A look at the Reality of Office Space Post Covid-19 in Kenya, and How Real Estate Investors can Sustain Cash Flow, for Investment Risks Management for Kenya Real Estate Investors.
According to recent surveys, remote working in the corporate world proved to be surprisingly effective for many employees in the midst of covid-19 pandemic; as a result, few office occupants were projected to go back to their offices post-Covid-19 as many of those surveyed preferred working remotely. Furthermore, reports indicate that nearly three out of four will be somewhat or very concerned about the spread of the virus in their workplace post-Covid-19, and therefore, Office space leasing is likely to slow due to tenants reprogramming their space needs. Besides, surveys predict that at least 30 percent of employees will continue to work from home several days a week post- Covid-19.
Consequently, there will be shifts in commercial real estate that will last much longer and could subsequently reconfigure the entire notion of offices as most companies will rethink about permanent changes in how they operate and the amount of space they need for offices. Nevertheless, Real Estate Investors should take note of the following measures in order to sustain their cash flows and occupancy post Covid-19.
Provide Co-Working Spaces at relatively affordable prices
Investors should put measures to provide options for co-working space, which provides flexible payment and lease options, thereby managing the efficiency of both the investor’s and the office occupant’s cash flow. As such, options to rent or to sign membership from one day up to one month should be provided coupled with safety and office benefits like custom partitions with clear plexiglass, using high-speed internet connectivity, meeting rooms, and access to a printer. Besides, the measure will attract more SMEs and Startups, which cannot afford to rent an office space or are on the verge of closing up given that the arrangement does not require signing of long term leases accompanied by huge deposit amounts.
Multi-Tenancy Leases – (Time Schedule Arrangement)
Additionally, investors should make arrangements for Multi-Tenancy leases, which offers the benefit for shorter leases with multiple tenants paying rent. Moreover, the arrangement could include Time Schedules, where one tenant could be using the office space for a specified time period during the week or during the day, before the other occupant comes in; as such, firms could make arrangements to have rotating shifts or to have a standard business day which requires the firm to be in the office during the standard business hours, for instance as from 8 am to 12 pm. Besides, the arrangement alleviates the risk of only one tenant paying rent and the possibility of the premise being 100 percent vacant. Moreover, if there happens to be a vacancy at one point, the luxury of other tenants paying rent will sustain the Investor’s cash flow.
Provide more office space, at relatively the same cost.
Meanwhile, the need for social distancing will see buildings reduce the number of occupants significantly as offices find ways to operate with more distancing. Additionally, the minimum100 sqft per person guideline countries that have opened up their economies may become a reality in the Kenya office space, and the need for decongestion in the office building will arise. As such, real estate investors should be ready to provide more office space at relatively the same cost, to cater to this need for them to sustain tenants.
Provide additional space for free movement around the building
Moreover, to reduce friction and contact, and to cater for the need for social distancing, it will require offices space investors to adjust or rethink of the design of office space that provides safety, convivial, and comfort to their occupants. As well, Investors should rethink of how the workplace design would begin to place more emphasis on choreographing the movement of workers. As a result, they should put up wider corridors and doorways, as well as increasing partitions between departments.
Smart technology
Besides and in order to raise confidence and safety among office occupants, Real Estate Investors should utilize smart technology that streamlines interaction between employees and their workplace. As such, measures like automating frequent touchpoints such as doors and elevators and using voice-based interfaces should be put in place. Real Estate Investors can also deploy technology such as the 3XN AI developed by Danish architects, to connect internal building systems such as access control, lift operations, and HVAC to users via mobile phones. As well, they may provide UV cleaning through Facility Managers to clean up the air in the building, thereby disinfecting the office space.
Incorporate safety occupational designs in the building:
To address the spread of the virus, Real Estate Investors should also incorporate designs that will facilitate the disinfection of floor finishes, furniture, curtains, and door handles. Besides, additional rooms in the building should be set aside for first aid or quarantine needs that might arise. As well they should create hand sanitization stations where sinks are fitted.
Furthermore, Investors should choose building materials that can withstand heavy cleaning using caustic products, and as well avoid porous surfaces like natural oiled wood but instead use non-porous surfaces.
Rent and Lease Review
Building owners should provide rental review to the occupants of the office space to cushion them against the disrupted cash flow, as a result boosting occupant’s retention rate and consequently their cash flow in the short-term and eventually in the long term period post Covid-19.
These measures might call for additional operating costs to Real Estate Investors, and the cost of doing business might increase, leading to the creation of sinking funds but meanwhile sustaining office occupancy and hence cash flow.
Buildafrique Consulting Group is a specialist Property Management in Kenya, including Property Sales and Letting Agency, and Property Transaction Advisory, together with conducting Real Estate Feasibility Studies, Real Estate Finance, Quantity Surveying, and Development Project Management and Consultancy.
B.) WEEKLY NEWS HIGHLIGHTS
MAJOR ECONOMIC NEWS HIGHLIGHT.
i.) As the shilling decline, public debt hits Sh6.4 trillion
Kenya’s total public debt hit Sh6.4 trillion by May, attributed to a rise in local borrowing and an external push by depreciation of the Kenyan shilling. According to the CBK’s most recently updated figures on domestic debt, public debt stood at Sh3.144 trillion as of May 15, while external debt reached Sh3.284 trillion ($30.69 billion) after depreciation of the local currency, making a total of Sh6.428 trillion. When the shilling exchanged at 101 to the dollar in early March, the external debt stood at a value of Sh3.1 trillion
ii.) Loan guarantee schemes for SMEs backed by global lenders
The World Bank, International Finance Corporation, European development Bank and the African Development Bank backs plan to craft a credit guarantee scheme by the CBK. The four financiers reached out to by the CBK, are expected to provide technical expertise and also contribute funds on top of the 3 billion seed capital that the National Treasury set aside to cushion banks that lend directly to SMEs.
iii.) CBK says three-quarter of MSMEs likely to face Closure
According to the CBK Governor Patrick Njoroge, 75 percent of Kenya’s Micro, Small and Medium Enterprises (MSMEs) across all sectors of the economy, including construction industry, are likely to face Closure by the end of June. In a virtual press briefing on Thursday, May 21, while giving an update on the status of the economy, the Governor called for measures to facilitate the survival of Kenya’s MSMEs as most of them face the risk of collapsing by the end of June.
iv.) KNCCI backs plan to reopen the economy
Kenya National Chamber of Commerce backed measures to reopen the economy by the President, saying that the move will ease member’s cash flow problems. Besides, KNCCI implored upon President Kenyatta to reopen the economy gradually, saying that the purpose of reopening is to get people back to work and allow them earn their livelihoods with dignity.
CONSTRUCTION NEWS HIGHLIGHTS
i.) Building and Construction industry key beneficiary of loan restructuring by commercial banks
A report on the status and outlook of Kenya’s banking sector released by the CBK indicated that 311 loans associated with Building and Construction were restructured, and as such, terms of maturity and interest rates were renegotiated. In addition, 1,592 loans in the construction industry received a moratorium on the principal bringing the total amount of loans restructured to 9.1 billion.
ii.) Contractors allege New building defect rules bad for business
Contractors say that the newly introduced regulations holding them responsible for defects in completed projects should be scrapped for lack of public participation. Moreover, the chairman of the Institute of Construction Project Managers in Kenya, Tom Oketch, said that the newly gazetted National Construction Authority (Defects Liability) Regulations 2020 undermined the role of architects as supervisors during the implementation of projects and was terrible for business and therefore it should be scrapped.
iii.) Construction of Jomo Kenyatta Sports Ground in Kisumu begins
The cabinet secretary for Sports, Amina Mohamed, on her courtesy call to Kisumu Governor Anyang Nyong’ o, on May 21, revealed that the construction of Kisumu’s Jomo Kenyatta Sports ground had commenced and that experts from the ministry of works were already at the site working.
iv.) Private developer plans Sh20bn estate.
A private developer, Uaso Nyarobe Waterfront Ltd, plans to create an urban village with 600 affordable housing units and 2, 500 kiosks, prime offices, a hotel, shops, apartments, amphitheater, and a parking area for 3,300 cars. As such, the firm wants the Government to vacate its land, ccupied by the kenya Forest services on April 10, 2020, set between Kijabe streets and Kipande road, to pave the way for the construction of the Sh20 billion mixed-use development on the land.
COMMERCIAL REAL ESTATE HIGHLIGHTS
i.) Fairmont closes hotels indefinitely over COVID-19 uncertainties
Fairmont Hotels and Resorts, which owns Norfolk hotel, said on May 28 that it is closing its hotels indefinitely and, as such, fired all its staff due to the uncertainty of the coronavirus pandemic. On a memo to staff signed by the Country General Manager, Mehdi Morad read that ” Due to the uncertainty of when and how the impact of the global pandemic will result in the business picking up in the near future, we are left with no option but to close down the business indefinitely,”
ii.) Institute of Budget and Devolution wants Sh50 billion revolving fund for housing recovery
Institute of Budget and Devolution said the housing sector received a beating for the past three months from the coronavirus pandemic, and as such, the Government should set aside at least Sh50 billion to rejuvenate it. According to the Institute, the Real Estate sector will find getting back to recovery hard because buyers and sellers have been starved of cash, and returns are dwindling by the day.
iii.) State frustrates civil service home loans plan
According to experts, the proposed regulation that requires beneficiaries of the Civil Servants Housing Scheme to contribute for at least 6 months and save up to 10 percent of the house price to qualify for affordable houses, seeks to lock out most civil servants from accessing home loans from the Housing Scheme; dealing yet another blow to the states affordable house drive. Besides, the Treasury had failed to allocate cash to the State Department for Housing for disbursement of loans under the Civil Servants Housing Scheme for the second year in a row. Meanwhile, the scheme was intended to encourage uptake of mortgage, which could be paid up to five years after the official retirement age of 60.
iv.) There is a growing interest in Health Care Real Estate amid covid-19, says Knight Frank
According to the latest report by Knight Frank, released on May 26, there is a growing interest in health care real estate investment in Kenya and across Africa. The report shows that health care investments are gaining traction among real estate investors due to their defensive and triple net lease and sustainable demand amid covid-19. The report further showed that Kenya lacked a space to add 691,000 beds to meet the existing deficit at the global average hospital bed density rate.
C.) KENYA REAL ESTATE TRENDS
ii.) Top End Property dips amid Covid-19
In the past month, demand for commercial space, offices, and apartment acquisition continued to be on a downward trajectory. According to the KNBS economic survey 2020, Real Estate and other services were expected to be suppressed due to slowdown in economic activities and declining disposable income. As such, demand for office space was projected to have a significant drop in the second half, as companies and individuals adapt to the ‘work from home’ plan brought about by the stay home directive.
Besides, latest reports indicate that high-end properties saw a decline in the first quota of 2020 with prime properties in Nairobi declining to 1.8% compared to the 0.4% drop reported in 2019. Rental fees for high-end properties also declined by a margin of 1.7% as compared to a 0.3% drop in 2019. Moreover, the decline was attributed to the economic slowdown caused by the coronavirus coupled together with an oversupply of residential properties, which is pushing rental and sale prices down. Besides, the downward trajectory will extend to the second half as most investors and homeowners continue to hold back money as people are in a wait and see situation.
iii.) Real estate activities remain critical in the country’s GDP growth
According to the economic survey 2020, the real estate sector grew by 5.3 percent in 2019, with the gross value added for the construction sector estimated to have risen by 6.4 percent in 2019 compared to 6.9 percent in 2018, thereby contributing highly to the country’s GDP. Nonetheless, the sector’s growth was comparatively stable, mainly supported by investments in road construction and development of housing projects under the affordable housing program of the Big Four agenda. Besides, uptake of credit in the construction sector grew by 1.6 percent in 2019 compared to a 1.8 percent growth in 2018.
Furthermore, in order to boost the economy and create jobs amid an economic slowdown caused by covid-19, the President allocated KSh 5 billion to the building and construction sector with the hope that construction companies will use local labor and materials, thereby creating jobs.
D.) GLOBAL REAL ESTATE TRENDS
i.) A slowdown in commercial real estate volume in Europe to slide over to Q2,2020
The first data collected by Real Capital Analytics for April show cracks are starting to emerge in European real estate transaction volumes, as IMF forecasts indicate the coronavirus crisis will result in the worst recession since the Great Depression of the 1930s, with falling GDP, declining trade volumes, low consumer confidence and rising unemployment.
Furthermore, an Analysis by EMEA shows that the count of RCA-registered European investment deals was down 75 percent in March compared with the same month of 2019, with smaller transactions, below the EUR100 million level, hit particularly hard. Besides, the number of busted deals and the time transactions are staying under contract for retail and office properties, are also rising quickly. RCA’s European Capital Trends report shows that prices are falling in the retail sector, and further declines are likely, given the current stress in that market with prominent retailers across the continent entering bankruptcy proceedings
ii.) Uptake of luxury houses by wealthy Chinese surges amid Covid-19
Amid the Economic fallout as a result of the coronavirus, wealthy Chinese real estate investors are finding luxury real estate the right hiding place for their money. As such, across Asia, Investors are snapping top-end housing to guard their wealth against anticipated inflation and a weakening yuan. Consequently, the rush to add real estate has led to a jump in upmarket housing prices in China.
According to Black Diamondz, a real estate company, more Chinese are buying top end properties amid the coronavirus pandemic, with the company selling about USD55 million of prime property with more than half the sales to Chinese buyers, which is equivalent to a 25 % jump from last year’s sale. Besides, according to data from Juwai Iqi, a real estate firm in China, Chinese buyer inquiries for South Korean top-end property increased 180 percent in the first quarter compared with the fourth quarter of 2019, while inquiries on New Zealand top-end properties jumped 75 percent.
E.) COMMON REAL ESTATE & DEVELOPMENT CHALLENGES, AND SOLUTIONS
Coming up with the right Real Estate Product for your Investment, in a particular market.
YOUR CHALLENGE:
During real estate investment, you shall find yourself with the challenge of coming up with the right real estate product for your investment, which includes:
- Coming up with the right property type for the investment, say Residential, Commercial, Hotel, or Industrial Property.
- Coming up with the right product ratio for a certain product type, say number of two (2) bedroom to number of three (3) bedroom ratio.
- Coming up with the right size (Floor Area) of your product, say size of two (2) bedroom or three (3) bedroom units, according to market supply and demand dynamics.
- Coming up with Finishes specifications for your product type, for a particular location and market.
THE SOLUTIONS:
The solution to this challenge is to conduct a Feasibility Study and Market Research at the onset of the project. The Feasibility Study shall inform you on the most viable property type for a certain market, as well as ideal product ratio in situation where you have a mix of various property types in a development, say two (2) and three (3) bedroom units.
The Feasibility study further informs on the sizes (Floor Area) of the various products, say ideal size of rooms, size of units, according to market supply and demand dynamics for that particular location, or target market, in comparison with other products in the market.
Finishes specifications is also informed by the Feasibility study, in relation to projected income or pricing for the investment, target market, competitive landscape with other products in the market, and market demand.
THE CONSULTANT TO ENGAGE:
The Consultant to engage for Feasibility Study and Market Research is a Real Estate Research Analyst.
F.) THIS WEEK ON FREQUENTLY ASKED QUESTIONS (FAQs), AND ANSWERS
QUESTION:
What are the merits and demerits of importing Building Finishes materials, against buying them locally?
ANSWER:
We have seen a trend in recent past where developers imports building materials, especially finishes from other countries especially China, for reasons ranging from cost cutting measures to search of better quality materials. So what are the merits and demerits of this kind of an arrangement.
a) Merits: One of the merits is that developers are able to access a wide variety of finishes to choose from, thereby having an opportunity to explore on their taste and preference. Another merits is the wide range of quality to choose from, due to the huge variety of materials. Cost saving has also been cited by many developer as a merits to importation of building finishes, mainly being as a results of savings in profits and overheads for traders of the same materials, once you import the materials yourself. The cost saving also comes in discounts and economies of scale once you purchase materials in bulk, for large real estate development.
b) Demerits: Demerits for importation of building finishes includes uncertainty of the life cycle of the finishes, especially equipment due to unavailability of servicing parts locally, which means that you would have to import the serving parts, say for Lift Elevators every time there is a breakdown. Another demerit is technical compliance, especially for fittings equipment, whereby you may end up having a fitting that does not comply with counterpart local fitting during installation. Sustainability of sale guarantee also become an issue because of logistical issue related to an equipment imported from another country, when you want to activate a replacement through a sale guarantee.
G.) THIS WEEK ON DEVELOPMENT COSTS ANALYSIS – KAREN AREA, NAIROBI COUNTY
This week’s focus on Development Cost Analysis is for Karen Area in Nairobi County, an upmarket area in the Metropolitan area of Nairobi. The Development type in this area according to the land-use and county zoning regulations includes Maisonettes and Town House, and Shopping and Retail Complex.
Below is an analysis of Construction Cost per Square Meter (SM), for the option of procuring the development project through a Building Contractor, or an option of direct procurement of the Materials and Labour through a Labour Contractor for recommended building types.
H.) THIS WEEK ON REAL ESTATE PRICE ANALYSIS – KAREN – NAIROBI.
The Real Estate price analysis focus for this week is on land, sale, and rental prices for a 4 and 5 bedroom house in Karen- Nairobi County. The data were obtained through surveys, and analysis of asking prices on property listing in Nairobi.
i) Sales price – Apartment and houses
ii) Rent price – Apartment and houses
iii.) Land price per acre (commercial/residential)
I.) CENTRAL BANK OF KENYA INTEREST RATE WATCH – (T-BILLS)
The money market was liquid during the week ending May 28, supported by government payment. The average interbank rate was 4.28 percent on May 28 compared to 4.21 percent on May 21, with the excess reserve standing at KSh38.9 billion in relation to the 4.25 cash reserve requirement. Besides, open market operations remained active, and the interbank rates remained stable.
91 day T-bill rose by 0.01% from 7.212% previous week rate to 7.33%. CBK offered a total of Kshs4 billion, and bids amounted to Kshs3.251 billion, of which 2.269 was accepted. Volume on bids received increased week on week basis. 182 day T-bill rose by 0.04% from 8.191% previous week rate to 8.248%. CBK offered a total of Kshs10 billion, and bids amounted to Kshs5.840 billion, of which 1.404 was accepted. The 364 day T-bill rose by 0.01% from 9.17% previous week rate to 9.198%. CBK offered a total of Kshs10 billion, and bids amounted to Kshs15.498billion, of which 11.456 was accepted.
J.) KENYA EQUITY MARKET INDICES
The effect of tax amendment bill assented last month by the president was felt on last week’s trading activities as stockbrokers charged 14 percent VAT on service fees and commissions. Consequently, trading activities reduced significantly as the equity market plummeted over the week with the NASI, NSE 20, and the NSE 25 share index losing by 1.55, 1.97, and 1.034 percent, respectively. The total shares traded during the week dipped by a margin of 19% to 14,226,000 million from the previous session 17,738,200 million, while the Market capitalization declined by 1.55 percent, indicating depreciation in prices due to reduced trading. I-REIT turnover was 836,626 recorded in 24 deals a drop by 66 percent from the previous sessions.
K.) KENYA CAPITAL MARKET ANALYSIS
During the week ended May 28, the capital market was on a downward trajectory as most investors shunned penny stocks for high dividend-paying stocks, with Safaricom, ABSA, Equity, and KCB being the most sought stocks. Meanwhile, Crown Kenya ltd, Olympia, Home Africa, Flame Tree Group Holding and ABSA bank were the week’s top gainers with their stocks increasing by 10%, 9.68%, 6.38%, 4.76% and 3.86% respectively. KQ, NSE, FARH, KPLC, and UMME shares declined by 9.63%, 4.23%, 3.94%, 2.75%, and 2.67% respectively, emerging as the week’s top losers.
L.) CURRENCY HIGHLIGHTS
The squeeze in the forex reserves continued to exert pressure on the Kenyan shilling that depreciated to 107.25 against the US dollar the week ending May, 28 which was mainly triggered by a fall in diaspora remittances, in the wake of the coronavirus pandemic. Central Bank data shows that the country’s forex reserves remained adequate at 8,489 million (5.11 months of import cover) as of May 21. Besides, that meets the BK statutory requirement to maintain at least 4 month of import cover and the regions convergence criteria of 4.5 import cover.
M.) FACTORS THAT WILL SHAPE THE REAL ESTATE AND OTHER MARKETS IN THE NEXT ONE WEEK.
i.) Rollout of Credit guarantee for small businesses by the Treasury.
According to the CBK, the majority of SMEs are running out of money, with a projection that they will run out of working capital by June, 2020 if the Treasury delays further the stimulus package announced by the President. On Thursday, 28, the Governor of Central bank outlined the importance of SMEs to the economy and further called out on the Treasury to release the stimulus package immediately in order to facilitate the survival of the sector.
The package announced by the President allocated Sh10 billion to fast-track payment of outstanding VAT refunds and other pending payments. In addition to this, the stimulus is expected to inject Sh3 billion as seed capital for the SME Credit Guarantee Scheme and, consequently, provide affordable credit to small and micro-enterprises.
A high percentage of small businesses are in the retail sector of commercial real estate, and therefore, faster rollout of these funds will not only ensure that SMEs survive but also sustain commercial real estate cash flow in the coming month.
ii.) Reopening of the economy
While addressing the nation on May 23, President Uhuru Kenyatta hinted at a possibility of relaxing measures to curb the spread of coronavirus. Moreover, economic experts argue that current containment measures are not sustainable and that the current state of the economy will pressure the Government on reopening the economy. Furthermore, the KNBS survey indicated that nine out of 10 Kenyans out of work were unsure of a return to their livelihoods as containment measures threaten to fold business units’ especially small and medium enterprises (SMEs).
As such, the pressure from the state of the economy and the fact that the virus may not fade away might force the Government to reopen the economy at the end of week ending 6th May, thereby enabling the sustainability of cash flow in real estate and other sectors as more people embark to their businesses – opening offices and retail businesses. Furthermore, stalled projects will be resuscitated due to availability of labor as the stay at home measures gets relaxed.
N.) UPCOMING REAL ESTATE EVENTS AND TRADE SHOWS IN THE COMING ONE WEEK.
1.) A webinar on developing and building future cities
Date: June 2, 2020
Time: 1400 – 1500 hrs EAT
Venue/Media: Online.
Event Organizer: https://www.built-environment-networking.com/event/webinar-smart-future-cities/
2.) Workshop: Real Estate Development, Investment and Management
Date: 06 – 10 Jul 2020
Time: 09:00 AM-06:00 PM
Venue/Media: Online
Writer of the Report:
This Report is written by Buildafrique Consulting Group, Kenya multi-disciplinary consultancy, that offers END-TO-END DEVELOPMENT CONSULTANCY, REAL ESTATE, and PROJECT FINANCE solutions through specialized subsidiaries. Among our solutions includes:
- Feasibility Studies and Market Research.
- Project Finance and Capital Raising.
- Project Management.
- Investment Design Appraisal.
- Quantity Surveying
- Construction Cost Consultancy
- Physical Planning and Planning Permissions
- Environmental Management and Impact Assessment
- Real Estate Development and Structured Investment Solutions
- Property Valuation
- Marketing and Property Sales Agency
- Property Management and Facility Management
Our Contacts:
- Office: Navigators, Kindaruma Road, Nairobi.
- Website: buildafrique.com
- Email: [email protected]
- Tel: +254 20 8058493 / Mobile: +254 722 474285
Disclaimer:
The information contained in this report is for general information purposes only. While we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information contained on the report for any purpose. Readers are therefore advised in all circumstances to seek the advice of Registered and Licensed professionals in all matters related to Real Estate Investment and Project Development.