Here is something to consider the next time you drive by a new residential development in Kololo and wished you were living there; your chances are better than you think.
Property developers in Kampala’s prime residential areas, especially those with newer apartments, were forced to lower rents last year to stay competitive as supply overran demand, according to a new report by Knight Frank.
The supply of newly completed apartment units in the prime areas of Kololo, Nakasero, and Naguru rose 8.5% year on year in 2019, the report said. Knight Frank also registered a 9% year on year decline in occupancy for the suburbs, from 81% in the second half of 2018 to 72% in H2 2019.
This saw property owners discount their rents, “allowing tenants who would have chosen to live in secondary suburbs particularly Muyenga, Mutungo and Ntinda to opt for prime areas,” according to Knight Frank’s Kampala Market Update for the second half of 2019.
On average, residential rental rates fell 1.3% year on year. Plus, the increase in the number of new rental properties in prime areas favoured tenants, who found that they could always negotiate down listing prices.
But it was not all gloom for rental developers. Knight Frank says the gross rental yield in prime areas — gross rental yield is an indicator of the return on investment for a property and involves dividing its price or value by its annual rental income — was stable at between 7% and 9%, which is considered pretty good.
The properties with the highest yields were two-bedroom apartment units. And with good reason: the property agent says it recorded an increase in inquiries for two-bedroom units, especially from single expatriates and young couples. The average rent for the two-bedroom units in prime areas was $1,750, while three-bedroom units went for an average of $2,750.
|Property type||Rent (per month)||Sale|
|Four-five bedroom house
The prime residential sales market was stable, on the other hand, with both buyers and sellers looking out for changes in broader economic conditions before making a move.
|Location||Price per SQM ($)|
|Tier 1 (Kololo, Nakasero, Naguru, Bugolobi & Mbuya||198-741|
|Tier 2 (Ntinda, Luzira, Mutungo, Munyonyo & Muyenga)||33-200|
In the office market, rents in prime areas were down 10% year on year as a result of an increase in vacancy rates. Occupancy rates for prime office space fell 3% year on year to 83%, mainly due to a 6% decrease in demand by large space occupiers (500 square meters and more) — mostly multinational firms and large corporate companies and the addition of more space.
|Building grade||Average rent($) in H2 2019|
According to Knight Frank, 18,000 square meters of prime office space was added onto the market in the first half of 2019, but only 20% was absorbed in the second half.
This worked out to the benefit of ‘smaller office occupiers’ (below 200 square meters), such as start-ups, whose leasing activity rose 4% in the second half of the year. These “prefer flexible office terms and solutions (including shared and serviced offices) which best suit their requirements.”
Still, the returns on office space were strong, at 9-10% for prime offices (Grade A) and between 10% and11% for Grade B+ office space.
Government-funded projects in the road sector took up 40% of the office space leased in the second half of 2019, followed by start-ups with 20% and insurance firms with 15%.
Industrial rental property
Leasing activity in the industrial rental segment was particularly slow in the second half of 2019, and was concentrated in the traditional industrial areas closer to the city.
New leases of industrial space, or take-up, fell 50% year on year to 13,000 square metres. About 80% of the new leases were registered in 1st-7th Street, Ntinda, Banda, and Luzira, and were driven by e-commerce companies, especially Jumia, furniture stores, logistics, fast-moving consumer goods companies, and car companies.
“To remain competitive, rents for the older stock of warehouse space declined from an average rate of $5.50 per square metre registered during H2 2018 to $4.75 per square metre during H2 2019,” said the report. “However, rents for the newly built or refurbished industrial space have stagnated at an average rate of $5.75 per square metre.”
It added that 75% of the inquiries received for industrial rentals were for space ranging between 100 to 500 square metres.
The retail segment sailed through the last six months of 2019 in a steady motion compared to the rest. Rental rates were stable, while foot traffic increased by 5% year on year, with growth of the latter figure impacted by “the road disruptions on John Babiha for Acacia Mall and the road works on the Entebbe Expressway” for Victoria Mall.
Malls also recorded a surge in foot traffic on Black Friday, the highlight of an annual shopping weekend celebrated every November. In the five Knight Frank managed malls celebrated the day last year, foot traffic increased by 15.7% from the previous year while revenue rose 15.7%. In raw figures, the malls received over 100,000 customers combined, with Entebbe’s Victoria Mall reporting a 44% increase in foot traffic to 22,339 customers.
Knight Frank expects further drops in both residential and office rents in the first six months of 2020. More apartment blocks are expected to come onto the market to “compete for the limited pool of corporate and expatriate tenants who can afford prime residential properties.”
The same trend is expected for the office space segment; increased supply yet little change on the demand side.