Kenya’s retail sector ranks as second-most formalised in Africa

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Increasing urbanisation and rising levels of disposable income should fuel growth in Kenya’s retail sector in 2016 and beyond, as demand for quality outlets and a broader range of shopping options drives the construction of floor space.

Over the past five years, the average value of consumer spending has risen by as much as 67%, making Kenya the continent’s fastest-growing retail market.

With increased urbanisation and an ongoing rise in disposable incomes, formal retail activity – which is led by large blue-chip domestic companies in a number of segments – should continue to expand and diversify, especially as more international brands enter the marketplace.

Demographics of demand

The rise in formal retail activity can be seen most clearly by the expansion of dedicated property in major urban areas, including the country’s 3.5m-person capital city. Last year alone saw a near tripling of Nairobi’s modern retail space, with close to 170,000 sq metres of new leasable area coming on-line.

The rise in capital investment – combined with encouraging fundamentals, such as an urban population that the UN expects will rise by 2.8m over the next five years to reach 14.7m by 2020 – has led to the country being singled out as a hot prospect in several recent publications.

In its 2016 “Global Cities” report, for example, real estate consultancy Knight Frank predicts the Kenyan retail sector’s positive momentum will continue over the next two years. “In 2016 and 2017, a further [120,750 sq metres] of modern retail space will complete development in Nairobi,” the report said.

Online real estate platform Lamudi, part of Germany’s Rocket Internet, has also tapped Nairobi as one of the world’s fastest-growing real estate markets this year, with particular mention of the prospects for commercial and retail real estate, which it says will benefit from a rise in white-collar professionals.

Formal market expansion

In comparison to other African markets, Kenya’s formal retail penetration rate – which ranges from 30% to 40%, according to analysts – is the second highest in sub-Saharan Africa. This places the country at roughly half the level of South Africa, where formal retail is estimated to stand at 60% of overall activity, but twice that of Nigeria, Africa’s largest economy.

At least some of this potential is likely to be unlocked by the expansion of retail hubs into rural areas and cities outside of Nairobi, reducing the distance shoppers have to travel to access large shopping outlets.

While much of Kenya’s formal retail capacity is concentrated in central Nairobi and the port city of Mombasa, there has been growing development of formal space in cities such as Kisumu and Eldoret in recent years, with potential for even wider diversification in the future.

This is being driven in large part by the devolution process, which has led to higher incomes in counties outside the capital, and consequently to a significant increase in investor interest in developing retail centres in these areas.

In Kisumu, Kenya’s third-largest city, three new shopping malls opened in the twelve months to November 2015, bringing the total in the city to seven. One of the three new centres, the 27,000-sq-metre Lake Basin Mall, was developed at a cost of KSh2.5bn ($24.5m) and now stands as the largest mall in the region, according to developers.

Existing shopping centres in Kisumu are also being expanded to accommodate growing demand. The Mega Plaza Mall, which opened in 1996, is adding an additional 10 storeys, while the Mega City Mall is also undergoing expansion.

Meanwhile, in Eldoret, a second Buffalo Mall – following on the successful launch of the first Buffalo Mall in Naivasha in 2014 – is currently being built. The 14,250-sq-metre shopping centre, located on the outskirts of the city, plans to open in 2017.

Urban sprawl

The ongoing development of satellite communities outside Nairobi should also help drive retail expansion in the coming years, as investors move to cater to the rising middle class and the overflow of residents from the capital.

Expanding commuter townships and second-tier cities, such as Kiambu, Kiserian, Kitengela, Mlolongo, Ongata Rongai, Ruaka and Syokimau, are all poised to see rapid growth, offering further opportunities for retailers, according to Dan Karua, managing director of Lamudi Kenya.

The KSh60bn ($588.9m) Two Rivers Mall – which, at 62,000 sq metres, will be largest shopping centre in East Africa when it opens in March 2016 – is being developed on the outskirts of Nairobi. The mall has been cited as one of the driving forces behind rapidly rising real estate prices in the nearby satellite town of Ruaka.

According to local media, Ruaka now has the highest per-hectare prices of any satellite town, with prices up 9.4% year-to-date as of June 2015.

"By shifting focus from capital cities to smaller areas, investors get more for their money due to lower costs of land, resources and building materials,” Karua told media in late 2015. “Developers have more space for construction. This makes these second-tier cities a very attractive option for real estate professionals."

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