Cytonn Real Estate Maintains Negative Outlook for Nairobi Office Market

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Cytonn Real Estate has maintained a negative outlook for the commercial office sector theme in Nairobi Metropolitan Area (NMA)owing to increased office space supply and expected stagnation in performance in 2020 depending on how fast the Coronavirus is contained.

However, they have a neutral outlook in demand in differentiated concepts such as serviced offices due to their ability to offer flexible lease agreements and office space.

The company also expects a slowdown in construction activities allowing the existing demand to absorb the current supply.

“With the Coronavirus, many corporates have also now tested working from home, and as such, it is unlikely that occupancy levels will recover to the levels they used to be at previously, at least in the medium-term,” said Wacu Mbugua, Research Analyst at Cytonn.

According to the report, performance softened in 2019 recording 0.7 per cent points and 3.3 per cent points y/y decline in average rental yields and occupancy rates, to 7.7 per cent and 80.5 per cent in 2019, from 8.3 per cent and 83.8 per cent, in 2018, respectively.

Average rental yields declined slightly from 8.3 per cent in 2018 to 7.7 per cent creating room for potential tenants to bargain for lower rates.

“The investment opportunity is in mixed-use developments (MUDs) and serviced offices that attract yields of 7.9% and 12.3%, respectively,” they note.

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Gigiri, Karen and Westlands were the best performers in 2019 recording rental yields of 9.2%, 8.3%, and 8.3%, respectively, attributed to increased demand by businesses and multinational companies due to their proximity to the Central Business District (CBD) and other business nodes, relatively good infrastructure network, their superior locations and availability of quality Grade A offices, enabling them to charge a premium on rentals.