Office rents in Nairobi are expected to be static in the short to medium term, according to a market report, amid the challenging economic conditions and subdued supply.

This despite the prime real estate properties in Kenya remaining resilient to market shocks, despite harsh economic times that have led to currency depreciation and a decrease in GDP growth rate.

According to real estate consultancy firm–Knight Frank, exclusive high-end office, retail, and residential developments continue enjoying prime rents, and above market occupancy rates.

Occupancy levels in Nairobi nevertheless fell by 3.9 per cent in H1, 2023 to 71.5 per cent.

The mismatch between demand and supply has made investors holding out on above market rents to ultimately give in and accept at least what the market is willing to pay for.

Similar to the previous periods, half one 2023 prime office rents remained static at $1.2 (about Sh179 at current exchange rates) per square foot, per month.

“In the short run, the $1.2 is expected to stagnate because of the challenging economic conditions and the subdued supply in 2023,” Knight Frank said in its half year 2023 Kenya Market Update.

Latest Kenya National Bureau of Statistics data indicates the construction sector, a foundation of the real estate industry, recorded a decelerated growth of 3.1 per cent in the first quarter of 2023 financial year (July-September).

This is compared to 6.0 per cent growth realised in the first quarter of 2022.

The decelerated growth was reflected in the volume of cement consumption, which declined by 7.7 per cent during the period. 

The growth, albeit slower than the corresponding quarter of 2022 was evident in the volume of imports of various construction materials such as bitumen and iron and steel in the first quarter of 2023, compared to the same quarter in 2022.

Credit advanced to the construction sector increased from Sh397.8 billion last year to Sh414.6 billion in the same quarter of 2023.

Overall economic growth slowed to 5.3 per cent compared to 6.2 per cent growth in the corresponding quarter of 2022.

The tough economic times have seen a significant rise in loan defaults amid high interest rates, with the realm estate sector among those affected.

Central Bank of Kenya latest data indicates the ratio of gross non-performing loans (NPLs) to gross loans stood at 15.0 per cent in August 2023, compared to 14.2 per cent in August 2022.

“Increases in NPLs were noted in the manufacturing, mining and quarrying, real estate, and building,” governor Kamau Thugge said in his Monetary Policy Committee statement, on October 3.

Kenyan borrowers have now defaulted on more than Sh596 billion in loans.

According to Knight Frank, the increasing cost of capital amidst struggle by developers to service their loans has made financial institutions "very conservative" in supporting large real estate developments, hence the subdued real estate activities.

Meanwhile, the preference from landlords for dollar denominated rentals has proven beneficial for tenants whose earnings are in dollars, while posing a drawback for those whose income is in shillings.

“This preference is due to the continuous devaluation of the Kenyan shilling against the US dollar, leading to forex losses. This need is also to align revenue and cost currencies as most commercial debt is dollar denominated,” Knight Frank noted.

While rents have remained static, the report depicts a stable market of the prime rents as a result of protracted historic oversupply as the office market largely remains a tenant market.

The fall in occupancy level in H1 is attributed to the introduction of more than 600,000 sq. ft. of grade A office space in 2022, combined with non-renewals of some leases.

“It has been observed that some companies are shelving their plans to take additional spaces in favour of remote working and co-working, a way to cut their recurrent expenses,” Senior Researcher Charles Macharia noted.

The fall in occupancies is in tandem with an 18.72% drop in absorption rates in H1, 2023, from H2, 2022.

The pipeline supply for 2023 remains subdued compared to previous years, as very few office developments are expected to be completed – over the review period, the report notes.

“This may largely be due to the historic oversupply the office sector is experiencing, making investors wary of heavily putting their money into this real estate class,” Knight Frank noted.