The East Africa Property Investment (EAPI) Virtual Summit has noted that the effect of the global pandemic could mean new investment opportunities for the sector.
The summit held on July 29th and 30th featured 69 regional and international speakers, providing tangible insights on how Kenya’s property sector has weathered the Covid-19 pandemic, and what the future holds.
According to Gerhard Zeelie, Divisional Executive: Commercial Property Finance Africa – Nedbank CIB, South Africa, Covid-19 has revealed strengths and weaknesses of the East African property sector, but saw Nedbank remaining cautious on the long-term impact of the pandemic.
“It is too early to make a call. We have seen fewer clients discussing new development opportunities with us, which indicates to me that everybody is adopting a cautious approach. I also think that this is smart. We are seeing how the pandemic is impacting our day-to-day lives, but it is too early to speculate on how it will impact the next three to five years,” said Zeelie.
However, according to a report by World Bank, growth in Sub-Saharan Africa (SSA) is projected to slip into its first recession in 25 years with the average growth expected to decline from 2.4 percent in 2019 to a range of between -2.1 and -5.1 percent in 2020.
An analysis by Knight Frank, an international real estate consultancy group, shows that it is unquestionable that Kenya’s medium-term growth prospects will be impacted by COVID-19, and much remains uncertain about the magnitude of the effect. However, the situation is evolving quickly; with the global economy tipped for a recession in 2020, with significant negative spill over into Kenya.
In the real estate sector, the pandemic has accelerated certain trends that were already in evidence prior to COVID–19. Trends differ across sectors and Knight Frank Kenya has compiled an assessment of the short-term and longer-term implications so far.
Knight Frank Kenya MD, Ben Woodhams says that his firm has been monitoring the market closely and their agents and occupier services teams are making every effort to ensure the company provides the necessary assistance to its clients as the country is in a rapidly evolving situation.
“These are challenging times and we must all innovate to ensure business continuity,” he adds.
The Knight Frank analysis shows that the real estate sector witnessed a 68 per cent decline in office space absorption in Q1 of 2020, compared to Q4 of 2019, but a 60 per cent increase compared to Q1 of 2019.
This could mean that the sector, despite facing challenges brought about by the global pandemic, still remains resilient.
Covid-19 has provided an opportunity for the sector to reset, with underlying supply and demand challenges that the industry needs to address having been exacerbated by the pandemic.
“The Covid-19 pandemic has provided an opportunity for the sector to reset itself. However, it is important to remember that a slowdown in development will not result in supply and demand equilibrium, as Covid-19 has exacerbated the demand supply mismatch, and so it will take longer to settle than if the pandemic had not occurred,” says Mr. Woodhams. “Before the pandemic, we had witnessed a good level of enquiries both from international and local corporates and transactions were underway. Corporates have since placed major decisions on “pause” whilst they assess their positions. We expect a significant slowdown in the absorption of office space in Q2 of 2020 as organisations focus on handling the COVID-19 pandemic. This has already been manifested in the form of fewer office inquiries and postponement of key business decisions, causing a delay on imminent lease start dates.”
The sector has also witnessed a decline in house sales and rental prices in Nairobi in the first quarter of 2020.
This, Knight Frank says, was mainly attributed to pre–existing market conditions rather than the pandemic. Prevailing macro- and micro-economic conditions coupled with an oversupply in the segment have resulted in a sustained price correction which continued into 2020.
“However, we have started to see a decline in prime rental levels during the duration of the pandemic as landlords are prepared to lower their expectations to attract the few new inquiries.” Mr. Woodhams explained that the firm has also noted a decline in international rental inquiries and by extension the expatriate market as some international prospective tenants have stopped their search and gone back to their home countries for the time being.
Across the country there has been an increasing trend of landlords and tenants negotiating flexible payment plans where possible, as cash flow is currently greatly affected.
According to Mr. Zeelie, prior to the pandemic, capital structures had to be cheap; previously investors were only looking for the cheapest funding, which was not always the most flexible.
“Now, capital structures must be flexible to be able to withstand some uncertainty in the asset’s performance without resulting in time and costs wasted to restructure the capital structure. I think that will be the biggest change,” he adds.
“Yes, the pandemic has emphasised the need for logistics and flexible workspace solutions. Our view is that logistics will bounce back quickest and have proved to be resilient and when normality resumes, we expect a lot of activity in this sector. While serviced offices have been hit very hard, we expect that they will also recover very quickly as businesses look for more flexible office solutions,” Mr. Woodhams says.
The pandemic has therefore emphasised the demand and resilience of new sub-sectors; there also remains a strong case for flexible working solutions.
The World Bank has projected Kenya’s GDP growth in 2020 to be 1.5 per cent, with the hardest hit sectors being hospitality, transport and horticulture.