Politics, inflation and interest caps: Daily struggles of the Kenyan mall

Thika Road Mall, popularly known simply as TRM, is one of the few that have weathered current economic climate. PHOTO| FILE| NATION MEDIA GROUP

What you need to know:

  • That almost every corner of Nairobi has a mall today is not in contention, but are these real estate monoliths making any economic sense to the developers?
  • Food inflation might not point to easy connections with the falling fortunes of malls, but in a country where supermarkets are, invariably, the anchor tenants for malls, when people cannot afford unga or rice, the footfall into supermarkets, and therefore malls, takes a beating.
  • Following in the footsteps of struggling malls is the commercial offices market, which is over supplied at the moment. The popularity of Nairobi as a base for multinational companies in the last decade has pushed up demand for office space.

Necessity, they say, is the mother of invention, and Kenyan mall developers are learning this the hard way. A tough economic environment has been made worse by a particularly bad political environment, forcing developers to rethink their business model, and that is how the new Kenyan shopping mall is offering more than just acres of retail space.

That almost every corner of Nairobi has a mall today is not in contention, but are these real estate monoliths making any economic sense to the developers? In the race to outdo each other with the glitziest, swankiest shopping mall, are developers burning money?

Does Nairobi, really, need a mall in every residential estate?

To answer those questions you need to consider this; there are approximately 48 malls in Nairobi, both within the CBD and in the outer pockets of the city, especially along Thika, Ngong, Mombasa, and North Airport roads, as well as within the residential neighbourhoods of Komarock, Kayole and Ngong.

Further away from the limits of the city, in places like Thika, Kitengela and Machakos, which also serve as the bedrooms of Nairobi’s workforce, the craze is catching on too. But whereas shopping malls in other towns — like Mombasa and Kisumu — seem to be serving a need, some of those within Nairobi’s residential areas are literally pissing in the wind. And the current economic and political climate is not helping matters at all.

Empty halls, shops and parking lots are the order of the day, especially in the week, only populated by gawking ‘window shoppers’ over the weekends.

Occupancy remains a hit-or-miss affair within the estate malls.

This is giving developers a hard time as they try to figure out what to do next. At NextGen Mall, off Mombasa Road in the South C neighbourhood, the management, led by Navin Shah, even as it primes itself for take-off, agrees that business has been tough, especially this election year.

“With all the politicking you expect a lot of anxiety,” says Shah, indicating that anxiety and new malls, generally, do not mix well. Investors want a predictable political and economic environment, and election years tend to be depressing.

His sentiments are echoed by Bashir Dalvi, the chief operating officer at Thika Road Mall. “It has been a lull market since January,” says Dalvi.

“Inflation has pushed up the cost of living dramatically, and then the politics of unga hit us badly since July.”

Food inflation might not point to easy connections with the falling fortunes of malls, but in a country where supermarkets are, invariably, the anchor tenants for malls, when people cannot afford unga or rice, the footfall into supermartkets, and therefore malls, takes a beating.

NextGen opened its gates to the public two years ago with the exciting offer of owning a piece of the pie rather than renting it.

“It was the first time in Kenya a mall was being sold to business people to put up offices and shops,” Shah recalls. “It excited the market.”

But so far only 70 per cent of the space has been sold. And, to make matters worse, anchor tenant Nakumatt Supermarkets has just exited following a biting financial crisis that has crippled the retail chain.

Arabian retailer Souk Bazaar has expressed interest in the 90,000 square feet of space on the ground and first floors of NextGen. “This will no doubt give the mall a bounce,” says Shah. “It will be the second-biggest shopping space after Carrerfour at Two Rivers.”

At TRM, Nakumatt is also closing shop, and the management says it is looking for international retailers to fill the void. “We got plans, no matter what happens to Nakumatt,” says Dalvi.

NextGen Mall on Mombasa Road, Nairobi is now allowing tenants to buy their rental space through monthly instalments. PHOTO| FILE NATION MEDIA GROUP

NextGen, feeling the pinch of empty shops, has introduced an interest-free, rent-to-own model for prospective investors. “We are not asking for any commitment fee or deposit,” says Shah. “Just pay 10 per cent of the actual purchase and settle the rest in instalments. We are actually giving back to community by enabling the ordinary businessperson to own a part of the mall.”

Even though business has slowed down, TRM’s location seems to have worked for the investors. The mall is surrounded by middle-class residential estates — Ngumba and Kasarani. Some drive in while others just walk in to shop, bank, eat or just have a good time at the coffee shops and fast food outlets.

“Our customers have been loyal,” says Dalvi. “But also retailers have struggled with tartgets.” A recent study showed that most of their footfall is aged between 18 and 35. “These are upcoming professionals and entrepreneurs, and what they are looking for at the mall is a wow shopping experience,” says Dalvi.

MORE RESIDENTS MEANS MORE CLIENTS

Generally, business at the mall has been vibrant as the only available space has been taken up by the UK-based Easy Gym, which is setting up in Kenya.
NextGen’s location is served well by estates along Mombasa Road, such as South C and the industrial area. It is also a gateway to the city and an entrance to the north of Nairobi through the Southern Bypass.

The locale is ideal, as it is next to three-star hotels such as Eka Hotel, Panari Hotel and Ole Sereni, but the investors want residents surrounding them, not tourists. More people living around the mall would mean more people looking for stuff to buy or a place to have fun in.

As a result, the management is building two- and three-bedroom apartments just behind the mall to create a community. The apartments fetch Sh6 million and above, through a similar rent-to-own model.

“They will be served by the biggest food court in Kenya — serving all cuisines and complete with a kids playground, a swimming pool and other amenities,” says Shah.

NextGen Mall on Mombasa Road is putting up a residential neighbourhood to guarantee footfall into the mall. PHOTO| FILE| NATION MEDIA GROUP

The tough economic environment for mall investors started way back in 2015, says Patrick Kavindu, a fund operations analyst at Cytonn Investments.

“In the second half of 2015, interest rates on loans went down and this saw a high liquidity in the market, making inflation a bit unstable,” Kavindu offers. And then, to make matters worse, the government borrowed from the market, seeing interest rates on loans shoot above 20 per cent. Most homeowners could not afford to take up mortgages and a high rate of default on loans led to a challenging operating environment.

“To control this, the government capped interest rates,” says Kavindu. And, miffed, banks responded by stopping lending the ordinary mwananchi due to the lowered profitability.

This has seen the rate of mortgage uptake slow down — the first decline in the last five years — to a constant 24,000. Private sector credit growth has also sharply dropped, from 18 per cent to two per cent; meaning growth within the SME sub-sector is minimal.

“The private sector is the mainstay of the economy,” says Kavindu. “When it does not contribute as much, incomes do not grow, affecting spending culture and future investments. The government should rethink the interest rates cap as it has not had the desired effects. It is affecting the economy, not just banking.”

CITY OFFICE SPACE OVERSUPPLIED BY 3.2M SQUARE FEET

Following in the footsteps of struggling malls is the commercial offices market, which is over supplied at the moment. The popularity of Nairobi as a base for multinational companies in the last decade has pushed up demand for office space, with prices rising to Sh150 per square feet.

The new, modern UAP Towers in Upper Hill. The popularity of Nairobi as a base for multinational companies in the last decade has pushed up demand for office space. PHOTO| FILE| NATION MEDIA GROUP

Naturally, developers moved into this area, putting up office blocks in, especially, Upper Hill, says Nancy Murule, a research analyst with Cytonn Investments. She notes that, currently, Nairobi is oversupplied by over 3.2 million square feet of office space.

What many have not realised, even as they put up these mega developments, is that the retail market runs the mall culture in Nairobi, whose population growth is estimated at 3.3 per cent per year, due to urbanisation. This is way higher than the country average of 2.7 per cent.

“The increased urbanisation of Nairobi is partly due to employment prospects and higher incomes,” says Ms Murule. With this, they are able to afford a lifestyle experience; which has informed the development of malls in Nairobi. However, this has led to the duplication of retail outlets and business models, affecting footfall in malls, she notes.

Another key thing no watch closely is the repeat presidential elections. “If they turn out peaceful, the shilling will no doubt strengthen and restore market confidence in investors,” she notes.

Similar views are expressed by Bashir Dalvi, of TRM. “Once elections are over, Kenya will still be among the top 10 most secure investment destinations in the world,” he says.