Continued growth in Kenya’s logistics sector boosts the real estate market

Elaine Wilson, Director, Broll Property Intel

The report covers the last quarter of 2018 and was released during the East Africa Property Investment Summit in Kenya’s capital Nairobi on Wednesday 10 April. The report shows that Nairobi’s supply of warehouses per Q4 2018 was an estimated 1.2 million square meters, registering a growth of 15% from close to 1.1 million square meters per Q4 2017.

“Kenya is the most advanced economy in East Africa and one of the largest in the sub-region. With GDP growth picking up from around 5% in 2017 and projected to come in at around 5.9% for 2018, the country experienced increased investor confidence and foreign direct investment, says Elaine Wilson, director of Broll Property Intel.

Vivian Ombwayo, Broll Kenya’s head of research and valuations, who contributed to the report, notes: “The Kenyan logistics sector is directly affected by the performance of all sectors of the economy and particularly the industrial sector, which includes the import and export of goods (warehouses). The country’s logistics market is largely driven by manufacturing, transport and storage, as well as wholesale and retail trade, while the establishment of special economic zones (SEZs) has also facilitated the sector’s expansion.”

Increased supply pipeline of A stocks

She adds: “Digging into the details of the report, our research shows that there was an increased supply line of A stocks, mainly in Nairobi’s peripheral areas. Inventories of lower specification stock called ‘go-downs’, mainly supplied in the main industrial area, showed a decline. This points to the changing face of the Nairobi market, which is now increasingly able to meet the demand for quality stock.”

On the occupancy front, the report shows that logistics occupancy registered a year-on-year increase of 4% in Q4 2018. “The highest rate growth, from 67% in 2017 to 77% in 2018, was noted for A-grade storage units, as most of the operators appear to appreciate higher specifications, which ultimately means lower running costs,” it notes.

The report highlights that Kenya’s logistics market has continued to evolve over the past decade, from the typical low specification ‘go-downs’, to higher quality A and B warehouses. “With improved infrastructure, most operators are now considering relocating to less congested areas away from Nairobi City, such as Kiambu and Machakos counties where relatively cheap land is available,” explains Omwayo.

Rental terms

Vivian Ombwayo, Broll Kenya’s Head of Research and Valuations

Regarding lease terms in the Kenyan logistics market, the report notes that leases are typically for a minimum of five years and one month with fixed lease terms and predetermined annual escalations. Rental areas are given in square feet (ft²). The rent is based on net rent, which means that service charges (electricity and water) are charged separately. In industrial properties, parking is usually free.

Typically, rent is quoted as net rent in Kenya shillings (KSh or US$)/ft²/month. The rents are paid quarterly in advance and exclude the payable value added tax of 16%. The report notes that “rent-free periods” are not common in the market, but in some cases a month can be negotiated.

In terms of average rents in Q4 2018, the report highlights that across the logistics market, rents remained fairly flat compared to Q4 2017. However, A-grade warehouses achieved the highest net rents of between KSh50/ft²/month – KSh80/ft²/month. Rental prices vary depending on specifications, facilities and location.

B-class warehouses account for around 920,000 m² of space, and take up the highest share of the market. However, rents for B-class warehouses were much lower, at between KSh25/ft²/month – KSh48/ft²/month. Ombwayo notes that the difference in rental rates between the classes creates a two-tiered market.

The report also zones in the various sectors that take up logistics or storage space, including transport and storage (approx. 26%); manufacturing and engineering (23%); and, wholesale (22%). “Demand from these users is mainly driven by improved infrastructure; government support in terms of tax incentives and SEZ status; expanding retail platforms; and Mombasa Port’s throughput growth,” Ombwayo explains.

Special economic zones

As for new SEZs, the report states that the Special Economic Zone Act of 2015 has facilitated the establishment of these zones, with the aim of reducing operating costs for potential investors in the production of goods and services. There are currently two privately owned SEZs in Kenya, which include the 907-acre Tatu City, located in Kiambu County; and Africa’s economic zones on a 700-acre site, located in Uasin Gishu County.

In addition to new SEZs, another key driver of growth and confidence in the market includes the expansion of port throughput attributed to major infrastructure investment in the new Standard Gauge Railway (SGR) link to Mombasa.

“The volume of port throughput grew by 10% in 2018, from 1.19 million twenty-foot equivalent units (TEU) in 2017, to 1.31 million TEU in 2018. This growth was driven by the performance of SGR from Nairobi to Mombasa, which commenced commercial shipping operations in January 2018. The next phase of the SGR, connecting Nairobi with Nakuru (Kenya’s fourth largest city), is expected to be completed by the first half of 2019,” the report said.

Ombwayo says: “Continued growth in Kenya’s logistics sector is envisaged for the foreseeable future. The expansion of A-grade storage is expected to grow as confidence in regional and international operators increases, due to improved business conditions such as tax rebates offered in SEZs and increased port throughput expected from the completion of the Nairobi-Nakuru SGR in mid-2019. “

Download the full report.