A year is like a short story. Brief, yet lengthy enough for plot twists, cliff-hangers and a satisfactory ending. And for sure, the year 2022 gives us a satisfactory ending when it comes to the property market.
Every sector made a strong comeback after the General Election, with new developments disrupting and expanding the commercial real estate market. The construction industry endured increased costs of construction, and thrived, with some grand projects completed this year. Yes, the outlook is promising.
The comeback
At the beginning of the year, the General Election and growing inflation were the biggest concerns for most players in the market. Though the market tends to slow down for months before and after this period, this year was slightly different. Most companies seem to have bounced right back just three months after the tightly contested election, pointing to a maturing market.
The commercial market, especially office space which has served heightened suspense since Covid-19 came about, gave us a surprise ending. Wayne Godwin, the Head of East Africa and Indian Ocean at JLL, says, “There were thoughts around whether the office had a place post-Covid-19, but it’s proving it very much does, as businesses adopt hybrid working arrangements.”
He adds that office space never really lost its relevance, most people were just forced to work from home, but as the excitement of working remotely wore off, we realised we are inherently built to work in social environments. Besides, there’s only so much you can achieve through a Zoom call.
As people started returning to offices in 2021, there was a dilemma on how to go about the comeback, considering that commuting every day has a big impact on people’s time, money and the environment. Godwin points out that businesses began adopting flexible hybrid solutions.
Some moved to co-working spaces while others downsized and created shifts that allowed employees to work from an office a few days of the week and work from home on other days.
Others adopted the hubs and clubs’ concept, whereby businesses still kept their essential headquarters, or hubs, where people get intense work done one or two days a week, but they also added a flex space (club) mostly closer to employees’ homes.
The clubs, which are more collaborative and playful, cut down commute time. Food and beverage centres also became a norm after the comeback, given that people got used to accessing their kitchens while working from home.
Traditional spaces within offices are also changing. Godwin observes that office designs are now more flexible as businesses provide creative and less formal meeting rooms for employees to collaborate and brainstorm.
“Basically, we are not going back to full-time traditional office set-up. Covid-19 changed how we think about the future of work and this has been cemented this year,” he adds.
Logistics and industrial spaces have also experienced major growth in 2022, thanks to the disruption in the supply chain witnessed due to prolonged lockdowns and transport restrictions in some countries, as well as the Ukraine-Russia war.
“We’ve seen supply chain bottlenecks that helped us understand how important it is to have adequate supply and distribution networks within a region rather than having things come directly from the source without alternative interventions,” says Godwin.
Cereal, oilseeds and fertiliser markets are some of the worst hit due to the war. As businesses tried to salvage their production and import functions, the need for modern warehousing increased, leading to a boom in this sector.
Godwin also foresees a future where niche spaces for call centres will be in high demand. Being a global economy that has been termed a melting pot, Africa needs to position itself for certain sectors and provide spaces that can serve multinationals at a global scale.
“There is more appetite for Africa when it comes to these kinds of outsourcing businesses. Kenya has a good time zone and the literacy levels are quite high. Though South Africa has been at the top of the list for multinational companies in this industry, Kenya is a good runner-up. Start-ups and multi-nationals in the call centre outsourcing business are likely to require workstations that accommodate their needs”.
Co-Living
Further, in a report by JLL dubbed Living in Africa: Investing in People, launched in November, 2022, it was noted that a new asset class was introduced to the Kenyan market recently. Co-living, a housing concept gaining popularity globally, entails renting rooms within a house or apartment unit to several people.
Part of the JLL report reads, “Co-living generally entails a private bedroom, bathroom, and communal eating and living spaces. Benefits of co-living include a greater sense of community, convenience, cost savings and comfort. Co-living arrangements are typically operated by specialised service providers who include additional products or services – akin to some hotel services. Lease terms are more flexible, and each resident has their own contract.”
Co-living is attractive to young professionals just launching their careers. They may be looking for modern units situated close to their workplace or social amenities. However, such units may be out of reach with limited income, but with co-living, the cost of a room in a good neighbourhood may reduce rent cost by 10 per cent to 30 percent, making the model attractive.
Service providers and landlords are also likely to increase their yields by renting out individual rooms especially in neighbourhoods with low occupancy rates. So far, only one service provider has been identified in this new niche, though other key players targeting young demographics are likely to explore the concept soon.
The report also outlines other investment opportunities with growing deficits in supply. Student housing, for instance, has a deficit of 600,000 units, a figure expected to grow as the transition rate from primary school to high school to tertiary institutions continues to improve. In addition, the number of international students is increasing, and Kenya is currently a continental leader in hosting university students mostly from other African countries.
Other factors that will impact the demand for housing in the near future are population growth, urbanisation and the age of populations. Needless to mention, the demand for affordable housing continues to increase.
Demand for green buildings
Michael Mugambi, a tenant representation, leasing and sales manager at CBRE Excellerate, observes that this year has seen a rise in demand for greener buildings in the commercial sector, a trend that is likely to catch on in the coming years.
“An increasing number of companies are now asking for green credentials of buildings, and this is often informed by a company’s internal policies on environmental conservation. Most of them want to see certifications by IFC Edge or LEED Green Building before they take up office space in a building,” says Mugambi.
Unfortunately, he notes, there is a major gap as developers are either unable to meet this demand or do not prioritise it in their conceptualisation stage.
“When it comes to office spaces, we have an oversupply of units. New buildings have been constructed this year and more are still in the pipeline as evidenced by the number of options we have when helping companies relocate or find space.
However, most developers are focusing on amenities that are not necessarily meeting the global standards multinationals look for. We end up with new buildings that are not unique.”
With more multinationals setting up shops in the country and local businesses tightening their policies on environmental conservation, the demand for greener buildings will probably take centre stage in the coming years.
Another popular demand has been the number of floor plates.
As Mugambi explains, companies involved in outsourcing people are asking for buildings with larger floor plates to fit more people on the same floor. Perhaps this is in line with the downsizing trend that many businesses have adopted. Besides, occupying fewer floors in a building eases the supervisory processes while cutting down on energy and utility bills.
Businesses have also taken back the power where leasing terms are concerned. After the pandemic, everyone wants a foreseeable exit in case the company’s needs to change.
Though negotiations for flexible lease agreements began way before the pandemic, Mugambi says they are slowly gaining acceptance as the norm. These changes in what businesses want from commercial landlords have affected the demand for older buildings that lack adequate parking, are not green or modern.
“Old buildings struggle to attract tenants, but they are good for small companies that don’t require a lot of parking”
Land buyer-seller stalemate
On matters land, Mugambi says, demand is driven by the subsector of real estate it serves. For instance, residential land within the Nairobi metropolis is still very attractive, and new locations within developing metropolitan counties are still opening up. However, when it comes to the commercial sector, there hasn’t been a lot of land acquisition as most organisations still prefer to lease, rather than own commercial space.
The land buying and selling market still remains a buyer’s market. We’ve experienced a prolonged stalemate between buyers and sellers. “Joint ventures were quite popular back in 2015 to 2017, but after the concept failed to work, land owners have focused on maximising profits while developers too, look for ways to cut down on cost, with land being the most expensive asset in development.
Joint ventures entailed land owners giving land in exchange for equity in the project. Though there were a few successful collaborations, land owners began to feel like they were short-changed. Thereafter, they preferred to just sell their land and focus on their capital gains. This was a disadvantage to the developers as the cost of land increased,” explains Mugambi.
However, for years, it’s been a buyer’s market, and 2022 has not been so different. With countless speculators hoarding land, the buyer has high bargaining power, unless the land is extremely prime and well-priced.
Lastly, Mugambi points out, the biggest win for the real estate market has been the continuation of digitising land registry records. With a new government and new leadership at the Ministry of Lands, things were hanging on the balance but it seems the grand plan is still on.
However, the process has left everything in a limbo. Finding physical records is more difficult and transactions are taking longer but Mugambi is hopeful that by next year, the process will be complete.
“A fully functional digital registry is going to change land transactions. Once this process is complete, without loss or misplacement of records, then it will improve the transparency of transactions. It’s going to transform the outlook of the market, increase the volume of transactions and hopefully impact property markets in major cities as other locations catch up.”
Construction sector unfazed
Finally, the cost of essential construction materials such as cement, nails and steel has been on an upward trajectory for the past three years, hitting an all-time high this year.
In April, a bag of cement retailed at an unprecedented Sh800 due to increased production cost and high cost of clinker, an essential raw material. It was expected that this would slow down the construction sector, but on the contrary, there has been increased activity.
According to the 2022 Nairobi Pipeline Report by Estate Intel, a company that tracks and stores data on buildings in Africa, there was an estimated total of 2,452,385 sqft under construction in office blocks, 160,000+ units in residential units, 1,065,627 sqft of retail space, 1,868,174 sqft in the industrial sector and 2,600 keys in the hospitality sector.
Though the retail sector has the least volume of new construction projects, Estate Intel notes that the sector is still oversupplied, just like office blocks and hospitality spaces. Industrial and residential developments are the only undersupplied sectors at the moment.
The report also identified data centres as a significant investment opportunity as the tech industry grows. Data is becoming an asset to most businesses and data centres will be more essential as we delve deeper into the tech way of doing things.
Currently, we only have nine data centres in Kenya and statistics point to a growing need for specialised spaces for this upcoming niche. BY DAILY NATION