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NAIROBI INDUSTRIAL MARKET REPORT READY FOR THE NEXT WAVE? APRIL 2016 In association with +254 20 3744903/4 | www.mmlea.com 2 Industrial Market Outlook While the Nairobi industrial market is starting to attract interest from a number of potential investors, and there is an obvious shortage of international – quality accommodation, it is yet to be demonstrated that occupiers are prepared to pay the rents required to provide institutional levels of return on this higher quality stock. Construction cost for a typical warehouse ranges between KES25,000 to KES40,000 per m2 while a high bay, dock level warehouse construction cost would analyze to an average KES60,000 per m2. An example of a high bay warehouse project in the market is the Imperial Logistics Pharmaceutical Warehouse located along Mombasa Road. Planned developments by Actis at Northlands Commercial Park may well be the first developer-led project to reach these international standards. Industrial Nodes Supply • The developer-led supply of speculative warehouses located in traditional multi-unit Industrial Parks was highest in 2014 at approximately 120,000m²2 followed by approximately 100,000m²2 achieved in 2012. However, 2015 experienced a drop of supply to approximately 76,000m2. • The Embakasi area is leading in the supply of warehouses for lease or sale while the main Industrial Area is leading in supply of warehouses for owner occupation. • The sector has traditionally been owner-occupied. However, in the last three years, the market has gradually transitioned to having 35% of the market supply developed for owner occupation and 65% released into the market for either sale or lease. • As yet, the industrial real estate sector has attracted limited institutional or overseas investment and the vast majority of speculative stock is developed by local diversified industrial groups generally on surplus land in their operating portfolios. Figure 1: Industrial Park Warehouse Supply (m2 ) Pre 2010 to 2016/17F (Nairobi/Mavoko/Kiambu)² 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - • The industry is expecting an increase in supply as 2015 registered the highest industrial building plans approvals by Nairobi’s County 2 the majority of which is expected to Government of circa 280,000m² be delivered in the next two years. 500,000 99,423 78,862 72,407 76,353 65,430 400,000 300,000 200,000 29,411 100,000 Pre 2010 2011 2012 2013 Supply (m²) 2014 2015 2016/17SF - Cummulative Supply (m²) *Source: MML Figure 2: Nairobi Warehouse Building Plan Approvals 2009-2015 300,000 264,749 250,000 200,000 Approvals 600,000 120,562 175,161 127,598 150,000 100,000 50,000 - *Source: NCC 278,594 258,074 114,576 52,913 2009 2010 2011 2012 2013 2014 2015 3 Take-Up • The average occupancy across the sector is currently sitting at around 90%. Newer, better- quality space tends to show higher occupancy than poor quality space. Most of the upcoming projects expected to be delivered in the next year or two have registered healthy interest and pre-lets/ presales of approximately 70%. • Warehouse take-up in the peripheral areas of Kiambu County and Mavoko sub County are expected to match Nairobi’s take up in 2015. This is because these areas are becoming more popular compared to the typical industrial areas due to increased development on cheaper land in these areas and improved accessibility to the airport through the bypasses. Specification • Warehouses with a height of 8m and above have competitive advantage over those with less than 8m. Figure 3: Occupancy Levels Over Time (Pre 2010 to 2016/17F) 120% 100% 91% 88% 80% 80% 70% 60% 40% 20% 0% Pre 2010 2011 2012 2013 2014 2015 2016/17SF *Source: MML Figure 4: Average Floor-to-Ceiling Height (m) For Business Parks Per Location 11.0 12 10 • Warehouses in Embakasi area have the highest floor-to-ceiling height of an average of 11m, while warehouses in Baba Dogo area have the lowest average floor-to-ceiling height of 7.5m. Pre-commitment to projects under development 99% 91% 90% 9.0 8.0 8 9.0 7.5 6 4 2 • The average floor-to-ceiling heights are below the levels required by international businesses who utilize racking systems. In these cases, occupiers require 11-12m eaves height capable of taking 7 pallets vertically stacked. • The more spacious the hard standing area the more attractive the warehouse is to prospective tenants. Most developments provide for a hard standing area of between 8m to 10m for vehicles’ loading and parking. Secure external storage areas are extremely rare. • The average warehouse unit size ranges from 600m²2 to 1,000m².2 However, there are handful smaller unit schemes offering approximately 400m2 inter-connected bays with the option of joining two or more units to get larger space. • There are very few speculative developed units available either below 2 400m²2 or critically above 1,000m², suitable to large scale storage and distribution. Warehouses in Embakasi area have the highest floor-to-ceiling height of an average of 11m, while warehouses in Baba Dogo area have the lowest average floor-to-ceiling height of 7.5m. 0 Athi River Syokimau Juja Baba dogo Embakasi *Source: MML Figure 5: Ground Coverage Analysis 80% 70% 60% 50% 40% 30% 20% 10% 0% 71% 60% Embakasi Athi River 57% 57% Juja Ruiru 65% 54% 57% Syokimau Industrial Ruaraka/ Baba Dogo area *Source: MML 2 Figure 6: Average unit (size m²) Industrial Parks 1,200 1,000 800 600 400 200 - 1,000 900 800 600 600 700 *Source: MML Rental Market • Rental rates have increased slowly in the recent years. The Embakasi 2 area offers the highest average rental rate of KES 44/Ft²/month compared 2 to the other industrial zones which averages to KES 32/Ft²/month. • Warehouses with close proximity to the international airport, a railway line, cheap labour and spacious hard standing area are achieving the highest rents of an average of KES 35 – 45/Ft 2/month exclusive of service charge. • Generally, the industry has experienced a slow down of rental growth over the last three years. Embakasi area offers the highest average 2 rental rate of KES 44/Ft²/month 2 Figure 7: Industrial/Business Parks Warehouse Average Rent KES/Ft²/ Month 50 45 40 35 30 25 20 15 10 5 0 44 32 30 Syokimau Juja/Ruiru 35 32 23 Athi River Ruaraka/ Baba dogo Embakasi Industrial area *Source: MML The industry has experienced a slow down of rental growth over the last three years. 4 Sales Market Figure 8: Industrial/Business Parks Warehouse Average Sale Price KES/Ft²2 • The sales market has been smaller than the rental market. Only 25% developer-delivered warehouses have been for sale while the majority are built to let. 2 • Sales range from KES 4,000 - 9,000/Ft². The Industrial Area and Embakasi Area register the highest average sale rates of KES 7,000/Ft²2 and 6,000/Ft²2 respectively mainly attributed to the high cost of land and proximity to JKIA compared to industrial parks that are further afield. Saku Business Park currently offers the highest sales rate of approximately 9,000/Ft².2 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - 7,200 5,828 4,795 4,301 4,516 3,000 *Source: MML Industrial Area and Embakasi Area register the highest average sale rates of KES 7,000/Ft² and 6,000/Ft² respectively Only 25% developer-delivered warehouses have been for sale while the majority are built to let. Industrial Serviced Plots • The demand for light industrial serviced plots has been on the rise in the last three years. This market is mainly driven by manufacturing companies who are acting upon their expansion strategies and getting involved in land banking in areas that are currently not as congested as the main Industrial Area. Demand is being met in the past by large upcoming mixed use developments with industrial zones like Northlands Commercial Park, Tilisi, Tatu City, Infinity and Konza Tech City. • Peripheral areas such as Syokimau, Mlolongo, Athi River, Ruiru and KikuyuLimuru are gaining popularity for light industrial serviced plots because of relatively cheap land and improved accessibility to JKIA through the bypasses. The land prices in these areas ranges from KES 33m – 45m per acre. Conversely, land prices of light industrial areas in Nairobi’s Industrial zones like the Industrial Area, Ruaraka/Baba Dogo and Embakasi Area ranges from KES 80m to over KES 100m per acre. • A challenge for many potential purchasers of sites in peripheral locations is connected to infrastructure. This is particularly relevant to industrial users, who generally have higher power and water requirements than warehouse occupiers. It should be noted that none of the vendors of serviced sites’ have yet invested in full infrastructure provision, the full costs of which usually range from KES 5m to KES 12m per acre depending on location. Figure 9: Average Land Price (KES) Per Acre 100,000,000 90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 - Ruiru/ Tatu Athi River Industrial City/NorthernThika town area Eastern Bypass 2013 2014 Ruaraka/Baba Syokimau Dogo 2015 *The above land prices are indicative figures, we advise that the client carries out an official valuation as each plot of land has unique characteristics *Source: MML The demand for light industrial serviced plots has been on the rise in the last three years. Peripheral areas such as Syokimau, Mlolongo, Athi River, Ruiru and KikuyuLimuru are gaining popularity for light industrial serviced plots because of relatively cheap land • As an average, land prices have been appreciating between 2013 and 2014 at an average rate of 15%. Although, rates of growth of industrial land in Ruaraka/Baba Dogo, Athi River, Industrial Area and Northern/Eastern Bypass have slowed down over the last 2 years land pricing is still a major impediment to industrial development. Conversely, Ruiru and Syokimau areas have enjoyed accelerating land price growth of approximately +5% in the last year. About MML MML, based in Nairobi is the leading development services provider in the East African real estate sector with 28 years of experience and a team of 36 local and ex-pat professionals active on creating some of the finest property assets in the region. The company is currently overseeing a portfolio of development projects for a variety of clients with a combined value of over USD 750m in the capacity of project and development managers. Key Contacts James Hoddell [email protected] +254 715 000 669 Vivian Ombwayo [email protected] +254 712 718 379 Kelvin Muoria [email protected] +254 725 872 666 Ivy Kimotho [email protected] +254 711 464 105 COPYRIGHT ©MML.2016. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.