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Supermarkets, warehouses beat homes in rental returns

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Commercial property developers are outperforming their counterparts in the primary residential sector in terms of cash rental returns, helped by growing demand for storage facilities and retail space.

An analysis by property firm Knight Frank of rental yields across different market sectors showed that retail and industrial developers enjoyed returns of 9.5% in the first half of this year, compared with 5.5% for those in the residential sector.

Meanwhile, prime office developers enjoyed an average yield of 8.5 per cent, indicating that the sector is in recovery mode after a period of stagnation caused by oversupply and lower demand due to Covid-19-induced work-from-home arrangements among corporate bodies.

Oversupply or low demand in a particular market sector will cause rents to remain flat, and yields are also likely to decline if the property value rises at a faster rate than the rent increases. Rental yields are calculated by comparing the annual rent as a percentage of the purchase or market value of the property.

In the industrial property sector, there has been an increase in demand for premium warehousing space in the country, driven by manufacturing and logistics companies entering the local market under Special Economic Zone and Export Processing Zone licenses.

The growth of e-commerce, agribusiness and fast-moving consumer goods companies has also driven demand for prime warehouse space.

This demand has fuelled mixed-use commercial developments that have sprung up along Nairobi’s main transport arteries, such as Tatu City in Ruiru, Nairobi Gate Industrial Park along Eastern Road, and Telesi on the Nairobi-Nakuru Expressway in Limuru.

In the retail sector, increasing competition for shoppers and evolving consumer preferences for convenience have prompted department stores to venture outside traditional shopping malls and set up outlets near residential areas.

“Supermarkets dominate the formal retail market, with prime monthly rents ranging from $30 (Sh3,887) to $55 (Sh7,127) per square metre. With an average yield of 9.5 per cent, the retail sector stands as one of the best performing sectors in the market,” Knight Frank said in its Africa 2024/25 report, which provides an overview of the African property market.

“Elsewhere, ‘green manufacturing’ is gaining importance as evidenced by the rise in local assembly warehouses for electric bikes and electric motorcycles. Over the past six years, this trend has contributed to increased demand, pushing monthly rents for prime warehouses up by 20 per cent to nearly $6 (Sh777) per square metre.”

In the housing market, yields have remained relatively low over the years due to slowing rental growth amid rising house prices. Rents have started to rise, however, helped by new demand and reduced supply – as developers slowed down on new units when the market became oversupplied – in the prime sector of both apartments and townhouses, Knight Frank said in its report. The company said that in the past 12 months, rents for prime three-bedroom apartments have increased by five per cent to between $900 (Sh111,222) and $1,400 (Sh173,012) per month.

“Similarly, four- and five-bedroom homes saw rental price increases of six and four per cent respectively, over the same period, with rentals ranging between $2,000 (Sh247,160) and $4,000 (Sh494,320) per month, depending on the location, amenities of the property, features and perceived exclusivity of the neighbourhood,” according to Knight Frank.

Compared to the other 20 African markets covered by Knight Frank’s report, Kenya’s commercial property market yields are more competitive than the residential sector. In the office sector, Cameroon, Malawi (Lilongwe), Egypt, Mozambique and Zambia are the top markets in Africa in terms of rental yields at 10% – compared to 8.5% in Kenya. The continental average in this sector is 9.0%.

As for the retail sector, where the average return is 9.7%, the top markets are Uganda and Zimbabwe at 13%, followed by Zambia and Egypt at 12.5%.

In the industrial sector, where the average return is 9.8 percent (Kenya 9.5 percent), the best performing markets are Senegal, Cameroon (Yaoundé) and Ethiopia at 13 percent, followed by Mozambique at 12 percent and Côte d’Ivoire at 11.5 percent.

The average yield in Kenya of 5.5% in the primary residential sector is less than half the 12% yield in the Malawi market, and well below the 9.5% on offer in South Africa, Egypt and Zambia.

The average return across the 14 markets covered by the residential sector was eight percent.

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