A report released by Cytonn Investment has ranked Mombasa and Mt. Kenya as the best regions for retail real estate development because of high retail space demand.

The report showed the two regions have high retail space demand of 0.3 million square feet in Mombasa and 0.2 million in Mt. Kenya, attractive yields at 8.3 % and 9.9% and occupancy rates at 96.3% and 84.5% respectively.

Speaking on Monday during the release of the report, Cytonn Real Estate’s Research Analyst Juster Kendi said the sector remained cautiously positive and they expected to witness reduced development activity in Nairobi, with developers shifting to markets such as Mombasa and Mt. Kenya regions that have low retail space supply, attractive yields and high occupancy rates.

“The report focused on the performance of the real estate retail sector in Kenya in 2018, based on rental yields, occupancy rates, demand and supply, which was compared to 2017’s performance to gauge the trends,” said Kendi.

According to the report, there has been an increase in the supply of retail space, especially in Nairobi, where retail space supply increased by 4.8% from 6.2 million square feet in 2017 to 6.5 million square feet in 2018, based on malls in the pipeline.

The report also highlighted that Satellite Towns were the worst performing sub market with average yields of 6.6%, attributed to the low rent of Ksh124.50 per square feet, 30% lower than the market average of Ksh178.90 per square feet.

It further noted that the key drivers for the retail sector in Kenya are mainly high population growth rate and urbanization rate at 2.6% and 4.3% per annum, respectively, increased foreign investment in the country, increased infrastructural development opening up new areas for development, and E-Commerce diversifying retailers’ product offering and customers’ experience.

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Cytonn Real Estate’s Senior Research Analyst Nancy Murule underscored that the retail sector’s performance improved, recording average rental yields of 8.6%, 0.3% points higher than the 8.3% recorded in 2017.  Occupancy rates also increased by 5.8% points year over year from 80.2% in 2017 to 86% in 2018, she said.

“We attribute the improvement in performance to the recovery of the market from the tough economic environment in 2017, characterized by prolonged electioneering and reduced private sector credit growth, prudent methods employed by developers to attract clientele and enhanced footfall,” said Murule.

She added that entry and expansion of international retailers, supported by a widening middle class and provision of high-quality spaces in line with international standards and increasing purchasing power, with Gross Domestic Product (GDP) per capita growing at a rate of 7.9% per annum over the last 5 years also contributed to the improvement.

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The report was based on research conducted on 8 retail nodes in Nairobi, Satellite Towns and the key urban town of Eldoret, Mombasa, Kisumu and the Mt. Kenya Region, which included Nyeri, Meru and Nanyuki Towns.