Even though Nairobi currently has an oversupply of retail space, Kenya’s strong growth potential is expected to generate demand in the city’s real estate sector, according to James Maclean, Director of Real Estate, Fusion Capital.

“Factors, such as development of oil and gas sectors, can contribute to the upward trend in Kenyan real estate by supporting infrastructure development and urbanization in the country, he said.

“However, the oversupply of retail spaces is expected to exist in the near future, which along with increasing costs, long investment tenors and slow rate of retail stock utilization tempers investors’ expectations of high returns in the short term,” he added.

Kenya’s economic growth and infrastructure development have increased over the past decade. 

Increased urbanization coupled with increasing incomes have led to a 65% rise in consumer spending.

These factors have pushed the retail real estate sector to grow five times in the last decade.

According to BMI research, Kenya’s real estate sector is expected to have a growth rate of 8.7% by the end of 2017. 

Growth in the sector is anticipated to be steady till 2026, recording an annual growth of 6.2%.

Nairobi is the second largest market after South Africa with approximately six million square feet of formal retail space, up 41% from the 3.9 million square feet registered in 2016. 

It is further expected to grow to 6.9 million square feet by 2020. 

Between 2000 and 2008, Nairobi added 72,000 square meters of retail real estate, while between 2009 and 2017, the capital city added 351,900 square meters (approximately five times of earlier addition) of retail real estate across 17 developments to East Africa’s largest commercial hub. 

Maclean said the country’s retail and real estate sector leveraged this opportunity. 

“Presence of global banks and a robust financial services sector also contributed to the growth of retail real estate in the country,” he said.

Reportedly, vacancy rates in Nairobi have only reduced below 10% after two – three years of operation and as a result many of Nairobi’s newer developments have taken more time than expected to mature. 

Nairobi’s retail market has evolved with new entrants, who have rapidly adapted to changed consumer behaviour. 

“Recently built malls reflect the evolution of retail real estate market by offering experiences for the whole family as well as allocating the space to retail as well as entertainment and leisure activities etc.,” Maclean said.

He further said that Kenya’s vibrant retail market, which has a current penetration rate of just 30%, has lured foreign retail chains such as Carrefour, Choppies, Shoprite etc., in turn witnessing a rise in investment as well as competition in the last 18 months. 

“The performance of these retailers in the coming years and the progress of the retail market will drive growth in the retail real estate space. Further, satellite towns in the country-side provide room for expansion and development of retail shops and malls, as an attractive investment option,” he said.

Kenyan real estate and construction sector has collectively received Sh54bn in the last two years from three top Chinese companies – AVIC International, China Wu Yi Co. Ltd., Twyford Ceramic.

Despite the recent political disruption slowing down activities in the construction sector of Kenya, investors have been showing increased interest in the construction industry in the Kisumu region. The city has witnessed infrastructural developments in hospitality segment, real estate segment and even retail segment.

The newly elected Kenyan government has promised to create 500,000 new low cost homes by the end of its second term. The development will be supported by various administrative and policy reforms that will reduce the construction costs and improve accessibility to mortgages.

“Summarizing, the growth prospects of Kenya, developing infrastructure and oil and gas sectors, strong financial services sector, flourishing real estate sector, proliferating interest of global retailers and increasing digitalization and evolution of Kenyan consumers augur stellar well for the long term growth of Kenyan retail real estate sector,” said Maclean.