Oil and gas developments to push Kampala’s prime office rent up

But a shift in occupier preferences towards more flexible lease terms, with shorter rent payment periods could impact occupancy levels at the lower end of the market

Kampala, Uganda | ISAAC KHISA | Kampala recorded an increase in prime office occupier demand across various sectors, ranging from agriculture, food and beverage and multinational oil companies in the first quarter of this year, the inaugural Knight Frank’s Africa Office Market Dashboard shows.

This triggered an 8% increase quarter-on-quarter rental costs to US$15 per square metres. Overall, office occupancy rates increased by 3.4% during the period under review.

“However, a shift in occupier preferences towards more flexible lease terms, with shorter rent payment periods, is likely to impact occupancy levels at the lower end of the market,” the report notes.

 “Each market has continued to be impacted by unique factors beyond the pandemic such as currency fluctuations in South Africa, the political climate in Lusaka and a supply glut in Johannesburg and Cape Town,” Tilda Mwai, Knight Frank Researcher for Africa, said.

“On the other hand, locations such as Kampala are expected to record a rise in occupier activity due to the recent signing of the East African crude oil pipeline project which we expect will drive up demand from the oil and gas sector in particular”.

President Yoweri Museveni with his Tanzanian counterpart Samia Hassan Suluhu signed an agreement in April this year in Kampala, paving the way for the construction of a 1,440 km crude oil pipeline from Uganda’s Albertine region to Tanzanian seaport of Tanga, ahead of oil production in 2024/25.

This development comes at the time economy in Sub-Saharan Africa is expected to make a strong recovery in 2021, following a contraction of 1.9% last year, according to the International Monetary Fund’s latest outlook.

In the East African region, prime office occupier activity in Nairobi has been characterized by consolidation activity by both domestic and international businesses, many of whom were capitalising on weaker rents by upgrading their offices, mirroring the flight to quality trend observed elsewhere in the world.

As such, monthly prime office rents remained subdued at US$12 per metres square and the new lockdown restrictions towards the end of first quarter are expected to further dampen demand, with rents coming under renewed downward pressure.

Anthony Havelock, Head of Agency, Knight Frank Kenya says there remains an oversupply of commercial space in most districts across the Nairobi which together with the slowly recovering economy and working from home dynamic has given occupiers the upper hand in lease term negotiations and forced landlords/developers to be more flexible.

“Positively as the global vaccination rate has increased and with some lockdown measures improving, we are seeing multinational occupiers looking to re-occupy their spaces and relook at their strategies which in turn is leading to increased market activity,” he said.

Similarly, the demand for prime office market in Dar es Salaam remained subdued as the fall out of the pandemic, coupled with the ongoing economic uncertainty and an oversupply of office stock placed occupiers firmly in the driving seat.

“Those businesses that remain in the market for space are seeking greater lease concessions in the form of longer rent-free periods and rent reductions through lease renegotiations,” the report states. “Despite this, monthly prime office rents have remained stable at US$15 per metre square.”

However, the report notes that the recent change in leadership in Tanzania is likely to boost investor confidence in the east African country, translating into stronger occupational demand as the year progresses.

Lagos the most expensive city

Lagos remained the most expensive on the continent in terms of rent, having risen by 20% to US% 62.50 per metre square in the first quarter of this year, fuelled by a strong economic recovery and pent-up occupier demand.

Overall, prime office rents in the 28-city composite index remained stable quarter-on-quarter during the period under review but increased by 2% year-on-year.

Looking ahead, Knight Frank anticipates that the prime office market across the continent will remain tenant favourable throughout 2021.

Trends on consolidation of space and flight to quality are likely to continue as occupiers seek to leverage on the weaker market conditions to upgrade the space occupied.

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