Knight Frank’s H2 2020 Kampala property market report: Tenants drive hard bargains as landlords innovate in pricing and development models

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Knight Frank, Uganda’s leading property consultancy firm today released its H2 2020 Kampala Market Update Report, revealing a property market that is still pressed by Covid-19. 

The H2 2020 report provides an analysis and outlook into the performance of the Office, Residential, Retail, Valuations, and Industrial property sectors from July – December 2020, against the country’s economic performance over the same period. The report highlights market dynamics that have been prevalent in H2 2020 in the wake of the COVID-19 pandemic and key stimuli that will impact the sector going forward.

For nearly a decade, Knight Frank’s thought leadership reports have been a source of the most authoritative insights on the office, retail, residential, and industrial property sectors for developers, occupiers and other players in the real estate ecosystem.

The H2 2020 report, shows that although the economy is slowly unravelling from the effects of the Covid-19 lockdowns that characterised much of H1 2020, the property sector was yet to pick up and is still reeling from the drag-on effects on both the demand and supply side across all the four sub-sectors of the industry. 

The Arena Mall in Nsambya, scheduled for opening this March. South African retailer, Shoprite, is set to open its 6th outlet in the state of the art mall. Knight Frank has reported that the retail sector, has started recovery, posting an average 8% month on month on month growth in traffic, with July registering the highest record in the half-year at 22%. 

A resilient retail sector

“The partial lifting of lockdown measures in the second half of 2020, saw on average, an 8% month-on-month growth in footfall, with July registering the highest record in the half-year at 22%. This was driven by the entry of new players in the market such as the opening of LC Waikiki, 2000m² Africa flagship store at Acacia Mall in December 2020; Carrefour’s second store at Metroplex Mall, set to open this February and Shoprite’s 6th store, set to open in the new Arena Mall in March 2021,” Judy Rugasira Kyanda, the Knight Frank Uganda, Managing Director told a gathering of industry players at the Latitude 00 Hotel in Kampala.

However, Ms, Kyanda said that trading, and therefore turnover of tenants in the retail remained under pressure, due to diminished consumer spending power, on the back of a slowdown in the economy and the continued restrictions on specific retail segments such as bars and nightclubs still under lockdown.

“Average year-on-year footfall reduced by 30% in H2 2020 as compared to H2-2019,” she said, adding that, however, “year-on-year retail occupancy remained relatively stable with a slight increase in H2- 2020 as compared to the same period last year, driven by new innovative thinking around the retail sector moving forward regarding space utilization, rent models and interactions with customers.”

“Average turnover, footfall and occupancy levels recorded significant improvement in the second half of the year, demonstrating, the sector’s resilience and increased demand for formal retail in Uganda,” she added.    

Inside the new state of the art Arena Mall in Nsambya. Knight Frank reported that although footfall and turnover are yet to reach the pre-Covid-19 levels, year-on-year retail occupancy remained relatively stable with a slight increase in H2- 2020 aided by new and innovative thinking around the retail sector moving forward regarding space utilization, rent models and landlord interactions with customers.

Office vacancies widen as occupiers seek pennywise, but safer occupancy strategies

According to the report, Covid-19-induced downsizing of office space, relocations to more affordable offices and postponement of new office rentals because of constrained cash flows as well as new office usage habits by tenants, such as the adoption of a 2 – 4 days a week in office, continues to impact on the office subsector. 

“Knight Frank registered a 6% year on year increase in vacancies for prime commercial office space (Grade A and AB) from 17% in H2 2019 to 23% in H2 2020. The increasing vacancies in the leased office sector experienced in H2 2020 led to softening of office rents as tenants continued to drive harder bargains for lenient lease terms during lease renewals, resulting in Grade A passing rents declining by 7%,” observed Ms Kyanda, saying that however this decline, affected mostly properties that were considered “over – rented” above-market prices.

The report observed that although, going forward, tenants would adopt a variety of flexible occupation models that would see them downsizing space demanded and driving hard bargains, a rebound was expected in 2021/2022 on the back of the much-anticipated Final Investment Decision on oil production, coupled with the anticipated rollout of the COVID-19 vaccine especially for quality, well-serviced and green and smart properties that catered to the needs of more meticulous and global occupiers.

“Whilst technology is a great facilitator of workflow processes, it cannot be at the total cost or replacement of human-to-human interaction. The office will remain key in collaboration, training and cohesion of teams as self-isolation is no longer mandatory, and the realization that it is very difficult to build teams virtually,” Ms Kyanda observed, on the future of offices.

LC Waikiki’s 2000m² Africa flagship store at Acacia Mall opened in December 2020. Activity by such new signature clients like LC Waikiki, a Turkish international fashion chain; Carrefour, French multinational retail giant and South Africa’s Shoprite are keeping hopes alive, in a rather downbeat but resilient retail sector

Oversupply in prime residential sector reduces occupancy

In the residential subsector, increased supply of properties, against measured demand from especially the expatriate community who left the country on the onset of the lockdowns and have not returned since, influenced a drop in occupancy rates. According to the report, average occupancy in prime residential apartments dropped by 8% year-on-year in H2 2020 compared to H2 2019, against a 6% year on year increase in the supply of apartments in the prime residential areas of Kololo, Nakasero, Bukoto, Bugolobi, and Naguru.

“The increase in stock forced some landlords to discount their rents to remain competitive in an already oversupplied prime residential market, that had been affected by the effects of COVID-19. As a result, overall average prime rental rates for furnished apartments declined by 4% in H2 2020. Rental yields in prime residential suburbs averaged between 8% – 10%,” noted the report.

An artist’s impression of the Lugogo One building on the Lugogo Bypass in Kampala. The property offers a mix of buy-to-own sectional office space as well as lettable space. Akin to condominiums, Sectional Office Space, according to Knight Frank is an emerging trend in the office sub-sector and presents an opportunity for investors seeking long term real estate returns but are unable to or uncertain of whether or not to develop themselves.

Industrial Sector Stable

The industrial sector, however, registered a noticeable short-term increase in demand for warehousing space, driven by travel restrictions, border closures as well as the need to repurpose production lines to manufacture products essential in the response against the pandemic. 

Average rents for warehouses, as a result, remained relatively stable, ranging between US$4-US$6 per sqm for warehouses in the Kampala Industrial Business Park (KIBP), while the older stock especially those found outside the KIBP registered rental rates of approximately US$2.5 to US$4.5 per sqm.

2021; The Year of Recovery?

Looking forward, Kyanda, said that, the jury was still out, as to whether 2021 would be the year of recovery.

“Whilst it is reasonable to forecast a gradual and modest improvement in the performance of the sector in general, it is important to bear in mind.

that the momentum of this improvement will be determined by how quickly and positively the economy rebounds to reasonable growth levels. Similarly, it is hoped that the speed with which the Covid-19 vaccine is acquired and administered, will also play a big impact in curtailing the spread of the virus, and enabling a faster return to some semblance of normalcy, all things remaining the same, and no new variants to further complicate the situation. We can only wait in hope, as we do our best to stay safe,” she said.

Source – Matooke Republic

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