In the report released on January 13th 2023, covering the six months to December 2022, Knight Frank, observed that “2022 was a year of resilience, circumspection, and optimism” and that despite slow economic recovery dogged by local and international challenges, such as inflation, the Ukraine war and lag effects of Covid-19, there was some remarkable rebound in the real estate sector.
“Across the different real estate sub-sectors, the post-pandemic recovery was optimistic, with demand and supply indicators pointing to positive growth on a year-on-year comparison,” the report said.
CEO East Africa Magazine’s Muhereza Kyamutetera read the report and presents some of the key trends and insights that will influence the real estate sector in 2023 and beyond.
OFFICE: Strong demand for high-quality space and mixed fortunes for Grade AB space
- Moderate growth in demand and rents for grade AB offices: Knight Frank observed that whereas the offices’ segment was vibrant at the start of 2022, driven by the signing of the oil and gas Final Investment Decision (FID) and the full reopening of the economy, this was later slowed down in H2 due to inflationary pressures and other movements in the economy. This affected disposable incomes leading to some occupiers differing their space needs, while others downsized. However, on an annual basis, occupancy rates increased by 8% to reach 84%. The high occupier activities at the start of the year led some landlords to revise the initially discounted rents upwards as the market conditions pointed to a return to normalcy. As a result, average rents in prime office buildings increased by 3% in H2 2022. As a result, the average Grade AB space went to USD12.5 per square metre.
- Increased demand for smaller office spaces: With a tighter economy in H2 2022, Knight Frank reported that there was a “noticeable rise in demand for smaller office spaces (between 50 to 200 square meters). It was also reported that “the high costs of doing business as a result of high inflation rates prompted occupiers to drive harder bargains for rent discounts although landlords insisted on maintaining the prevailing rates”.
- Strong demand and occupancy for Grade A offices: Regardless of a tight economy and slow recovery of the sector, there was reported “strong demand for best-in-class office space against a backdrop of limited supply”. The major drivers of demand were financial institutions and oil and gas-affiliated organisations. Newer buildings with better facilities and fittings, sufficient parking, and professionally managed, proved to attract more blue-chip occupiers. This encouraged some landlords to upgrade/refurbish the existing stock of buildings to meet the growing demand. Occupancy was reported at 95% and average prices at USD15 per square metre. Knight Frank says that this segment is still full of opportunities. “The limited supply of this standard of property presents an opportunity for developers seeking to enter the market and those with projects in the pipeline, to ensure the quality of stock meets the demand requirements of the occupier and the trending ESG requirements,” noted Knight Frank.
- Government-led office construction boom: During H2 2022, the pace of construction slowed down, given supply bottlenecks and the high costs of materials as a result of high inflation, resulting in longer than anticipated construction periods. However, construction activity remained high, with at least 150,000 square meters in the pipeline, expected in the next 12 to 24 months in the suburbs of Nakasero, Kololo, and Bugolobi. However, most of the buildings- up to 95% were for owner occupation, largely by government agencies. Knight Frank said that with a planned one-stop government 150,000 square metre campus in Bwebajja, there would be an anticipated “vacancy pressure on lower grade buildings”. Knight Frank observed landlords and developers to consider investing in upgrading and or redeveloping their premises to the in-demand Grade A offices.
- Green and smart buildings will influence the future: Knight Frank observed that demand for net-zero buildings and spaces that meet ESG standards will grow. It was also observed that demand for more flexible office options and co-working models will be pivotal in the future office, supported by multinational requirements. “With at least 4.2 million square meters of EDGE-certified floor space throughout Africa, Uganda is still in the nascent stage of green development. This, coupled with the fact that 40% of annual global carbon emissions are attributed to the built environment, initiatives to reduce the carbon footprint will be key, and as such, developers will be pushed to deliver on these metrics,” concluded Knight Frank.
R E TA I L: Slow and steady recovery on the back of cautious consumer spending
- 40% growth in footfall: Across Knight Frank-managed malls, average footfall was reported to have improved by 40% in H2 2022. Tenants in the malls also reported improved business with turnover for general grocery retail recording 15% growth. Average occupancies grew by 2.7% year-on-year. The growth in shopper traffic was driven by among other factors, the return of Black Friday promotions, as well as the steady recovery of the cinema industry, with the return of blockbuster movies. The footfall figures however remain 18% below the pre-pandemic performance, particularly due to the high inflation rates that caused consumers to adopt cautious and conscious spending habits, together with the outbreak of the deadly Ebola virus in September 2022.
- New Demand and expansion by existing tenants: Knight Frank reported renewed vibrancy in the leasing market with approximately 48,440 square feet of space leased out in Knight Frank-managed malls for H2 2022. This was driven by the entry of new retailers such as Hummel, U-Home and Optica. Existing clients such as LC Waikiki, Yashika, FB Fashions and Woolworths expanded to other malls. New entrants like Hummel opened stores at the Acacia Mall, while South African retailer, Woolworths expanded into their fourth store at the Village Mall. Century Cinemax, with their first VIP movie hall, opened a third store at the Arena Mall while LC Waikiki also expanded into Entebbe town with their third store anticipated to open at Victoria Mall in Q1 2023. The Patio Brasserie, one of Kampala’s fastest-growing bar and restaurant chains and Middle East Restaurant expanded into the Arena Mall as well. “This is all testament to the rebounding retail sector, and resilience amidst adversities and uncertain trading conditions after the long lockdown period,” observed Knight Frank.
RESIDENTIAL: Steady growth in demand for middle and affordable housing
- Steady Demand in the city suburbs: During H2 2022, effective demand for middle and affordable housing continued to grow steadily. Absorption rates for rental apartment units in these suburbs were high, with average occupancies going past 85%. This was driven partly by infrastructural improvements (mainly accessibility and road improvements), easy access to amenities, and other services such as schools, health facilities, banking services and restaurants that are making the suburbs an alternative to the higher-end neighbourhoods. These have boosted demand in these areas. Due to the steady demand in these next neighbourhoods, Knight Frank reported income yields of about 8%-12% for developers. Rents remained steady, ranging from UGX600,000-UGX650,000 for a 1-bedroom apartment. Rental incomes for a 2-bedroom apartment ranged from UGX850,000-UGX900,000 while that of 3-bedrooms went for an average of UGX1,200,000. Average net monthly rent and occupancy in Kampala’s Prime Suburbs were reported at USD1,800 for furnished one-bedroom apartments and USD1,500 unfurnished. Prime furnished two-bedroom partners went for USD2,340 and USD 1,750 for unfurnished while three-bedroomed apartments went for USD2,800 (furnished) and USD2,500 for unfurnished.
- Residential land price growth in select prime areas slows down: Knight Frank reported an increase in the supply of re-development plots against low demand in the prime areas such as Kololo, Naguru, Nakasero and Bugolobi. Against the increased supply, developers, who typically make up most of the land purchasers in the affluent suburbs, have started negotiating and or are forming joint ventures with landowners, to reduce costs associated with redevelopment. This has in turn impacted sale prices, resulting in some vendors reconsidering their decisions to sell. As a result, average land prices per acre in affluent suburbs such as Kololo reduced by approximately 10% in H2 2022, as compared to the same period in 2021. This is also causing the market prices to correct and adjust accordingly to match the rental rates being achieved.
- Persistent affordability gap, against developer price and demand price mismatch: The Knight Frank H2 2022 report, reported that the trend of developers developing larger and more expensively serviced units for sale in Kololo, at price ranges between $500,000 and $700,000 for 300 to 500 square meter apartments persisted, yet it was becoming increasingly evident that the Ugandan market is yet to realise effective demand for residential units at this price range. “The sweet spot for prime residential units is between $250,000 to $350,000 for an apartment in the prime suburbs,” Knight Frank observed, adding that there was also a “lack of product selling at between $100,000 – $150,000 in the prime and semi-prime locations in a radius of approximately 10 – 12 kilometres from the city centre”. These include areas such as Ntinda, Muyenga, Makindye, Mutungo, Luzira, Mbuya, Kyambogo, Mengo, and Rubaga, among others, which Knight Frank said have higher effective demand at this price bracket. The property firm said that residential housing developers who heeded advice to address this affordability gap would see their returns improve.
INDUSTRIAL: Rising demand for warehouses for rent
- Steady demand for industrial warehousing space in the Kampala Industrial Business Park (KIBP): Industrial space requirements remained relatively stable in H2 2022, despite the high inflation, dry weather conditions, currency depreciation, and rising costs of finance. Warehouse leasing dominated the inquiries, at approximately 70%, while sales inquiries accounted for 30%. Of the sales inquiries, 97% were for land, with size requirements ranging between 5-15 acres, predominantly in the Kampala Industrial Business Park (KIBP)-Namanve, which offers suitably sized industrial land options for greenfield projects. This demand, especially in the KIBP- Namanve has been largely attributed to the park’s strategic location and proximity to Uganda’s main business hub (approximately 15Km from Kampala’s City Center), location along the corridor to the Kenya border, government incentives to boost industrialization as well as the strategic future added advantage like connectivity to the planned Southern bypass, Bukasa Port, and the Standard Gauge Railway. A rise in demand for warehouses for rent was also observed, with demand from logistics, cold storage, and agricultural processing. Warehouse occupier requirements were mostly for large spaces, between 500-2,000 square meters, dominated by Fast Moving Consumer Goods (FMCG) suppliers, cold storage and distributors. Average rents for warehouses remained relatively stable throughout the year, ranging between USD3 to USD5.5 per square meter in the Kampala Industrial Business Park -Namanve (KIBP), while warehouses in the traditional Kampala Industrial area were between USD5- USD7 per square meter.
Looking Ahead: 2023 and beyond
Looking ahead, Knight Frank said that in the residential property market, demand for housing in secondary markets, away from the prime suburbs, will continue and that investment opportunities in the secondary residential suburbs will increase, given the growing young population and potential for good absorption rates.
“The growing demand for smaller unit types (1-and 2-bed units), observed over the half year in the prime suburbs will also persist. It will be upon investors to strategise and capitalize on this opportunity,” observed Knight Frank.
The property advisory firm also said that the general outlook for the office market remains positive, hinged on demand from players in the oil and gas sector, financial services, and professional services.
“The post-pandemic office recovery has proved resilient in the sector, with increased occupancies and stable rentals. The current deficit in the supply of grade A office space is projected to persist in the short term, given that most office buildings (for rent), currently under construction are expected on the market towards the end of 2023 or 2024,” observed Knight Frank.
The company also projected that industrial activity was also expected to remain stable in 2023 supported by the anticipated economic recovery and government initiatives to boost industrialisation.