Real Estate Sector in Kenya: Knight Frank, A Leading Real Estate Consultancy in Kenya

Interview with Ben Woodhams, Managing Director at Knight Frank Kenya

What is your assessment of the sector in Kenya? What are the latest trends?

All property markets are cyclical. Generally, they operate within 7-year cycles. Since I came to Kenya in 2003, we have not really seen that. We have seen a bull run from 2003 right up through the global financial crisis in 2007 up until 2015 which was the year where we started to see a change in the year on year growth that we had been experiencing up until that point. There are a number of different circumstances that caused that change. Primarily, it came about as a result of the introduction of the interest rate cap in 2016 which led to a substantial reduction in liquidity in the local market. We started to see sectors across the market go into oversupply -residential, office, retail in particular, and to a lesser extent industrial- which caused a stagnation in price rather than a massive collapse in price. We do not have the ingredients for a bursting bubble as it were in Kenya. We have seen a price correction and slowdown and a lack of growth from 2016. 2017 was an election year. Typically, in African countries, particularly in Kenya, we see a slowdown in the economy in the lead up to an election and then we see people who have deferred decisions make them once the election is settled down and we see a recovery. In 2017, that did not happen in Kenya because we actually had a second election. Where we were expecting the market to recover in August 2017, we actually lost the whole of 2017 because those decisions were being deferred right through to the end of the year when the second election was held. So then, we expected 2018 to be a year of recovery, but too much had gone wrong in 2017. We still had the liquidity issue so 2018 was a fairly flat year. In 2019, we were hoping to now start to see growth after a year of recovery in 2018, but that also did not happen. So, 2019 has been a flat year as well. Although there has been a lack of movement in the local market, the FDI market has still continued. Although we have been in oversupply, we have also seen a slowdown in construction so that oversupply has gradually been absorbed over that time period. We are now starting to see early signs of recovery which will start to get to the point where we will see a continuation of the growth of rent and capital values, probably in 2020.

Do you see a place for investors to come in the same area where you are? Do you see competition growing?

We have been here for a long time so we have that experience, but we also have the global brand as well. That combination sets us apart from the local and international competition.

Nairobi is still a regional hub. A lot of the macroeconomic problems that we are seeing in Kenya are also being felt in Tanzania, Uganda, Ethiopia and Sudan certainly. If you want a regional headquarters, Nairobi is still, even now, really the best choice for you to make which is why the FDI has not really gone away. Last year, the BBC decided to make their continental headquarters in Nairobi and it is still the most popular place to be if you are serving the 150 to 180 million people in East Africa, depending on which countries you include within that definition. The simple answer is yes, we are still seeing people invest here. There are some international companies that are making major investments. The biggest deal we ever did in Nairobi to Tullow Oil was 65,000 square feet, around 7,000 square meters. It was not a huge deal, but we are going to eclipse that this year with another global corporation who is consolidating some space in Nairobi. Those big global corporates still recognize Nairobi as the regional hub and will continue to do so going forward. What we need now is the local market to recover because the international market remains.

There is a lot of competition in the market. What do you bring that is different from the other companies in the sector?

The difference that Knight Frank has to the local competition is that we have our global brand behind us. That helps us a lot. The difference between Knight Frank and the global players that are recently coming into the market is that Knight Frank has been here for 20 years. We have a huge management portfolio behind us and we have a wealth of experience of dealing with this market and the vagaries, the eccentricities that this market presents. So, in a way, we are in the best of both worlds. We have been here for a long time so we have that experience, but we also have the global brand as well. That combination sets us apart from the local and international competition.

Is there any area of your business you would like to promote more?

We are a real estate consultancy so we have to cover all of the different aspects of that. One of the things that we have been focusing on very closely recently is what we call “occupier services”, that is to say servicing the occupiers, the tenants themselves, looking after the global corporates, the FDI who are coming into this market. Historically, we have represented most of the owners of Grade A office space. We sit back and say that we are looking after the landlords so someone else can look after the tenants. But what we have been neglecting historically is that looking after those tenants is also a very important role and there is nothing to stop us from doing both. Although Knight Frank does not have the most global mandates in the world, we do have a good number of them, clients that Knight Frank represents globally, occupier clients. But also, because we are very well established in this market and we have these international contacts, we can actually compete with other organizations that have global mandates who are not very well represented here in Nairobi or in Kenya as a whole. We are starting to specialize in looking after tenants, looking after those big global players. Although they occupy only a small part of an office building, they are often much bigger clients to Knight Frank globally than the owners of those buildings themselves. That is an aspect we have been focusing on over the last five years.

What is your international reach?

Historically, Knight Frank is a UK based company. In the past, all of the large international real estate consultants that were based in the UK were private partnerships. Knight Frank is the last one remaining. All the others had been bought out typically by large American corporations listed on various stock exchanges. Knight Frank remains a private partnership but it is a global organization. Whether those affiliates are joint ventures as they are here with local partners, or whether they are licensees, or whether they are wholly owned by Knight Frank, the spread is truly global. We have offices all over the world and in 10 countries in Africa. The statistics are out there but it is truly global, particularly now in the far East as well such as in Hong Kong, Singapore, China, the Philippines, etc. With our relationship with Newmark, we have coverage all over the US as well and all over Europe from Russia to Portugal. It is a truly global company which helps us a lot here in Kenya because we get referrals from all over the world. We track the movement of capital into Kenya and going out of Kenya. So, we are working more and more with our offices all over the world to try and capitalize on that. It would be very easy to operate as a fractured business and not be aware that someone in the Paris office is dealing with one of our Kenyan clients or vice versa. It is very important that we keep that level of communication up and capitalize on that global network.

What percentage are you active in residential versus office?

Residential is not much smaller, probably 60/40. We obviously manage quite a lot of residential property for our clients, but we tend to manage clusters of property. If you came to me and said you have an apartment in Nairobi, I could sell it for you, find you a tenant, but it would be very difficult for me to manage an individual unit. It would be different if you had a block of apartments or a gated community. The biggest property we manage here is Riverside Park, which is 150 residential units, all duplexes, three to four-bedroom units. The smallest we would go down to is a cluster of high-end houses in a gated community of 6 or 8 units, typically in Karen or Runda. They tend to be for corporate or institutional clients or high net worth individuals who own a relatively large number of properties. The third party residential we do tends to be at the high end of the market as well. A lot of it tends to be reselling. In the UK, for example, most of Knight Frank’s income comes from the sale of country homes and estates, etc., but it is also from high end -what they call Project Marketing. In the development of a new block in London, for example, Knight Frank will get an instruction to sell those units, such as with the conversion of Battersea Power Station. Those big market projects do not exist in Kenya per se. Anything done on a large scale here tends to be relatively low-end apartment complexes, which is not really our niche. We tend to operate from 30 million shillings up to anything above 200 million shillings. We tend to be in the large villa type properties. We do not really have high value apartments. There are a few, but not enough to create a niche.

What current projects are you working on?

What we are doing in Knight Frank on the residential side is the high end. If you were to think of a high-end example of new build, it would be something like Deer Park Estate in Karen where you have, again, a relatively small number of high-end properties in the 1 million to 1.5 million dollar per unit space. But the largest part of our fee income is derived from the resale of high-end property. That would be individual properties that might be on the beach, in a wildlife estate, or simply high-end properties here in Nairobi where an expat might be leaving the country and might want to on sell their property of 2 to 2.5 million dollars. Those tend to be the biggest instruction, the large, single dwellings on a fairly substantial amount of land.

On the commercial and office side, do you have a project coming up?

One Africa is probably the most high-profile building that is being developed next door to Delta Corner. Delta Corner is where Oracle and PwC are here in Westlands. We will let that and fill it with the best quality tenants we can find in the market and then manage it going forwards. There are also various other buildings we are involved with in the Westlands which is the prime business market. Sanlam Tower we are joint with a number of other tenants on as well. There are others in Upper Hill, but Upper Hill is a slightly secondary location which has Britam Tower and other developments.

What are the major challenges that you face?

The challenges that we face in Knight Frank after three years of a subdued economy probably relate to having had 13 to 14 years of year on year growth. When you start to see that growth reverse, you obviously have to reverse other policies within the company. If you are not used to doing that, then that could be a challenge. Year on year growth means year on year recruitment and growth in the payroll. That has to be reversed quickly. You might not be able to rely on natural wastage and you might have to take positive steps towards actively reducing your payroll. That is something that we have not had to do, thankfully. We have been able to rely on promoting from within and not recruiting from without and relying on natural wastage through retirement and people moving on to do different things. It is remaining lean and mean as an organization and not allowing yourself to simply just keep on growing because that is what you are used to, saying no to new instructions, only taking on work that is profitable, and not just for the sake of growing. These are hard lessons to learn if you have been sitting in a market that has simply been growing year on year for as long as this market has. It is probably typical of a lot of emerging markets. The fact that the market is growing so quickly because it is coming from such a low base and with such a rapidly growing population as well, it can mask the underlying fluctuations that would occur within a normal market because normal markets do not grow as fast as emerging markets do. A lot of organizations fail because they are too slow to react to changing market conditions. But if you look at the market very carefully and understand it very well, you will see that even though you have had year on year growth, there have been some changes under the surface that are much more difficult to detect.

What is your vision for the company in the medium term, three years’ time? What would you like Knight Frank to be and what would you like to have achieved?

We have been in a rather flat market since 2015 and so far into 2019. But because Nairobi is a regional hub and is a two-tier market, the FDI has remained strong in terms of demand. We have started to see the oversupply being whittled away. We have seen a slowdown in construction. Going forwards, I see an economic recovery, particularly if the interest rate cap is repealed as has been suggested it will be in the last budget. Therefore, I see the imbalance between supply and demand being addressed and we will see a recovery in rental and capital values probably occurring during the latter part of 2020 going forwards, a general economic recovery in the real estate space. I just hope that it is not effected by a slide into the next election cycle which happens in 2022. I hope that in 2020 and 2021 we will see sufficient growth in the market to ride through the 2022 election without too much disruption.

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