Here’s a detailed study of this year’s property market
The office space sector has continuously made strong comebacks after taking a hit in 2020.
As we settle down for an interview with Stephen Omengo, the Director, Tysons Limited, he mentions that the company is celebrating 100 years in the real estate industry. Established in 1923, Tysons and affiliates have witnessed the full evolution of Kenya’s property market. In their boardroom, a peculiar black and white image occupies a corner quietly. It is an old photograph of Moi Avenue in the 1920s. The street is barely recognisable. The transformation today is almost unbelievable.
Omengo is also a registered valuer and estate agent and has been in the industry since the mid-90s, and therefore understands the industry’s dynamics. As the New Year begins to unfold, stakeholders in the property market are wondering what’s in store. DN2 Property curated insights from the most established players in different sectors of the market. They tell us how the market changed in 2023, market demands plus nuggets of wisdom on how to navigate the property market in 2024.
Not such a bad year…
“2023 was not a difficult year as such, but there was a lot of uncertainty on the buyer’s end. Initially we were ready for a takeoff. The election was behind us and everyone was optimistic. The economic challenges caused by Covid-19 seemed to have passed, and politically, we were in a good place. But we experienced a lot of surprising challenges, like the depreciating shilling value and new taxes,” begins Omengo.
Stephen Omengo is the Director at Tysons Limited and a registered Valuer and Estate Agent.
When it comes to commercial real estate, some sectors did better than others. Hospitality, which was deeply affected by Covid-19 has continued to struggle. This was symbolised by the closure of several major hotel chains and hospitality businesses. “The demand for certain facilities such as conferencing has gone down significantly. Serviced apartments, which primarily target expats and investors, were doing very well previously but are now registering very low occupancy rates,” adds Omengo.
However, with travel improving and Kenya hosting several major events such as the Africa Climate Summit and the Youth Connect Africa Summit which attracted thousands, there was a bit of life and vibrancy in the chains that have been resilient.
The office space sector has continuously made strong comebacks after taking a hit in 2020. Despite the oversupply, there is still a lot of activity within office blocks. “The records show that previously we had about 600,000 square feet in office supply. In 2023, there was an additional 300,000 square feet in supply. Though the oversupply has been perceived as a negative aspect, it is good for tenants. When there is oversupply, the rents are flexible and the prices fix themselves naturally,” Omengo explains.
In previous years, the retail sector struggled as large malls sprouted everywhere. It seems, in 2023, investors scaled down to mitigate the risks that existed. The overreliance on anchor tenants made retail risky. When an anchor tenant, normally a large supermarket chain, goes out of business, the mall loses its attraction. To mitigate this risk, Omengo says players in retail are investing in smaller shopping centres within neighbourhoods. “They have fewer spaces to fill and the risk is way less. They are also partnering with the anchor tenants before building. By the time they break ground, they know who will take up the space. These shopping complexes are smaller and the designs are simpler and less costly. By minimising the cost of construction, investors are maximising their profitability, while reducing the risk.”
A unique tenant with unique demands
On whether commercial tenants presented any interesting demands or patterns, Omengo explains that businesses are taking up less square footage out of caution. But we also have a few entities demanding large office space. “Government agencies take up more square footage. In the recent past we have seen more government agencies taking up space in commercial real estate perhaps to accommodate growing operations. This unique tenant also comes with unique demands. They go for highly accessible locations. Paraplegic toilets and disability friendly features are very important since the government serves the entire population.”
Other additions to the list of demands by commercial tenants include kitchens within the office and lactation rooms. With conversations on climate change and sustainable building escalating, the demand for green buildings by multinationals has also increased.
“Green buildings are good for everyone and the universe, but they are not cheap to build. They end up being costlier to let than others”
While green buildings are great, Omengo cautions investors from investing in projects that only target multinationals, noting that the market has such projects tailored for these coveted tenants but they are empty because the target clients are yet to arrive. “I would advise investors to go for hybrid buildings that are attractive and affordable to diverse tenants.”
Investing in commercial real estate, in 2024?
“If you are an investor, you need to align your project with market demands. Identify potential tenants and initiate conversations with them before breaking ground to eliminate risks. Talk to professionals as well to help you analyse the market. You can work with an estate agent who understands the specific market dynamics and especially if they are valuers too,” says Omengo.
If you’ve already invested in this sector, and are struggling to attract tenants, Omengo has some advice for you too. “Start by renovating. Old buildings are not bad buildings. If the building has small windows, break them up and make larger ones. Reconfigure the building to suit the target tenants. Also, look into issues such as management and lease agreements and whether they align with market trends. If you have tenants, avoid losing them. Moving offices is very expensive for commercial tenants and once they leave, they will not be back.”
Still in the woods
Finally, whether 2024 will be easier for industry professionals, Omengo is of the opinion that there are two issues we need to pay attention to. The lending rates and dollar exchange rate. Both are still relatively high and that means we are not in the clear yet. “Anyone going into construction now should know that credit is still expensive and imports will still be costly. Developers need to be creative in managing costs. Choose materials wisely and go for designs that are not too expensive.”
The residential sector
Economically, 2023 was a tough year marked by high inflation, however, Peter Karoki, the Managing Director, Lifestyle Estates, a real estate development company with over 12 years in business, says it was business as usual for the company. Karoki attributes this to the company’s relationship with its buyers. One of their projects, with over 500 units which were constructed in phases spilling over to 2024 is already sold out. Several factors played out in the company’s success. First, the pricing strategy which the director says is based on the cost of construction rather than what others in the market are charging. In a year where we saw developers discount prices to attract buyers, Lifestyle Estates did not have to do that. Further, the company also attributes the smooth sailing operations to their good relationship with their financiers.
“We have good support from our financier which enables us to access funds for construction and deliver on time, regardless of the eventualities,” says Karoki.
Whether the rising cost of construction affected the company, Karoki says, “It was definitely a challenge, but the increment in cost is just a percentage, not something to take a serious developer out of business. At one point, we had to adjust the payments we make to contractors to compensate for the rising cost of cement, steel and labour, but we took it in our stride.”
A word for new developers
If planning to launch a new project in 2024 as a new developer, Karoki advises this: “The perception is that there is a lot of money in real estate. Like any other business, there are profits but you have to do your homework. Identify your target market first. The biggest assignment is structuring cost. Some people make the mistake of identifying land, paying for a small percentage, and they start planning for the development before paying for the land fully. You have to figure everything out before developing.”
Factor in the cost of time too. If construction and selling take too long, there is an added cost. If you take a bank loan, the longer you take to pay the more interest you attract. In addition to understanding cost and business dynamics, Karoki identifies three crucial relationships to maintain. “You need strong relationships with your professional consultants -architects, engineers, electrical engineers and clerks of works among others. Create rapport with the bank because your money might never be enough for projects. The third party is your contractor. These three parties are crucial in the success of a project.”
On the issue of affordable housing, Karoki’s observations are that the biggest challenge for developers is the cost of land. Locations with cheap land are not accessible and are far from industrial and commercial zones where people can find work. Utilities such as sewer, water and electricity are also not available. Constructing sewer treatment plants escalates the cost of construction, and even when the units are cheap, there is a possibility of high service charge. “If the government can create cities within the locations where land is affordable and bring in industries, schools and other amenities, it will be easier for residential developers to venture into affordable housing.”
New trends in residentials
Finally, sellers and buyers need to familiarise themselves with emerging market trends. Rawlings Omwansa, the Head of Sales and Marketing at Lifestyle Estates, shares some interesting observations on shifts in the market. “The mindset of our buyers is slowly changing. People are paying more attention to the exterior spaces. They still want nicely designed interiors but that extra pergola, basketball court, swimming pool or children’s play area makes all the difference. In the past, these were unique additions, but now, the consumer expects more effort on the exteriors.”
There is also a shift in the type of units that are in demand. For a while now, small apartment units have been very popular for their investment advantages, but Omwansa notes that family sized units are coming back to the front seat. There is, however, a catch that makes these family sized units more attractive. “When we added additional amenities like a swimming pool, basketball and football courts, clubhouse, a restaurant and a bigger gym, buyers developed more interest.”
A regular apartment unit without these kinds of amenities is limiting since families end up spending a lot on weekends as they look for fun elsewhere.
Unexpected buyer profile
The buyer's demographics have also changed significantly. “There is a different profile I never thought would be attracted to apartments - the elderly who have retired. We have elderly buyers in their eighties looking for these kinds of units that were previously attracting middle aged buyers. Most of these buyers want security, interaction with nature and proximity to hospitals and relatives, who can visit anytime. Some of them have sold their properties to invest in an apartment to live in and one to rent, so that they have cash flow,” explains Omwansa.
On the other end of the spectrum, the age of young buyers is also reducing. People as young as 21 or 22 are also managing to buy. “We have a lot of young buyers making crazy amounts of money online. They are looking for nice quiet places where they can work from home.”
A maturing market
If planning to buy property in 2024, Omwansa has two things to say: first, developers are putting their act together and the industry is cleaner. Sellers are completing projects and rogue ones have been pushed out of the market. Do not be scared to buy property. Even then, he also cautions against gullibility.
“Kenyans can be too gullible sometimes. When you see a three-bedroom going for Sh2.5 million at a very prime location, don’t just commit your money. Go to the site and talk to people. Look at the market value within that area and talk to friends who are engineers and consultants to understand the cost of building.” Pricing is often based on cost of building, in addition to other costs such as approvals, consultancy fees, cost of land, labour, marketing costs and cost of credit.
