_Rental and Occupancy analysis for prime commercial office buildings in Kampala
With a commercial office portfolio of over 380,000 square feet under Knight Frank Uganda’s management, we take a look into the rental and occupancy trends against the trends recorded in approximately 2,940,000 square feet of the overall prime (A/AB) office portfolio of Kampala.
Overview of the general commercial office market
Occupancy and rental rates of different commercial buildings have recently come under pressure due to the effects of the pandemic that has impacted global economies.
Below is a graphical overview of occupancy and rental performance for overall prime commercial buildings in Kampala since 2016.
Figure 1: Rentals vs Occupancy for Prime Office Buildings in Kampala Jan 2016 to Jun 2020
Source: KF Research
Knight Frank registered an increase in demand for Grade A/AB office space in 2017 as compared to 2016, despite the higher rents at the time. This was attributed to limited supply of prime office space resulting in an average occupancy of 86%. The supply gap of prime office space narrowed in subsequent years, on the backdrop of over approximately 65,000 m2 of Grade A/AB space delivered on the market during the next 24 months with at least 50% of it being built for owner occupation by organizations such as law firms and government parastatals.
Rental and occupancy trends have since been observed to skew downwards, registering 83.5% occupancy in June 2020 and average passing rentals at 14US$ per square meter per month, exclusive of VAT and Service Charge for Grade A/AB office buildings.
The overall prime office portfolio in Kampala recorded a 2% reduction in occupancy in Q3 2020 as compared to Q2 2020. The drop was attributed to the exit and downsizing undertaken by a number of tenants within several commercial buildings who did not renew their leases at expiry, or opted for early termination of their tenancy post lockdown. The reduced levels of occupancy are anticipated to result in softening of office rents across different suburbs as landlords seek to fill vacancies. While some buildings’ occupancies remained stable or improved slightly due to the competitive rents being offered, the general outlook will be clearer at the end of Q4 2020. Asking rentals in prime office buildings remained relatively stable in Q3 2020.
The current slow market conditions and reduction in business activity among tenants has been one of the key attributes to the prevailing office conditions. Landlords have softened their stance towards their tenants with regards to rent payments, opting to retain them through flexible payment plans. Currently, tenants continue to drive harder bargains for lower rents before renewing their leases or taking up new spaces.
On a brighter note, inquiries have improved since the lockdown was lifted, with many coming from NGO’s who are looking to downsize or relocate.
Focus on Knight Frank managed Offices
Figure 2: Rent vs Occupancy for Knight Frank managed Offices- Jan 2016 to Sept 2020
Source: KF Research
Similar to the general prime office rental trend, the Knight Frank managed office portfolio passing rentals have experienced a downward trend since 2018 as shown above. The reduction in rentals resulted in increased occupancy as is evidenced in 2019 and 2020.
Average monthly rental rates per square meter in Q3- 2020 remained relatively stable at 14.5US$ as compared to 14.6US$ recorded in Q2 2020. The same applied to quarterly occupancy which averaged at 89% in Q3-2020, and the previous quarter. This is attributed to the stimulus packages accorded to various tenants during and after the lockdown, which comprised up to 50% rent discounts for the period of the lockdown and deferred rent escalations to 2021. Additionally, an exceptionally proactive and empathetic approach in Knight Frank’s management during the crisis has been pivotal in maintaining high occupancy levels as compared to the general occupancy recorded in Kampala’s prime office buildings.
Knight Frank’s goal during the period of the lockdown was to help their tenants stabilize their businesses through flexible and agile solutions to rent payment in view of their constrained cashflows, whilst ensuring that the landlords were receiving a slightly discounted but steady income stream. As a result, rent collections from offices within the Knight Frank Portfolio remained stable despite many office buildings having remained closed during the months of April to June.
Occupancy and rental comparison (Knight Frank managed offices vs overall Kampala prime offices)
Figure 3: Average Occupancy: Knight Frank managed offices vs Kampala prime offices from Jan 2016 to June 2020
Source: Knight Frank Research
Figure 4: Commercial Office Rental Rates: Knight Frank managed vs general prime office rents from Jan 2016 to June 2020
Source: Knight Frank Research
Since 2018, occupancy in prime Knight Frank managed buildings has improved tremendously as compared to the trend observed in Kampala’s general commercial office market. Rental rates experienced slight reductions in the years leading to 2020 but remained relatively stable in quarters 1 & 2-2020. Although we expect tenant retention in several commercial office buildings to be a challenge due to the current crisis, we strongly believe (as we predicted at the start of the lockdown) that the situation would not be as bad as earlier expected by the market in general. Similarly, our emphasis on an even closer relationship with our tenants, and the interventions we put in place has proven that we value them and our relationship not only in good times, but more so when times are tough.
In conclusion, general current market sentiments indicate that the market has shifted to a tenant’s market, with landlords facing increasing pressure for rent concessions and growing vacancies across different buildings. As a result, our outlook is that prime rentals will continue to fall depending on the bargaining strength of each tenant, as landlords strive to fill current vacancies resulting from relocations and downsizing. However, a balanced market is forecast in the second half of 2021 as the market continues its journey to recovery. We wait to see the market developments as they happen.