Posted  Wednesday, September 7  2011 at  18:00

Nairobi is a city that is literally competing against itself, what with the continued sprouting and growth of many sub-urban centres that are increasingly taking the shine off the once highly-regarded central business district.

Today, thousands of working Nairobians can go for months on end without setting foot in what has for a long time been regarded as the capital’s commercial hub, the CBD – and they don’t feel like they are missing out on something.

They include those who work in Upper Hill, Westlands, and lately, Mombasa Road. Most of these areas are now considered as independent commercial centres that are not just complementing but are actually competing with the CBD as ideal investment destinations.

And this fact is not lost on commercial real estate investors.

Just like their residential property counterparts, commercial real estate investors usually have no choice but to go for the choicest when choosing where to put up an office block or a mall.

A new survey on the perception of the various real estate market players on the performance of Nairobi’s various commercial sub-centres makes this clearer.

Quoting architects, land use planners, valuers and estate managers, the study acknowledges that there indeed exist differences in the performance of commercial real estate among the various sub-markets in Nairobi and that commercial real estate developers pay keen attention to these differences.

The 32 experts who participated in the survey rated Upper Hill as the most appealing to investors, scoring 4.20 points out of a possible total of five.

It was followed closely by Westlands at 4.13 and the CBD at 3.35.

The Inner City – the section covering the Tom Mboya Street area, River Road up to Kirinyaga Road – brought up the rear at 2.60.

In terms of how these locations appealed to tenants, the experts said, Upper Hill still led, although with a slightly depressed rate at 4.13 points out of five; Westlands (4.10); the CBD (3.55); and Inner City (2.90).

Based on these results, the best sub-market with the highest perception rating was Upper Hill.

“This suggested that real estate investment in Upper Hill had high chances of disposal and higher prices because of higher demand by investors,” says the survey conducted by Wilberforce Oundo, a director at Roack Consult Ltd.

The findings are in his research titled: The Impact of Commercial Urban Forms on the Performance of Commercial Real Estate Markets: A Case Study of Nairobi City, for his doctorate degree in Land Economics.

On the finding that the Inner City was the sub-market with the least demand/appeal, the report notes: “This implies that it was the lowest performing market.”

But that is not all. If you are going to invest in downtown Nairobi, especially in places such as River Road and Kirinyaga Road, you have got to be prepared to deal with a plethora of risks since it is the riskiest sub-market.

“This suggested that the professionals/experts considered that the chances of the real estate investment failing to achieve the projected returns were highest in the Inner City and lowest in Upper Hill,” it explains, noting that the perception was attributed to the poor rating of the spatial condition of the Inner City.

The implication of this is that the risk perception finally influences the kind of advice the experts give to investors and renters.

This, in turn, was expected to influence the financial performance commercial real estate sub-markets.

After interviewing the 54 investors/commercial building owners who participated in the survey on why they chose to invest in a given sub-market, the study concluded that a commercial centre would still retain investors as long as it commands good tenants, the rental yield is high, has secure land tenure and there are attempts to improve on its physical conditions.

Investors, it added, will also retain a property while investing in another in order to achieve portfolio balance as a means of enhancing the returns from an investment pool and hedging against risks.

The study revealed that investors remained in the various sub-markets because of several reasons that were discovered after moving in.

The investors in the Inner City liked the sub-market because the returns were higher than the market average rate of return and the ability to increase rents to match inflation.

The poor physical conditions of the Inner City and low property values were compensated for by the higher rate of return and mitigated market risks.

The ability to increase rents to match inflation cushioned investors in the Inner City against financial risks.

The mean rating for the “ability to pass over the entire running costs to tenants” and “high quality tenants” were very low, suggesting that the Inner City sub-market was heavily exposed to tenant and market risks.

And the low rating of the “good quality of neighbouring properties” suggested that the Inner City sub-market was considered moderately exposed to planning risks.

The CBD was liked as an investment sub-market because of the “ability to increase rents to match inflation” and “good quality of neighbouring properties”.

This suggested that real estate investment in the CBD was less likely to be exposed to financial risks and planning risks.

Commercial real estate investors who remained in the Westlands sub-market were attracted by the same attributes that make the CBD attractive.

The Upper Hill sub-market was rated as the most attractive investment location.

The high rating for most of the identified reasons for preferring a commercial sub-market suggested that most investors who have invested in the Upper Hill sub-market liked it.
However, the low rating for “ability to increase rent to match inflation” and “good quality of neighbouring properties” suggested that it is a growing sub-market with potential to exposure to market and financial risks.