What is the future for city landlords?

Demand for well-furnished office spaces to conduct business is increasingly gaining momentum among Small and Medium Enterprises (SMEs). As businesses wean employees off remote work and attract them back to the office, they are spending more than ever on upscale workspaces to pay rent for modern, amenity-rich buildings.

But the most pressing need for space is emanating from a segment of the economy engaged in formal economic activities.      

According to the latest Kampala Metropolitan Baseline Real Estate Property Market Report, there is now more demand for the newer Grade A office buildings that feature large –open layout floors and state-of-the-art design and safety characteristics.

As a result, real estate players are responding to this demand going by sector projects in the pipeline. With the completion of buildings currently under construction, approximately 36,000 square metres of lettable space will be added to the existing stock by the end of 2023. It is anticipated that Grade A space will account for 90 per cent of the pipeline developments.

In demand for this kind of working spaces are companies in the oil and gas sector, financial services, government parastatals and engineering sectors.

With the announcement of Final Investment Decision (FID) early last month, the oil and gas sector has opened up the country’s economy for an injection of $10 billion (about Shs35 trillion) before the anticipated commercial production of oil in the year 2025. It is expected that this (oil and gas) “windfall” will trickle down to economic sectors, partly explaining the upsurge in demand for such proper working spaces.         

After trying out smaller spaces in lower-tier Grade B multiple buildings, the report notes that players in the aforementioned sectors realised that the spaces they operate in are not sufficient enough to provide ample opportunities to consolidate several departmental operations in a single building – hence demand for Grade A spaces.

Other key demand drivers, according to the market report, is exclusiveness of the stand-alone Grade A office structures evidenced by an increase in enquiries away from multi-tenanted office buildings to take advantage of branding and fully control their security requirements.

Furthermore, demand for space in the lower tier Grade B and C buildings whose rents are low was dominated by start-ups as well as SMEs on the account of affordability.

The Stanbic Properties Limited inaugural real estate market report also found out that several Non-Government Organisations (NGOs) are scaling down their rental space by consolidating their operations in single stand-alone formerly residential buildings as opposed to renting several buildings in areas of Bugolobi, Muyenga and Naguru.

 This trend, according to the report, was primarily driven by downsizing resulting from Covid-19 related budgetary constraints faced by foreign funders as well as a growing work from home (WFH) trend for employees who only used formal office workspaces on an as-needed basis.   

Changing game plan

Before the Covid-19 pandemic struck, there were already signs of exodus from occupation of properties in the Central Business District (CBD) to areas outside the heart of the city.     

“The formal retail sector was traditionally concentrated in Kampala’s CBD and a few high-end residential areas in the peripherals particularly Naalya, Lubowa and Entebbe. However, the growth of Kampala’s prime retail sector has spilled over into the sub-urban areas of Wakiso district where the retail sector is experiencing a fundamental transformation through improved quality and standards,” reads part of the sector report findings. 

 “As of December 2021, we observed an increasing trend towards the development of formal super and hypermarkets as well as shopping malls in Sub-urban suburbs in Wakiso and Mukono districts. This trend is being driven primarily by the increasing purchasing power of the working-class, who predominantly reside in these areas,” the report further noted.

The report notes that the Covid- 19 related movement restrictions also forced consumers to increase their retail expenditure within their immediate residential neighbourhood.

Concentration of office market is in the City of Kampala particularly in the CBD is ranked according to classification that takes into amenities, age, finishes, accessibility and location of the office space.

As of December 2021, average occupancy from surveyed buildings, according to the findings of the report, was recorded at 89 per cent for Grade A, 83 per cent for Grade B and 74 per cent for Grade C buildings.

Prevailing average rents were recorded at $15 (about Shs52,600), $11 (about Shs38,000) and $8 (about Shs28,000) per square meter per month for Grade A, B and C buildings, exclusive of service charge.

Run for the money

With majority of the money economy being generated in Kampala, it is no brainer that the retail sector in Kampala City is more vibrant compared to the metropolitan areas of Wakiso and Mukono. That said, findings from the survey revealed that Kampala’s prime retail malls is facing stiff competition from locally owned sub-urban shopping centres in Wakiso district whose market was majorly supported by a higher domestic consumption by the middle-class.

The highest rental rates were registered in prime malls where tenants pay between $22 (about Shs77,100) and $27 (about Shs94, 700) per square metre every month for prime retail space on the lower floors and between $12 (about Shs42,000) to $16 (about Shs56,100) per square metres per month for large space occupiers n similar floors.

Importantly perhaps, openings of new retail stores and expansion of existing ones is expected  to remain stagnant or very limited as retailers acclimatise to the post Covid-19 retail environment in the near future. This is mainly due to the fact that Covid-19 related restrictions have forced consumers to adopt online retail, a tendency that is likely to continue.

Going forward, market activity for the prime malls will pick up over the next four months, thanks to total lifting of curfew restrictions and the full re-opening of the economy.

A new real estate sector report compiled by Stanbic Properties Uganda Limited, a subsidiary of Stanbic Uganda Holdings Limited, as at the end of December last year, indicates that average

Industry players’ views

The member relations coordinator, Association of Real Estate Agents Uganda (AREA), Ms Catherine Kembabazi, notes that a section of people have since moved out of CBD and settled elsewhere.

But, “That doesn’t mean business in the CBD is not booming. There are people looking for vacancies everywhere including at the CBD to hire.”

This, according to Ms Kembabazi will get to a fever pitch point as consumer spending recovers – given that real estate development is dictated by improved population purchasing power. 

For Engineer Patrick Kivumbi, the difference between CBD and the outskirts, including up country locations, is evident in the value of the transactions.  He says in the CBD business is more swift, flexible and prompt, explaining the growth in real estate occupancy rates while Mr Fred Mutooro, trader in CBD is of the view that despite Engineer Kivumbi assertions, even with the full re-opening of economy, “the occupancy rate in town is still low, with pricing playing a huge part in that.”

According to Mr Mutooro, one will need to part with between Shs1.5 million to Shs4 million for space which he describes as “hardly enough for leg room of more than two people.”