Commercial property developers are beating those in the prime residential segment in rental cash returns, helped by rising demand for warehousing facilities and retail space.
An analysis by real estate firm Knight Frank of rental returns across different market segments shows that retail and industrial developers enjoyed yields of 9.5 percent in the first half of this year, compared to 5.5 percent for those in the residential space.
Prime office developers meanwhile enjoyed an average yield of 8.5 percent, signalling that the segment is on a recovery after a period of stagnation caused by oversupply and reduced demand caused by Covid-19-induced work-from-home arrangements among corporate bodies.
Oversupply or low demand in a market segment tends to keep rents flat, with yields also likely to fall if the value of a property goes up at a faster rate than the increase in rent. Rental yields are calculated by comparing the annual rent as a percentage of the buying or market value of a property.
In the industrial property segment, there has been an increase in demand for grade A warehousing space in the country, driven by manufacturing and logistics firms that have entered the local market under special economic zone (SEZ) and export processing zone (EPZ) licences.
The growth of e-commerce, agribusiness and fast moving consumer goods (FMCG) firms has also spurred demand for prime warehousing space.
This demand has fed into mixed use commercial developments that have come up along Nairobi’s key transport arteries, such as Tatu City in Ruiru, Nairobi Gate Industrial Park along the Eastern Bypass and Tilisi on the Nairobi-Nakuru Highway in Limuru.
In the retail sector, increased competition for shoppers and evolving consumer preference for convenience have seen supermarkets venture outside of traditional malls and establish outlets near residential areas.
“Supermarkets dominate the formal retail market, with prime monthly rents ranging between $30 (Sh3,887) and $55 (Sh7,127) per square metre. With an average yield of 9.5 percent, the retail sector stands as one of the top-performing sectors in the market,” said Knight Frank in their 2024/2025 Africa Report that offers an overview of the African real estate market.
“Elsewhere, ‘green-manufacturing’ is rising in prominence as evidenced by the rise in local assembly warehouses for e-bikes and e-motorcycles. Over the past six years, this trend has contributed to heightened demand, which has driven monthly prime warehousing rents up by 20 percent to approximately $6 (Sh777) per square metre.”
In the residential market, yields have been kept relatively low over the years by slow rental price growth amid surging home prices. Knight Frank said in its report that rents are starting to go up, however, helped by new demand and falling supply — due to developers going slow on new units when the market became oversupplied — in the prime segment for both apartments and standalone houses. In the past 12 months, the firm said, prime three-bedroom apartment rents increased by five percent to stand at between $900 (Sh111,222) and $1,400 (Sh173,012) per month.
“Similarly, four- and five-bedroom houses have experienced rental rate rises of six and four percent, respectively, over the same period and command rents of between $2,000 (Sh247,160) and $4,000 (Sh494,320) per month, depending on the location, property amenities, features, and the perceived exclusivity of the neighbourhood,” said Knight Frank.
In comparison to the other 20 African markets covered in the Knight Frank report, Kenya’s commercial property market returns are more competitive than the residential segment. In the office space segment, the top markets in Africa in rental yields are Cameroon, Malawi (Lilongwe), Egypt, Mozambique and Zambia at 10 percent —compared to Kenya’s 8.5 percent. The continental average in this segment is 9.0 percent.
For the retail sector, where the average yield is 9.7 percent, the top markets are Uganda and Zimbabwe at 13 percent, followed by Zambia and Egypt at 12.5 percent.
In the industrial segment, where the average yield is 9.8 percent (Kenya’s is 9.5 percent) the top 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.
Kenya’s average yield of 5.5 percent in the prime residential segment is less than half of the 12 percent on the Malawi market, and well below the 9.5 percent on offer in South Africa, Egypt and Zambia.
The average yield in the 14 markets covered under the residential sector stood at eight percent.
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