Construction sector to remain subdued in 2021 - architects

 

Kenya's construction sector is up for tough days ahead as Covid-19 continues to affect investment decisions by developers and investors, the Architectural Association of Kenya (AAK) says.

However, developers are expected to explore more investment opportunities healthcare, industrial and data centre segments which have shown resilience in the Covid-19 environment.

The high-end residential sector, popular with expatriates and other well earning Kenyans remains among the most hit going forward, with an overall negative outlook, as low returns are seen in leasing activity by new tenants with a moderate negative outlook on rents.

Developments in this segment of the market remains flat into 2021, as investors maintain a wait-and-see attitude on future demand and return on investment.

In the low-middle income segment, rents are expected to remain flat with an expected moderately negative outlook on new developments.

Leasing by new tenants is also projected to remain flat amid notable defaults among the growing number of tenants using flexible rent payment platforms, or those that have landlords willing to offer monthly and quarterly rental payments.

“On the property acquisition side, many payment plans for properties are being extended while the very small pool of Kenyans using mortgages may note the difficulty in meeting payments due to salary cuts and layoffs,” AAK says in its 'Status of the built environment report' July-December 2020.

Luxury segment demand is expected to reduce as corporates hold off on making decisions in this environment.

Where they proceed, they will be seeing significant rental discounts, AAK notes, with the pipeline for new developments projected to remain flat through strong.

Uptake of office space is also expected to remain low as businesses adopt a wait and see approach.

While many landlords have been incorporating attractive tenant incentives to remain competitive in recent years, they are expected to focus more on flexibility in leases (break clauses, options to surrender and much shorter terms altogether) in lieu of creative discounts, going forward.

Demand for serviced offices and co-working space is expected to grow post-Covid era as businesses opt for flexible options or remain put in serviced space in lieu of investing in fitting out new space.

The development outlook for the commercial sector is negative, AAK says, as the sector’s performance continues to be constrained by an oversupply of 6.3 million square feet of space as of 2020.

“The sector is also facing reduced demand as some firms downsize due to financial constraints while others embrace the working from home strategy amid the Covid-19 pandemic,” the survey released this week indicates.

The asking prices and rents are also expected to decline as landlords continue giving discounts and concessions to attract and retain clients.

Though this pipeline includes conceptual and active site projects, the Covid-19 pandemic is expected to encourage many to reconsider or slow down.

This will reduce additional downward pressure on a market, which is already under immense stress.

“The industrial sector is on an upward trend. For residential and retail, I expect a steady recovery before year-end. Commercial/offices may take a while due to oversupply as well as hospitality will need time to recover until full travel recovers and vaccine is widespread,” AAK president Mugure Njendu told the Star yesterday.

The retail sector has a negative outlook with performance being constrained by among others, the existing oversupply of space estimated at 2.0 million square feet, dwindling demand for physical space due to shifting focus to e-commerce, reduced purchasing power among consumers amid a tough economic environment and reduced rental rates.

“Only 4.55 per cent and 3.45 per cent reported an increase in the number of prospective clients inquires for new projects and ongoing leads respectively,” Njendu said. 

However, architects remain optimistic that the sector’s performance will be cushioned by the continued expansion of local and international retail chains.

Construction and the real estate sector faced a downtime last year in the wake of the pandemic that slowed down activities and investments, with the overall economy taking a hit.

National Treasury has projected a growth of 0.6 per cent from an upward of 5.6 per cent it had foreseen at the beginning of the year before the pandemic hit the country in March.

Reflecting low activities in building and construction in the capital is the drop in the total permit fees collected by the Nairobi Metropolitan in the second half of 2020, which were valued at Sh215.9 million, a 20.3 per cent decline from Sh270.9 million recorded in the first half.

A recent report by Knight Frank showed that real estate investors recorded a double-digit loss in income as the Covid-19 pandemic reduced rent prices and occupancy rate.

According to the report, hospitality, retail, and health centers were the most affected assets, posting 50.5 per cent , 41.4 per cent and 26.7 per cent drop, respectively.

AAK has noted a total of 87.50 per cent of professionals in the industry last year experienced a significant decrease in client inquiries for new projects while another 70.11 per cent reported a decrease in communication or follow up of ongoing leads.

The country's real estate sector had a good run the previous year (2019) where an average growth rate of 5.3 per cent was recorded, which was 1.2 percentage points higher than the 4.1 per cent growth rate recorded in 2018–Kenya National Bureau of Statistics, Economic Survey 2020.