Economic Update

Published 02 Jul 2016

The arrival of new supermarket chains in Kenya highlights the potential of the country’s retail sector, though a congested project pipeline – concentrated largely in Nairobi – could result in a slowdown in retail rentals in the medium term.

Nairobi – one of the largest markets in sub-Saharan Africa in terms of shopping centre floor space – has seen a number of dedicated retail properties open up in the past decade, with more than 390,000 sq metres of gross leasable area (GLA) already available, and a further 470,000 sq metres in the development pipeline.

The dramatic rise in formal retail space has helped attract new foreign investors in the sector. In mid-May Carrefour, the world’s second-largest retailer, opened its first outlet in Kenya, its first in sub-Saharan Africa.

The French chain – through its franchise-holder, Dubai-based Majid Al Futtaim Retail – occupies 5000 sq metres as the anchor tenant in the new Hub Karen in Nairobi. Carrefour has plans to open a second outlet at the Two Rivers Mall, also in the capital, set to launch by the last quarter of this year.

Another significant international entry in the Kenyan market is Botswana-based supermarket chain Choppies. In early May Choppies announced it had taken over eight Ukwala Supermarket outlets in Nairobi, Kisumu and Bungoma, according to press reports.

Foreign retail legion

In addition to the growing supply of retail property, rising levels of disposable income and an expanding middle class have contributed to Kenya’s appeal among overseas retailers.

The transition has been underpinned by the country’s middle class, which represents around 45% of the 47m-person population, according to the African Development Bank, although this figure includes individuals with a consumption level of between $2 and $4 per day and those at risk of falling below the $2 poverty line, which means that formal retailers still tend to focus on the higher-income segments of the market.

Global retailers are being drawn specifically into the upper end of the sector, according to Peter Kang’ethe, managing director of Tiger Haco Brands.

“The high-end segment is attracting foreign brands as it is growing with new developments such as Garden City and other mega retail space,” he told OBG. “While these developments are primarily in Nairobi, we expect this to spread to other areas.”

The increase in household income has also led to a change in consumer behaviour, which has favourable results for foreign retailers, according to Chris Steenkamp, manager of South African-owned discount retailer Game.

“Consumers in Kenya tend to equate international brands with quality,” he told OBG. “Conspicuous consumption and status shopping in the county have become more prominent than in other emerging markets.”

Supply-demand imbalance

However, there are some potential bumps ahead that the sector will have to navigate. While Nairobi does have several new mall projects in the pipeline, which should help attract new retailers, there are some concerns that the market may struggle to accommodate the coming floor space.

Additional formal retail space may lead to a risk of oversupply, according to some analysts, as leasing activity declined in some established malls. Those malls could be prompted to undertake upgrades to regain lost footfall and tenants as major retailers move to newer malls or secure space in upcoming developments, according to local media reports.

“Beyond the Two Rivers Mall expected to open by the end of this year, no further retail space will be required in Nairobi, as there will be oversupply,” Kenneth Kaniu, CEO of Britam Asset Managers, told local media. Other industry stakeholders, meanwhile, cited tough market conditions for retailers, and pointed out that potential growth markets may be elsewhere, such as in the low-end market, according to local media.

This potential for oversupply was also noted in a “Shop Africa” report conducted by real estate consultancy Knight Frank, which showed Nairobi had the fourth-highest ratio after Gaborone, Windhoek and Harare of GLA to population among 18 sub-Saharan cities, at 104 sq metres per 1000 residents.  

“The formal sector has witnessed rapid growth in penetration, from 15-20% of sales a few years ago to 30% today,” Kang’ethe told OBG. “However, this pace of expansion risks stretching financing too thin.”

Brighter prospects

As a result, there has been a push to expand formal retail activity and shopping centre acreage outside of Nairobi, into other major urban areas and commuter regions.

In light of the increased investment outside of the Kenyan capital following the devolution process, retail property development is likely to pick up pace in outlying neighbourhoods undergoing significant population growth, including towns such as Kiambu, Kiserian, Kitengela, Mlolongo, Ongata Rongai, Ruaka and Syokimau.

With the IMF forecasting GDP growth will rise from 5.6% last year to 6% in 2016, retailers will be aiming for stronger returns amid increased consumer confidence.

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