The wait-and-see attitude of the real estate sector in Kenya due to the election campaign led to a market slump in the first half of the year.
However, a market update from Knight Frank says the period saw lower office occupancy compared to a similar period last year, with prime offices being the biggest losers.
“The office occupancy rate fell by just over five percentage points from the second half of 2021, standing at 72.8 percent at the end of the first half of 2022. Class AB absorption fell about 30 percent from a similar period in 2021 as the market slowed ahead of the Aug. 9 general election,” the report said.
“Consequently, the office market remains a rental market due to the oversupply of commercial space in major commercial hubs, which is expected to persist into 2022.”
The report also predicts that office space occupancy will increase in the city as no major office developments are expected in Nairobi in 2023.
“This could potentially increase occupancy rates and prime rents in office buildings, as most companies have either resumed a ‘work-from-office’ policy or introduced a hybrid version,” the report said.
Players in the industry are striving for energy efficiency, with a preference for buildings that incorporate various environmental, social and governance (ESG) elements.
“Increased investor awareness and multinational corporations (MNC) expansion into the Kenyan market has increased the focus on sustainability in the real estate sector as most MNCs favor developments that incorporate ESG elements. During the period, Absa Bank Kenya received an EDGE (Excellence in Design for Greater Efficiencies) certification after retrofitting its branches with components for higher efficiencies, which cost them Sh45 million and is expected to cut annual energy and water costs by 30 per cent and 33 percent would cushion the annual expenditure by 25 million schillings,” the report states.
Elsewhere, prime residential property rents fell 2.2 per cent over the period due to an oversupply of properties in the sector over the last six months to June 2022, compared with a 1.58 per cent fall in 2021 over the same period. Unfavorable economic conditions also contributed to the decline, Knight Frank said.
However, sales prices for prime residential real estate improved by 1.2 percent over the same period. The marginal increase in peak sales is being attributed to the reopening of the economy.
“Although positive, the 2.4 percent increase in the first quarter of 2022 slowed due to the August 9 general election. According to the Central Bank of Kenya, the value of outstanding mortgage loans increased by 5.3 per cent from Sh232.7 billion in 2020 to Sh245.1 billion in 2021. The value of non-performing mortgage loans increased by 1.8 per cent from Sh27. Sh8 billion in 2020 to Sh28.3 billion in 2021. However, the ratio of non-performing mortgage loans to gross mortgage loans fell from 12 percent in 2020 to 11.6 percent in 2021,” the report showed.
Despite the slight decline, both rates in 2021 and 2020 were below the banking industry’s rates of 14.1 percent and 14.5 percent, respectively. The number of mortgages fell 0.9 percent from 26,723 in 2021 to 26,971 in 2020.
“This decline shows that the number of mortgage loans that were paid off was higher than the number of mortgage loans that were approved,” Knight Frank said.
The average mortgage loan size increased by 6.9 per cent from ATS 8.6 million in 2020 to ATS 9.2 million in 2021, reflecting higher values of mortgage loans granted in 2021.
Increased all-bank rates caused average mortgage rates to rise from 10.9 percent in 2020 to 11.3 percent in 2021, Knight Frank said. The average loan term in 2021 was 12 years with a range of five to 25 years, compared to an average of 11 years and a range of 4 years to 20 years in 2020.
Residential Investment Market
The majority of banks – in both 2021 and 2022 – capped their loan-to-value ratio (LTV) at 90 percent. “However, the market is seeing a trend where banks are increasing the LTV ratio to grow their mortgage accounts. In the prime residential investment market, the joint venture between Gateway Real Estate Africa (GREA) and Verdant Venture to build Rosslyn Ridge Residences, a 90 unit diplomatic condominium fully leased to the US Embassy for 8 years at a price of Sh5 . 52 billion, expected to be completed in the third quarter of 2022,” the company said.
Prime industry rates rose 5 percent during the period compared to the second half of last year. “The increase from approximately Sh68 per square foot to approximately Sh71 per square foot is primarily due to the easing of mobility restrictions that have fueled the recovery of the industrial sector,” said Knight Frank.