inevitably tips over into excess. This can happen because of: overbuilding by developers; a reduction in demand due to the economic slowdown, a move of economic centers.

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• Nairobi Luxury Homes Soften 6.5% as Oversupply Continues

The key aspect of this phase is that vacancy rates initially stabilise, but as developments take between 3-5 years to complete, supply keeps coming onto the market leading to a huge oversupply and the next phase – Recession.

Recession is where the supply is way higher than demand and vacancy rates start to go up. Rents go down as landlords compete on price. It is at this point that investors are suffering and stop investing in new projects leading to the suppressed supply that inevitably causes the cycle to start all over again.

The Recovery phase is the bottom of the trough. Occupancies are likely at or near their low point with tepid demand for space and minimal leasing velocity. Very little new construction is underway and rental rate decline flattens out. Identifying the beginning of the recovery phase is difficult as the market still feels like it is in recession.

So where are we with the Nairobi office market?

Economists believe we have just recently transitioned from the Recession phase into the Recovery phase. Rental rates have come down significantly, and office space has become very cheap despite the wider economy continues to perform. Even though some large scale projects (approved before 2016) are still being developed, the number of new schemes being approved has dropped off dramatically.

Kenya National Bureau of Statistics (KNBS) data that shows that last year’s approvals were the lowest since 2014. There is very little money in the market so prices are not expected to fall further meaning that now is the time to buy! You can right now pick up a 2,000 sqft office in Upperhill for just over Kes 20m – contact me directly and I will tell you how and where. If the average rental rates remain where they are (around Kes 105 per square foot), then your 2,000 sqft office will pay for its self in just under eight years.

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• Why Cytonn is Bullish about the Long-term Prospects for Commercial Real Estate

And if rates recover to where they were in 2015 (around Kes 140 per square foot) your new office will pay for its self in less than 6 years.

Though it is important to note that investors can invest successfully across all four phases of the real estate cycle, the smart money buys in the recession and sells during the recovery. Now is the time for owners, occupiers and investors to buy.

Fusion Capital, a Private Equity Firm focused on Real Estate Investment and Fund Management based in East Africa.