Increased occupancy rates and rental returns to boost Kenya’s retail expansion

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Kenya’s retail sector is looking to recover from a slow 2017 following solid gains in occupancy rates and rental returns; however, oversupply in some regions, along with an acceleration in consumer and wholesale prices, could dampen expansion.

Overall occupancy rates rose to 85.7% by the end of August, up from the 80.2% recorded at the same time last year, according to a report released by property consultancy Cytonn Real Estate in September. The result marked a rebound in occupancy after 2017 rates fell from 82.9% in 2016.

Rental yields also increased on last year, recording an average of 8.6%, compared to 8.3% at the end of August 2017.

While the sector as a whole made a strong showing over the period, an oversupply of gross leasable area (GLA) led to some mixed results for Nairobi.

Rental charges per sq foot eased by 3.4% in the capital, and while occupancy rates rose by 3.4% year-on-year to 83.7%, this was still below the national average. Rental yields dropped from 9.6% to 9.4%, with Cytonn citing the 2m sq feet in excess GLA as a factor behind the softer performance.

By contrast, the report found some regions, including Kiambu, Mombasa, Kajiado, Mount Kenya and Machakos, remained underserved by the formal retail sector, presenting opportunities for expansion and investment.

Local and international interest comes amid new supply

The improved occupancy rates and rental returns are coinciding with an expected increase in floor space to come onto the market in the medium term.

There are currently more than 150,000 sq metres of GLA under development, according to a report issued by property and business consultancy Knight Frank in mid-July.

Though the supply of retail floor space is set to rise, especially in Nairobi, where more than half – 79,200 sq metres – of new developments are concentrated, the Knight Frank report predicted an increasingly positive outlook for the sector due to the forecast improvement in the economy, which is expected to boost consumer spending.

GDP is set to expand by 6.2% this year, up on the 4.9% posted in 2017, the Central Bank of Kenya (CBK) said in a statement issued at the end of July. The positive momentum is expected to be mirrored in the retail and wholesale sector, which grew by 5.7% last year, up on the 3.4% rise achieved in 2016.

In terms of retailers, while some players have exited the market in the past year, with local supermarket chains Nakumatt and Uchumi closing their doors, much of their market share and floor space has been taken over by a mix of local and overseas operators.

This year saw local supermarket chain Naivas and French multinational Carrefour expand their footprint in the country, while South Africa’s Shoprite and the Botswana-based Choppies also moved into space vacated by the shuttered chains.

The interest in retail space bodes well for the sector in the short to medium term, with Knight Frank also noting an uptick in new brands entering the Kenyan market or expanding their existing presence. These included French sports retailer Decathlon, clothing line LC Waikiki and Miniso, the Chinese lifestyle brand.

Fuel hike and inflation could slow short-term activity

While the outlook is largely positive, one factor that could affect retail activity is the increase in inflation following a recent hike in fuel costs.

On September 11 the Treasury issued its latest forecast for inflation, with the consumer price index projected to rise by an annualised 6.04%, higher than the 4.04% recorded at the end of August.

The increase in the inflationary outlook came as a result of recent rises in fuel taxes, with the government implementing 16% value-added tax on petroleum on September 1.

The increased levy will not only add to production input costs, but could also reduce discretionary household spending as a result of higher transport costs, which could flow into the retail sector in the short to medium term.

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