Online commerce drives down returns for retail investors
Retail real estate investors have marked a further contraction in yields this year owing largely to the accelerated growth of e-commerce under the COVID-19 pandemic.
According to the just-published 2020 Retail Sector Report by Cytonn Investments, average rental yields have declined by 0.3 per cent to 6.7 per cent from a higher seven per cent in 2019.
Meanwhile, the average occupancy rates for retail spaces have fallen by 0.7 per cent to 76.6 per cent from 77.3 per cent last year.
Across five years, rental yields and occupancy rates have declined from 8.7 per cent and 82.9 per cent respectively revealing the thinning margins to investors.
“The decline in performance is attributed to a 2.1 per cent drop in rental rates, shifting towards e-commerce which has resulted to reduced demand for physical retail space and constrained spending power among consumers due to a tough financial environment attributable to the COVID-19 pandemic,” the report states in part.
The average asking rent has subsequently declined from Ksh118 per square feet (Sq. Ft) to Ksh.115.10 in 2019, and from a high Ksh.154.90 per Sq. Ft in 2016.
Other factors attributed to the dip in returns include constrained access to credit by businesses and the existence of an oversupply for retail spaces currently estimated at 3.1 million Sq. Ft.
Additionally, the pullout of major supermarket chains such as Choppies and Shoprite from malls has deemed the outlook for retail investors
“The oversupply of retail spaces has piled pressure on landlords to provide concessions and other incentives to attract new clientele or retain existing tenants,” the report added.
Nevertheless, some individual market nodes have continued to deliver a return above the depressed industry average boosted in large part by resilient occupancy rates and greater demand.
For instance, Westlands, Karen and Kilimani delivered the greatest returns to retail investors with yields topping 9.8, 9.3 and 8.6 per cent respectively.
Meanwhile, the Mount Kenya region delivered the highest returns in the region at 7.7 per cent ahead of Nairobi and Mombasa. Eldoret and Nakuru had the least returns for investors at 5.9 per cent each.
Nairobi and Kisumu represented oversupplied market nodes while the Mount Kenya region had an undersupply signaling retail developers are likely to switch to the node for future projects.
In spite of the shocks occasioned by the COVID-19 pandemic, the sector is expected to find footing from positive developments including the sustained rate of urbanisation, the low penetration of formal retail currently estimated at 30 per cent, and the entry and expansion of international retailers such as Carrefour and Turkey-based LC Waikiki.