Low rents attracting investors to Nairobi

BY VICTOR ADAR

It is easy to forget to make informed choices by doing thorough research. For years, leasing terms and rent have remained the big test especially for new real estate industry entrants. But that is currently not the case. The scenario has changed pretty much, and a lot of good things are happening. 

According to the “Africa Commercial Occupier Guide” published in the Knight Frank Africa Report 2015, commercial tenants – for offices, retail and industrial properties – usually secure typical leases of six years, for which rents are payable quarterly in advance. 

Longer lease terms are firmly anchored in law. These terms also foster corporate identity for tenant companies and boosts business continuity, which in a way reduces operational risks. The area of occupancy is currently developing well that players only need to know where hot money is. This presents money making opportunities in thriving tenancy economy. 

A majority of African countries are still struggling with the elephant in the room trying to overcome rental obstacles. The commercial lease period in Kenya is relatively longer than in most other African markets, where leases typically last for a year to a maximum of five years. For instance, lease terms are typically three to five years in South Africa, two to five years in Nigeria and Uganda, while Tanzania has one to three years. The longer the lease period the better for individuals and players as bottom-line is big opportunity for income growth. 

“Every real estate market operates differently in practise. However, lease terms and actual rents are key for multinationals considering moving into a given country,” said Ben Woodhams, managing director Knight Frank Kenya.

“Nairobi’s position as a regional hub ensures a steady demand for office space and the favourable terms available from landlords, combined with relatively low rents, ensure a good balance between demand and supply,” he added.

In Kenya, while the law allows for commercial leases of a minimum five years, the typical six-year lease agreements are beneficial to both landlords and tenants as they allow for predictability and therefore planning.

Landlords can plan on servicing their development financing, while tenants can plan on investments with longer horizons, including recouping their fit-out costs that are usually a huge expense for new occupiers.

The Africa Report 2015 established that break clauses are uncommon in typical commercial leases in the country, thereby guaranteeing the security of tenure for tenants, while also ensuring landlords lock in rental returns in the short- to medium-term. The report also provides a comparison of lease rates in 32 African countries placing Kenya at position 16. At the same time, Lagos and Abuja in Nigeria, Malabo in Equatorial Guinea, and Libreville in Gabon complete the top five list of most expensive locations in the continent for commercial occupiers. The commercial occupier guide also finds that tenants have the option of paying rents in Kenya shillings or US dollars.

It is time for occupiers (both local and international ones) to consider leasing especially at these times when absence of sub-let clauses in typical commercial lease agreements which more often than not ensure that the landlord or property manager deals directly with the actual occupiers. This is particularly crucial in recent times in light of the country’s security situation where property owners and tenants are finding it increasingly important to know all occupiers. 

“Having all these terms spelt out legally, and being widely accepted in practice, has helped boost transparency in the property market. This works for both landlords and tenants, and the engagements are clear even in the event of unforeseen market disruptions,” said Ben Woodhams

In 2014, office rents in Nairobi averaged $21 (Sh2, 016) per square metre a month, while retail and industrial space rents averaged $48 (4, 608) and $4.20 (Sh403) per square metre per month respectively. Lower rents has the potential to attract occupiers, and it has started bearing fruit now with multinationals taking advantage of the competitiveness in the rental market. 

It has seen tenancy get a boost as leasing shall ensure, for the period both parties have signed for in black and white, that things go according to plan. The “engagements” are actually clear and it will be beneficial since the parties involved can know what to expect. If the occupancy period is for five years, that’s what it is, and there are terms and conditions should there be need to change what is on the contract. 

It is seemingly the relative low rents in dollar terms and longer lease periods which have raised Nairobi’s profile among multinationals setting up regional bases, further cementing the city’s position as a logistical hub. 

These rents are relatively low when compared in dollar terms with some cities such as Luanda in Angola, which is the most expensive location in Africa for commercial and residential rents, averaging US$150 (Sh14, 400) per square metre per month for office space, US$120 (Sh11, 520) per square metre a month for retail and US$21(Sh2, 016) per square metre monthly for industrial property. Rental space is typically measured per square feet/metre per month.

 

 

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