Investment Updates:

• Weekly Rates:
• Cytonn Money Market Fund closed the week at a yield of 15.61% p.a To invest, dial *809# or download the Cytonn App from Google Playstore here or from the Appstore here;
• Cytonn High Yield Fund closed the week at a yield of 17.96% p.a. To invest, email us at sales@cytonn.com and to withdraw the interest, dial *809# or download the Cytonn App from Google Playstore here or from the Appstore here;
• We continue to offer Wealth Management Training every Monday, from 9:00 am to 11:00 am. The training aims to grow financial literacy among the general public. To register for any of our Wealth Management Trainings, click here;
• If interested in our Private Wealth Management Training for your employees or investment group, please get in touch with us through wmt@cytonn.com;
• Cytonn Insurance Agency acts as an intermediary for those looking to secure their assets and loved ones’ future through insurance namely; Motor, Medical, Life, Property, WIBA, Credit and Fire and Burglary insurance covers. For assistance, get in touch with us through insuranceagency@cytonn.com;
• Cytonn Asset Managers Limited (CAML) continues to offer pension products to meet the needs of both individual clients who want to save for their retirement during their working years and Institutional clients that want to contribute on behalf of their employees to help them build their retirement pot. To more about our pension schemes, kindly get in touch with us through pensions@cytonn.com;

Real Estate Updates:

• For more information on Cytonn’s real estate developments, email us at sales@cytonn.com;
• Phase 3 of The Alma is now ready for occupation and the show house is open daily. To join the waiting list to rent, please email properties@cytonn.com;
• For Third Party Real Estate Consultancy Services, email us at rdo@cytonn.com;
• For recent news about the group, see our news section here;

Hospitality Updates:

• We currently have promotions for Staycations. Visit cysuites.com/offers for details or email us at sales@cysuites.com;

Money Markets, T-Bills Primary Auction:

During the week, T-bills were oversubscribed for the fourth consecutive week, with the overall subscription rate coming in at 115.1%, albeit lower than the oversubscription rate of 208.3% recorded the previous week. Investors’ preference for the shorter 91-day paper persisted, with the paper receiving bids worth Kshs 23.4 bn against the offered Kshs 4.0 bn, translating to an oversubscription rate of 584.9%, albeit lower than the oversubscription rate of 942.7% recorded the previous week. The subscription rates for the 182-day and 364-day papers decreased to 23.8% and 18.5%, from 94.0% and 28.9% respectively, recorded the previous week. The government accepted a total of Kshs 26.6 bn worth of bids out of Kshs 27.6 bn of bids received, translating to an acceptance rate of 96.4%. The yields on the government papers recorded mixed performance, with the yields on the 182-day, and 91-day papers increasing by 1.6 bps and 7.9 bps to 15.4% and 15.4% respectively, while the yield on the 364-day paper decreased by 5.6 bps to 15.6%. The chart below compares the overall average T- bill subscription rates obtained in 2017, 2022, and 2023 Year to Date (YTD):

Money Market Performance:

In the money markets, 3-month bank placements ended the week at 13.5% (based on what we have been offered by various banks), and the yields on the 364-day paper decreased by 5.6 bps to 15.6% and 91-day T-bill yield increased by 7.9 bps to 15.4%. The yields of the Cytonn Money Market Fund increased by 68.0 bps to 15.6% from 14.9% recorded the previous week, and the average yields on the Top 5 Money Market Funds increased by 38.4 bps to 15.2%, from 14.8% recorded the previous week.

The table below shows the Money Market Fund Yields for Kenyan Fund Managers as published on 24^th November 2023: 

Source: Business Daily

Liquidity:

During the week, liquidity in the money markets slightly tightened, with the average interbank rate increasing to 11.2% from 11.0% recorded the previous week, partly attributable to tax remittances that offset government payments. The average interbank volumes traded increased by 1.6% to Kshs 23.8 bn from Kshs 23.4 bn recorded the previous week. The chart below shows the interbank rates in the market over the years:

Kenya Eurobonds:  

During the week, the yields on Eurobonds were on a downward trajectory, with the yield on the 10-year Eurobond issued in 2014 decreasing the most by 1.2% points to 12.9%, from 14.1% recorded the previous week. The table below shows the summary of the performance of the Kenyan Eurobonds as of 23^rd November 2023;

Source: Central Bank of Kenya (CBK) and National Treasury

Kenya Shilling:

During the week, the Kenya Shilling depreciated against the US Dollar by 0.4% to close at Kshs 152.8, from Kshs 152.2 recorded the previous week. On a year-to-date basis, the shilling has depreciated by 23.8% against the dollar, adding to the 9.0% depreciation recorded in 2022. We expect the shilling to remain under pressure in 2023 as a result of:       

1. An ever-present current account deficit which came at 3.7% of GDP in Q2’2023 from 6.0% recorded in a similar period last year,
2. The need for government debt servicing, continues to put pressure on forex reserves given that 67.1% of Kenya’s external debt was US Dollar denominated as of June 2023, and,
3. Dwindling forex reserves currently at USD 6.7K bn (equivalent to 3.6-months of import cover), which is below the statutory requirement of maintaining at least 4.0-months of import cover.

The shilling is however expected to be supported by:

1. Diaspora remittances standing at a cumulative USD 3,462.4 mn as of October 2023, 4.1%% higher than the USD 3,325.1 mn recorded over the same period in 2022, which has continued to cushion the shilling against further depreciation. In the October 2023 diaspora remittances figures, North America remained the largest source of remittances to Kenya accounting for 57.0% in the period, and,
2. The tourism inflow receipts which came in at USD 268.1 bn in 2022, a significant 82.9% increase from USD 146.5 bn inflow receipts recorded in 2021.

Key to note, Kenya’s forex reserves declined by 0.9% during the week to USD 6.7 bn from USD 6.8 bn recorded the previous week, equivalent to 3.6 months of import cover same as the previous week, and remained below the statutory requirement of maintaining at least 4.0-months of import cover. The chart below summarizes the evolution of Kenya months of import cover over the years:

Rates in the Fixed Income market have been on an upward trend given the continued high demand for cash by the government and the occasional liquidity tightness in the money market. The government is 2.4% ahead of its prorated net domestic borrowing target of Kshs 129.4 bn, having a net borrowing position of Kshs 132.4 bn out of the domestic net borrowing target of Kshs 316.0 bn for the FY’2023/2024. Therefore, we expect a continued upward readjustment of the yield curve in the short and medium term, with the government looking to bridge the fiscal deficit through the domestic market. Owing to this, our view is that investors should be biased towards short-term fixed-income securities to reduce duration risk.

Market Performance:

During the week, the equities market was on an upward trajectory, with NSE 20 gaining the most by 2.6%, while NASI, NSE 10 and NSE 25 gained by 1.9%, 1.9% and 2.1% respectively, taking the YTD performance to losses of 27.6%, 23.0% and 9.9% for NASI, NSE 25, and NSE 20, respectively. The equities market performance was mainly driven by gains recorded by large-cap stocks such as Bamburi, NCBA Group and ABSA of 21.1%, 6.9% and 5.0% respectively. The gains were however weighed down by losses recorded by stocks such as Cooperative Bank and BAT of 0.9% and 0.1% respectively.

During the week, equities turnover increased by 110.0% to USD 6.1 mn, from USD 2.9 mn recorded the previous week, taking the YTD total turnover to USD 621.9 mn. Foreign investors became net buyers for the first time in seven weeks, with a net buying position of USD 0.3 mn, from a net selling position of USD 0.5 mn recorded the previous week, taking the YTD foreign net selling position to USD 287.8 mn.

The market is currently trading at a price to earnings ratio (P/E) of 4.9x, 59.6% below the historical average of 12.1x. The dividend yield stands at 9.4%, 5.0% points above the historical average of 4.4%. Key to note, NASI’s PEG ratio currently stands at 0.6x, an indication that the market is undervalued relative to its future growth. A PEG ratio greater than 1.0x indicates the market is overvalued while a PEG ratio less than 1.0x indicates that the market is undervalued. The charts below indicate the historical P/E and dividend yields of the market;

Universe of Coverage:

We are “Neutral” on the Equities markets in the short term due to the current tough operating environment and huge foreign investor outflows, and, “Bullish” in the long term due to current cheap valuations and expected global and local economic recovery.

With the market currently being undervalued to its future growth (PEG Ratio at 0.6x), we believe that investors should reposition towards value stocks with strong earnings growth and that are trading at discounts to their intrinsic value. We expect the current high foreign investors sell-offs to continue weighing down the equities outlook in the short term. 

Weekly Highlights:

Earnings Releases

1. KCB Group Q3’2023 Financial Performance

During the week, KCB Group released their Q3’2023 financial results.  Below is a summary of the performance;

Key Take-Outs:

1. Increase in earnings - Core earnings per share (EPS) increased marginally by 0.4% to Kshs 9.6, from Kshs 9.5 in Q3’2022, driven by the 27.3% growth in total operating income to Kshs 117.3 bn, from Kshs 92.1 bn in Q3’2022, which outweighed the 57.0% growth in total operating expenses to Kshs 76.7 bn, from kshs 48.8 bn in Q3’2022,
2. Increased Provisioning – On the back of high credit risk occasioned by the deteriorated business environment, the bank increased its provisions holdings to cover for the anticipated losses in the future, with its provisions increasing by 47.9% to Kshs 96.7 bn from Kshs 65.4 bn recorded in Q3’2022, and,
3. Improved Lending – The Group’s loan book increased by 38.1% to kshs 1,047.9 bn, from kshs 758.8 bn in Q3’2022, which slightly outpaced the 37.5% growth in government securities to kshs 325.6 bn, from kshs 236.8 bn in Q3’2022, highlighting the Group’s strategy to increase lending while at the same time managing its non-performing loan book,
4. Revenue Diversification – The Group’s Non-Funded income increased by 38.7% to Kshs 42.4bn in Q3’2023, from Kshs 30.6 bn in Q3’2022, which resulted to a shift in revenue mix to 64:36 from 67:33 for the funded to Non-funded income in Q3’2022 following the 38.7% growth in NFI which outpaced the 21.6% growth in funded income.

For a more detailed analysis, please see the KCB Group Q3’2023 Earnings Note

2. ABSA Bank Kenya Q3’2023 Financial Performance

During the week, ABSA Bank Kenya released their Q3’2023 financial results.  Below is a summary of the performance;

Key Take-Outs:

1. Increased earnings - Core earnings per share (EPS) increased by 14.9% to Kshs 2.3, from Kshs 2.0 in Q3’2022, driven by the 20.0% growth in total operating income to Kshs 40.2 bn, from Kshs 33.4 bn in Q3’2022, which outweighed the 21.9% growth in total operating expenses to kshs 22.3 bn, from Kshs 18.3 bn in Q3’2022,
2. Increased Provisioning – On the back of high credit risk occasioned by the deteriorated business environment, the bank increased its provisions holdings to cover for the anticipated losses in the future, with its provisions increasing by 34.3% to Kshs 6.8 bn from Kshs 5.0 bn recorded in Q3’2022, and,
3. Improved Lending – The Group’s loan book increased by 14.3% to kshs 330.9 bn, from kshs 289.4 bn in Q3’2022, which outweighed the 23.8% decline investment in government securities to Kshs 106.6 bn from Kshs 139.8 bn in Q3’2022, highlighting the Group’s strategy to increase lending while shifting in its asset allocation strategy.

For a more detailed analysis, please see the ABSA Bank’s Q3’2023 Earnings Note

3. I&M Group Q3’2023 Financial Performance

During the week, I&M Group released their Q3’2023 financial results.  Below is a summary of the performance;

Key Take-Outs:

1. Strong earnings growth - Core earnings per share (EPS) increased by 14.3% to Kshs 5.0 from Kshs 4.3 in Q3’2022, mainly driven by 19.4% growth in total operating income to Kshs 29.9 bn in Q3’2023 from Kshs 25.0 bn in Q3’2022. The performance was however weighed down by the 28.6% increase in total operating expenses to Kshs 19.2 bn, from Kshs 14.9 bn in Q3’2022,
2. Increased Provisioning – The group’s provisioning increased by 8.1% to Kshs 14.6 bn in Q3’2023, from Kshs 13.6 bn in Q3’2022 aimed at mitigating increased credit risk on the back of the deteriorated business environment. This is evidenced by the 52.5% growth in Gross Non-Performing Loans (NPLs) to Kshs 36.1 bn in Q3’2023, from Kshs 23.7 bn recorded in Q3’2022, and,
3. Revenue Diversification – The Group’s Non-Funded income increased by 21.2% to Kshs 10.7 bn in Q3’2023, from Kshs 8.8 bn in Q3’2022, which resulted to a shift in the revenue mix for funded to non-funded income shifted to 64:36 in Q3’2023 from 65:35 in Q3’2022. The increase was mainly attributable to the 21.2% increase in non-funded income which outpaced the 18.4% growth in net interest income.

For a more detailed analysis, please see the I&M Group’s Q3’2023 Earnings Note

4. NCBA Group Kenya Q3’2023 Financial Performance

During the week, NCBA Group released their Q3’2023 financial results.  Below is a summary of the performance;

Key Take-Outs:

1. Strong earnings growth - Core earnings per share (EPS) increased by 14.4% to Kshs 8.9, from Kshs 7.8 in Q3’2022, driven by the 2.0% growth in total operating income to Kshs 46.7 bn, from Kshs 45.8 bn in Q3’2022,
2. Improved asset quality – The Group’s gross NPL ratio decreased to 12.0% in Q3’2023 from 12.6% in Q3’2022, attributable to the 14.3% increase in gross loans to Kshs 331.3 bn, from Kshs 289.9 bn recorded in Q3’2022, which outpaced the 9.2% increase in Gross non-performing loans to Kshs 39.7 bn, from Kshs 36.4 bn in Q3’2022, and,
3. Improved Lending – The Group’s loan book increased by 16.0% to kshs 308.7 bn, from kshs 266.1 bn in Q3’2022, which outweighed the 2.9% decline in investment in government securities to Kshs 200.8 bn from Kshs 206.8 bn in Q3’2022, highlighting the Group’s strategy to increase lending.

For a more detailed analysis, please see the NCBA Group’s Q3’2023 Earnings Note

5. Equity Group Q3’2023 Financial Performance

During the week, Equity Group released their Q3’2023 financial results.  Below is a summary of the performance;

Key Take-Outs:

1. Strong earnings growth – Core earnings per share (EPS) grew by 5.3% to Kshs 9.6, from Kshs 9.1 in Q3’2022, mainly driven by the 27.8% growth in total operating income to Kshs 130.4 bn, from Kshs 102.1 bn in Q3’2022. However, the performance was weighed down by a 46.3% growth in total operating expenses to Kshs 84.5 bn, from Kshs 57.7 bn in Q3’2022,
2. Increased Provisioning – On the back of high credit risk occasioned by the deteriorated business environment, the bank increased its provisions holdings to cover for the anticipated losses in the future, with its provisions increasing by 96.6% to Kshs 19.0 bn from Kshs 9.7 bn recorded in Q3’2022, and,
3. Revenue Diversification – The Group’s Non-Funded income increased by 36.9% to Kshs 57.8 bn in Q3’2023, from Kshs 42.2 bn in Q3’2022, which resulted to a shift in revenue mix to 56:44 in Q3’2023 from 59:41 in Q3’2022. The increase was mainly attributable to the faster 36.9% increase in non-funded income compared to the 21.3% increase in Funded income to kshs 72.6 bn, from kshs 59.8 bn in Q3’2022:

For a more detailed analysis, please see the Equity Group’s Q3’2023 Earnings Note

6. Standard Chartered Bank Kenya Q3’2023 Financial Performance

During the week, Standard Chartered Bank Kenya released their Q3’2023 financial results.  Below is a summary of the performance;

Key Take-Outs:

1. Strong earnings growth - Core earnings per share (EPS) grew by 11.8% to Kshs 25.8, from Kshs 23.1 in Q3’2022, driven by the 19.8% growth in total operating income to Kshs 29.4 bn, from Kshs 24.6 bn in Q3’2022. The performance was however weighed down by the 28.4% increase in the total operating expenses to Kshs 15.8 bn in Q3’2023, from Kshs 12.3 bn in Q3’2022,
2. Improvement in Asset Quality - The group’s asset quality improved significantly, with the NPL ratio improving to 14.4% in Q3’2023, from 15.4% recorded in Q3’2022. The improvement in asset quality was attributable to the 4.6% growth in gross loans to kshs 163.1 bn, from kshs 155.9 bn in Q3’2022, relative to the 2.0% decrease in gross non-performing loans to kshs 23.6 bn, from kshs 24.0 bn in Q3’2022, and,
3. Increased Provisioning - Q3’2023 was characterized by increased provisioning, attributable to the high credit risks brought about by the deteriorated business environment. As such, Standard Chartered Bank Kenya increased its loan loss provisions by 193.4% to kshs 1.8 bn in Q3’2023, up from Kshs 0.6 bn provisioning recorded in Q3’2022. Notably, General Provisions (LLP) decreased marginally by 1.0% to Kshs 10.2 bn, from Kshs 10.3 bn recorded in Q3’2022.

For a more detailed analysis, please see the Standard Chartered Bank’s Q3’2023 Earnings Note

7. Stanbic Holding’s Q3’2023 Financial Performance

During the week, Stanbic Holding’s released their Q3’2023 financial results.  Below is a summary of the performance;

Key Take-Outs:

1. Strong earnings growth - Core earnings per share (EPS) grew by 32.7% to Kshs 23.5, from Kshs 17.7 in Q3’2022, driven by the 33.7% growth in total operating income to Kshs 30.7 bn, from Kshs 23.0 bn in Q3’2022, and,
2. Improved asset quality - The bank’s gross NPL ratio decreased to 9.0% in Q3’2023 from 10.1% in Q3’2022, attributable to 6.2% decrease in Gross non-performing loans to Kshs 24.1 bn, from Kshs 25.6 bn in Q3’2022, compared to the 5.4% increase in gross loans to Kshs 266.9 bn, from Kshs 253.2 bn recorded in Q3’2022,

For a more detailed analysis, please see the Stanbic Holding’s Q3’2023 Earnings Note

Asset Quality:

Key take-outs from the table include:

1. Asset quality for the listed banks deteriorated slightly in Q3’2023, with market weighted average NPL increasing marginally by 0.06% points to 13.93% from a 13.87% in Q3’2022. The performance in asset quality was mainly driven by deterioration in Equity Group, I&M Holdings and Coop Bank asset quality with their NPL ratios increasing by 4.2%, 2.3% and 0.9% points respectively. The performance was however supported by KCB Group, NCBA Group and ABSA Bank Kenya asset quality with their NPL ratios decreasing by 4.2%, 3.4% and 1.8% points respectively,
2. Equity Group had the highest NPL ratio jump by 4.2% points to 13.6% from 9.5% points in Q3’2022, attributable to 83.5% increase in Gross non-performing loans Kshs 124.5 bn in Q3’2023 from Kshs 67.9 bn in Q3’2022, which outpaced the 27.3% increase in gross loans to Kshs 912.4 bn from Kshs 716.6 bn recorded in Q3’2022,
3. Market weighted average NPL Coverage for the listed banks that have released their results decreased by 2.7% points to 63.2% in Q3’2023, from 65.9% recorded in Q3’2022, majorly on the back of decreased NPL coverage recorded by I&M Holdings, Equity Group and Coop Bank by 23.6%, 9.6%, 9.1% and 7.2% respectively in Q3’2022. However, ABSA Bank Kenya, KCB Group and Stanbic bank NPL coverage increased by 9.3% points, 5.3% points and 3.0% points to 62.1%, 51.1% and 66.3% respectively in Q3’2023.

Summary Performance

The table below shows performance of listed banks using several metrics:

Key take-outs from the table include:

1. The listed banks that have released their earnings recorded an average growth of 10.7% in core Earnings per Share (EPS) in Q3’2023, compared to the weighted average growth of 36.3% in Q3’2022, an indication of suppresed performance due to the tough operating environment experienced in Q3’2023,
2. Non-Funded Income grew by an average of 17.3% compared to market weighted average growth of 30.1% in Q3’2022, despite the increased revenue diversification efforts by the banks, and,
3. The Banks recorded a deposit growth of 24.0%, higher than the market weighted average deposit growth of 9.8% in Q3’2022.

We are “Neutral” on the Equities markets in the short term due to the current tough operating environment and huge foreign investor outflows, and, “Bullish” in the long term due to current cheap valuations and expected global and local economic recovery.

With the market currently being undervalued to its future growth (PEG Ratio at 0.6x), we believe that investors should reposition towards value stocks with strong earnings growth and that are trading at discounts to their intrinsic value. We expect the current high foreign investors sell-offs to continue weighing down the equities outlook in the short term. 

I. Residential Sector During the week, property developer Mi Vida Homes broke ground for the construction of three projects namely, Amaiya, 237 Garden City (237 GC) and KEZA located within Garden City along Thika Road, and Riruta areas respectively. This comes more than a year after the developer announced plans to begin construction in April 2022. Amaiya, positioned within the Garden City Development, is the second phase of Mi Vida’s mid-market product, following the successful completion and sale of Mi Vida's inaugural project of 221 housing units also located within Garden City. Amaya project comprises one, two and three-bedroom duplexes targeting the middle-income segment of the market. The project is set to be completed by April 2025 and will offer amenities including an electric fence, parking area, CCTV cameras, a nearby bus stop, neighboring restaurants and shops, proximate hospital, and a nearby school. The table below presents a summary of the various typologies, sizes and unit pricing;

Source: Mi Vida Homes

On the other hand, 237 GC and KEZA constitute affordable housing projects initiated by the developer. The two projects are reflective of the broader trends currently witnessed in the Kenyan Real Estate market, in line with the government’s focus on provision of affordable housing. KEZA which is located in Riruta, Nairobi County, is an extensive 1,150-unit project with its mix of studio, 1, 2, and 3-bedroom apartments. This project also is set to commence in April next year and will offer amenities such as an electric fence, CCTV cameras, nearby shopping center, and neighboring schools. The table below gives a summary of the unit types, sizes and prices for the developments;

Source: Mi Vida Homes Website

Mi Vida Homes’ 237 GC project worth Kshs 1.6 bn which is situated within Garden City, will deliver 640 units comprising studio, one, and two-bedroom apartments. The project will offer amenities such as a parking area, an electric fence, state of the art surveillance systems, and nearness to key amenities such as schools, and hospitals. In terms of purchasing, the project will offer flexible payment plans to potential buyers including; i) a 5-year rent to own payment plan with monthly payments from Kshs 40,000, and no deposit payable before commencement of these monthly repayments, and ii) a rent to own scheme with monthly repayments from Kshs 19,000 payable over a 20-year period, upon the payment of a 30.0% deposit payable over the construction period.

In our view, the above affordable housing projects in comparison to the government’s affordable housing program (AHP) are significantly expensive. In terms of affordability, the unit prices translate to an average of Kshs 103,079 per SQM, which is 124.3% higher than the government’s affordable housing average of Kshs 45,833 per SQM.

On the other hand, we expect these developments will to some extent; i) contribute towards addressing the growing need for housing in the Nairobi Metropolitan Area, facilitated by the high urbanization and population growth rates currently standing at 3.7% and 1.9% respectively, ii) foster inclusive urban development, iii) enhance the quality of life of residents by providing quality affordable housing, and, iv) promote employment through the creation of both direct and indirect jobs

Moving forward, we expect to witness an increase in the number of institutional investors venturing in affordable housing segment which has traditionally been overshadowed by mid to high-end developments. Additionally, we anticipate to continue witnessing a surge in the development of Mixed-Use Developments (MUDs), as these schemes continue to grow in popularity both in Kenya and globally attributable to the diversity in amenities and social offerings they provide to clients. This inclination towards mixed-use, community-centric developments is indicative of a shift in modern homebuyers' preferences, who are increasingly seeking value beyond the residential unit.

2. Regulated Real Estate Funds
1. Real Estate Investments Trusts (REITs)

During the week, unitholders of ILAM Fahari I-REIT held an extraordinary general meeting, to vote on the proposed delisting of the fund from the Main Investment Market of the Nairobi Securities Exchange (NSE). Last month, the fund manager, ICEA Lion Asset Management (ILAM) acquired Kshs 36.5 million shares at Kshs 11.0 each from retail investors in efforts to buyout Non-Professional investors from the fund. The move was part of a larger plan to convert the REIT into a Restricted I-REIT from an Un-restricted I-REIT, which significantly limits trading of the units to only professional investors holding units worth Kshs 5.0 million and above. Upon successful delisting, ILAM Fahari I-REIT will be listed on the Unquoted Securities Platform (USP), subsequently joining the list of REITs trading on the USP alongside Acorn D-REIT and I-REIT. For more information regarding the operational restructuring of ILAM Fahari, please read our Cytonn Monthly October 2023 and Cytonn Monthly August 2023.

In the Nairobi Securities Exchange, ILAM Fahari I-REIT closed the week trading at an average price of Kshs 6.0 per share, remaining relatively unchanged from the previous week. The performance represented an 11.8% Year-to-Date (YTD) loss from Kshs 6.8 per share recorded on 3 January 2023, taking it to a 70.1% Inception-to-Date (ITD) loss from the Kshs 20.0 price. The dividend yield currently stands at 10.9%. The graph below shows Fahari I-REIT’s performance from November 2015 to 24^th November 2023;

In the Unquoted Securities Platform, Acorn D-REIT and I-REIT traded at Kshs 25.3 and Kshs 21.7 per unit, respectively, as of 27^th October 2023. The performance represented a 26.6% and 8.3% gain for the D-REIT and I-REIT, respectively, from the Kshs 20.0 inception price. The volumes traded for the D-REIT and I-REIT came in at 12.3 mn and 30.7 mn shares, respectively, with a turnover of Kshs 257.5 mn and Kshs 633.8 mn, respectively, since inception in February 2021.

REITs provide various benefits like tax exemptions, diversified portfolios, and stable long-term profits. However, the continuous deterioration in performance of the Kenyan REITs and restructuring of their business portfolio is on top of other general challenges such as; i) inadequate comprehension of the investment instrument among investors, ii) prolonged approval processes for REITs creation, iii) high minimum capital requirements of Kshs 100.0 mn for trustees, and, iv) minimum investment amounts set at Kshs 5.0 mn, continue to limit the performance of the Kenyan REITs market.

2. Cytonn High Yield Fund (CHYF)

Cytonn High Yield Fund (CHYF) closed the week with an annualized yield of 18.0%, a 1.6% increase from 16.4% recorded the previous week. The performance represented a 4.1%-points Year-to-Date (YTD) increase from 13.9% yield recorded on 1^st January 2023, and 2.3%-points Inception-to-Date (ITD) increase from the 15.7% yield. The graph below shows Cytonn High Yield Fund’s performance from November 2019 to 24^th November 2023;

Notably, the CHYF has outperformed other regulated Real Estate funds with an annualized yield of 18.0%, as compared to Fahari I-REIT and Acorn I-REIT with yields of 10.9%, and 2.8% respectively. As such, the higher yields offered by CHYF makes the fund one of the best alternative investment products in the Real Estate sector. The graph below shows the yield performance of the Regulated Real Estate Funds;

*H1’2023

Source: Cytonn Research

We expect the performance of Kenya’s Real Estate sector to remain on an upward trajectory, supported by factors such as; i) initiation and development of housing projects expected to boost the residential sector, ii) relatively positive demographics in the country increasing demand for housing, and, iii) the growth in popularity of Mixed-Use Developments attributable to the diversity in amenities and social offerings they provide to clients. However, factors such as; i) rising costs of construction, ii) limited investor knowledge in REITs, and, iii) an increase in gross non-performing loans advanced to the sector signifying elevated credit risk will continue to hinder optimal performance of the sector by limiting developments and investments.

In 2022, we published the Nairobi Metropolitan Area Serviced Apartments Report 2022, which highlighted that serviced apartment’s average rental yield grew by 0.7% points to 6.2% in 2022, from 5.5% recorded in 2021. This was attributed to an increase in average monthly charges per SQM by 6.6% to Kshs 2,716 per SQM, from Kshs 2,549 per SQM recorded in 2021, coupled with an increase in occupancy levels by 4.3% to 65.8% in 2022, from 61.5% recorded in 2021. The improvement in performance was attributable to increased demand for hospitality facilities and services as a result of the reopening of the economy, the return of international flights, and the improved rent collection amounts by serviced apartments that had previously been issuing discounts to attract and maintain clients. This year, we update our report using 2023 market research data and by focusing on;

1. Overview of the Kenyan Hospitality Sector,
2. Introduction to Serviced Apartments,
3. Supply and Distribution of Serviced Apartments within the NMA,
4. Performance of Serviced Apartments in the NMA,
   1. Serviced Apartments Performance by Node
   2. Comparative Analysis - 2022/2023 Market Performance
   3. Performance per Typology
5. Recommendations and Outlook. 

Section I: Overview of the Kenyan Hospitality Sector

In 2023, the Kenyan hospitality sector continues its path to recovery and expansion, demonstrating resilience and adaptability despite ongoing global challenges. Building on the momentum of the previous year, the sector has witnessed significant growth and transformation, driven by various factors contributing to its resurgence. The hospitality sector's recovery from the aftermath of the pandemic persists as one of the noteworthy highlights. Following the tumultuous period induced by COVID-19, 2022 marked a significant rebound, with 2023 showcasing a sustained trajectory of improvement. Key performance indicators, including hotel occupancy rates, international arrivals, and sectoral contribution to the economy, have displayed promising upward trends.

In terms of international arrivals, Kenya National Bureau of Statistics’ Leading Economic Indicators – September 2023 report highlighted that arrivals through Jomo Kenyatta International Airport (JKIA) and Moi International Airport (MIA) registered an increase of 13.3% to 317,196 visitors in Q2’2023 from 279,981 visitors in Q2’2022. This is was a result of i) increased international marketing of Kenya’s tourism market by the Ministry of Tourism in collaboration with the Kenya Tourism Board, through platforms such as the Magical Kenya platform, ii) the tourism board alignment of its marketing initiatives towards targeting emerging and established source markets, iii) concerted efforts to promote local and regional tourism, iv) development of niche products such as cruise tourism, adventure tourism, culture and sports tourism and, iv) an increase in corporate and business Meetings, Events, and Conferences (MICE) from both the public and private sectors. For the months of July and August 2023, the number of international visitors arriving through Jomo Kenyatta (JKIA) and Moi International Airports (MIA) came in at a cumulative 316,193 persons, representing a significant 34.0% increase, compared to the 235,982 visitors recorded during a similar period in 2022. The graph below shows the number of international arrivals in Kenya between Q1’2020 and Q2’2023;

Source: Kenya National Bureau of Statistics

Some of the factors that continue to cushion the hospitality sector include; 

1. Retraction of all Travel Restrictions: The retraction of pandemic-related travel restrictions, both domestically and globally, remains a cornerstone for the sector's revitalization. The restoration of international connectivity and a conducive travel environment have contributed to increased tourist arrivals and operational activities within the country,
2. Hosting Global Sports Events: Kenya has continued to host various events such as the World Rally Championship (WRC) held in mid-2023, and still expected to be hosted annually until 2026, and the World Freestyle Football Championship 2023. These events continue to boost visitor arrivals, hotel bookings and the general performance of the hospitality industry,
3. Rich Tapestry of Tourist Attractions: Kenya's diverse and captivating array of tourist attractions, encompassing wildlife reserves, cultural heritage sites, and breathtaking landscapes, continues to captivate travelers worldwide. These include; Kenya’s Lake System, Lake Turkana National Park, Mijikenda Kaya Forests, Mount Kenya National Park, Lamu Old Town, and, Fort Jesus. Preservation efforts, coupled with innovative experiential offerings, have sustained their allure, enticing visitors seeking authentic and immersive experiences,
4. Positive Accolades for the Hospitality Industry: The garnering of prestigious industry accolades has elevated Kenya's standing in the global hospitality sphere. These events serve as magnets for visitors while concurrently enhancing the country's reputation as an alluring destination for both leisure and business travelers. Some of these accolades in 2023 included; the 30th World Travel Awards and 17th World Luxury Hotel Awards. Furthermore, Kenya was voted as Africa's Leading Destination at the 2023 World Travel Awards. This is as Nairobi and Diani emerged as Africa’s top destinations in leading business travel and beach destinations respectively,
5. Peaceful Post-Electioneering Period: In spite of the uncertain political environment in the run up to the August 2022 General Elections, the country remained calm post-election. Additionally, Kenya had a smooth government transition within 2022 leading to a sense of security and stability during 2023. This encouraged both domestic and international visitors to engage more confidently with the country,
6. Aggressive Marketing of Kenya’s Hospitality Industry: The proactive role of the government in advocating and promoting Kenya as a premier tourism destination has been instrumental. This has taken shape such as through the annual Magical Kenya Travel Expo held in the KICC and organized by the Kenya Tourism Board. In addition, strategic investments in infrastructure, targeted promotional campaigns, and collaborative efforts to attract a diverse range of domestic and international tourists have significantly bolstered the industry, and,
7. Regional Expansion Drive by Market Players: The hospitality sector has seen continued expansions, signifying investor appetite and confidence in a bid to gain market dominance on the back of the recovery of domestic and international travel. In 2023, there has been expansions by international hotel chains and hospitality brands such as such as JW Marriott of the Bonvoy Global, Pan Pacific Hotels Group and Miftah Concierge into Kenya. In addition, there are 25 new hotels in the development pipeline during 2023, an increase from 24 hotels that were established in 2022, according to the Hotel Chain Development Pipeline Africa 2023 report. These expansionary efforts are expected to further cushion the performance of the sector.

Nevertheless, the sector continues to face challenges, mainly; 

1. Increased Costs of Operation: The burgeoning operational costs during 2023 have posed challenges in maintaining competitive pricing without compromising on service quality and profitability. This is due to a number of factors, including the rising cost of inputs caused by elevated inflationary pressures, coupled with continued depreciation of the Kenyan shilling against the US dollar. On a year-to-date basis, the shilling has depreciated by 23.8% against the US dollar, adding to the 9.0% depreciation recorded in 2022. As a result, the prices of crucial inputs have increased thereby reducing profit margins for service providers in the sector, and,
2. Lack of Proactive Reputational Management: During crises, Kenya is vulnerable to travel warnings advising against travel into the country, which lead to reduced international arrivals. Additionally, there is currently no dedicated strategy by the government to pre-emptively manage this reputational risk in existence. As a result, the hospitality industry may continue to face setbacks when foreign governments issue these advisories.

Section II: Introduction to Serviced Apartments

Serviced apartments are fully furnished residences available for short-term or extended stays, and have solidified their place within the vibrant hospitality landscape of the Nairobi Metropolitan Area. They encompass a spectrum of amenities and services, resembling the comforts of home combined with hotel-like conveniences. These accommodations typically feature spacious living areas, fully equipped kitchens, separate bedrooms, and en-suite facilities, providing guests with a self-sufficient and flexible living environment. In 2023, these establishments continue to redefine the hospitality experience by catering to a diverse range of guests, including business travelers, families, digital nomads, and leisure tourists, offering tailored experiences to suit individual needs. The appeal of serviced apartments lies in their unique offerings and advantages that include:

1. Flexibility and Space: These accommodations provide more space than traditional hotel rooms, offering separate living, dining, and sleeping areas. This flexibility appeals to guests seeking a comfortable and homely environment during their stay,
2. Personalized Services: Serviced apartments offer a range of services such as housekeeping, concierge, and even customized amenities, catering to the specific needs and preferences of guests,
3. Technological Integration: The integration of advanced technologies within these apartments, including smart home features and user-friendly apps, enhances guest convenience and control over their stay,
4. Integration with Local Communities: Often situated within or near residential neighbourhoods, serviced apartments allow guests to immerse themselves in the local culture, fostering a sense of belonging and community integration, and,
5. Long-term Stay Options: As the trend toward extended stays and remote work continues, serviced apartments offer appealing options for guests seeking longer-term accommodations, complete with dedicated workspaces and amenities conducive to extended stays.

Section III: Supply and Distribution of Serviced Apartments in the Nairobi Metropolitan Area

The number of serviced apartments within the Nairobi Metropolitan Area (NMA) has increased by an 8-Year CAGR of 8.6% to 6,627 apartments in 2023, from 3,414 apartments in 2015. Notable serviced apartments facilities brought into the market in 2023 included the 100-room Dusit Princess Residences located in Westlands, and Somerset Rosslyn Nairobi by Ascott Limited, a 150-unit development in Runda which is set to be launched in December 2023. The table below shows the growth in supply of serviced apartments in the Nairobi Metropolitan Area over the last five years;

Source: Cytonn Research

In terms of distribution, Westlands and Kilimani have the largest market share of serviced apartments within the Nairobi Metropolitan Area, at 37.8% and 25.6%, respectively attributable to;

1. A growing influx of international organizations aiming to bolster their footprint in Africa, exemplified by entities such as Price Water Coopers Kenya Headquarters, United Nations agencies, and numerous embassies. This trend contributes to an expanding customer base of expatriates, thereby increasing the demand for serviced apartments,
2. The presence of premium serviced apartments commanding higher rents and rental yields, instilling confidence among investors in the region,
3. Enhanced infrastructural connectivity by projects such as the Nairobi Expressway facilitating seamless connections to and from Jomo Kenyatta International Airport (JKIA) and relatively good road network simplifying accessibility from various key locations, and,
4. Abundant social amenities, including shopping malls, and efficiently organized delivery service companies in the surrounding areas.

The table provided below illustrates the market share of serviced apartments in the Nairobi Metropolitan Area in 2023;

Source: Cytonn Research

For the projects in the pipeline, serviced apartments and hotels with serviced apartments’ concepts currently under development in the Nairobi Metropolitan Area currently include;

Source: Online Research

Section IV: Performance of Serviced Apartments in the Nairobi Metropolitan Area

In the development of the report, the performance of seven nodes within the Nairobi Metropolitan Area was tracked, and compared to the performance in 2022, with emphasis on the following metrics;

1. Charged Rates: It is the daily, weekly and monthly rates that are charged to guests for serviced apartments in specific markets. This which form the basis for evaluation of the likely rental income to be received by investors in serviced apartments,
2. Occupancy Rates: It measures the number of inhabited apartments as a percentage of the total number of units available. It also guides in determining the expected rental yields for various developments, and,
3. Rental Yields: It measures the Real Estate investment return from the annualized collected rental income. It provides investors with an estimate of the returns expected from the property, as well as the time it will take to recover the investment. In the calculation of rental yields, we estimate annual income from monthly revenues and deduct operational costs (assumed as 40.0% of revenues).

In the estimations for the investment value, we have calculated development costs per SQM through factoring in land costs (location-based), costs of construction, equipping costs, professional fees and other costs relating to development. The formula thus used in the calculation rental yields is as follows;

It is important to note that investors will generally incur varying costs depending on the actual land costs incurred, the plot ratios, and the level of finishing and equipping. In analyzing performance, we will start by the node during the year, followed by a comparison with 2022 then the performance by typology will then be covered;

1. Serviced Apartments Performance by Node

The average rental yield for serviced apartments within the NMA increased by 0.6% points to 6.8% in 2023 from 6.2% in 2022. Westlands and Limuru Road emerged the best performing nodes, with rental yields of 10.2% and 8.2% respectively, compared to the market average of 6.8%. The performance was attributed to, i) the proximity  of the nodes to international organizations and embassies concentrated within their bounds which has continued to drive the demand for serviced apartments in the nodes upward, owing to a high influx of foreign nationals and expatriates, ii) presence of high quality serviced apartments available in the nodes which attract premium rates, iii) the ease of accessing the areas through well-developed infrastructure road networks, and, iv) their relative closeness to the Nairobi CBD and other upscale neighborhoods. On the other hand, Thika Road was the least performing node, with an average rental yield of 4.1%, 2.7% points lower than the market average of 6.8%. The performance is attributed to, i) the relatively low charge rates for apartments in the node, ii) the low demand for its serviced apartments caused by their unpopularity, iii) the long commute to main commercial zones, and, iv) reduced monthly charges in the area compared to last year, as landlords continued to offer discounts in efforts meant to attract customers and improve occupancy rates. The table below highlights the performance of the various nodes within the NMA;

Source; Cytonn Research

2. Comparative Analysis - 2022/2023 Market Performance 

The performance of the serviced apartments improved slightly y/y, with the occupancy rates coming in at 66.3% in 2023, a 0.5%-points increase from the 65.8% recorded in 2022. This was lower than 2022, where occupancy rates improved by 4.3% points to 65.8% from the 61.5% recorded in 2021. The slower growth is ascribed to tough economic challenges occasioned by rising inflation, which continues to eroded the purchasing power of consumers. As a result, this has curtailed the expenditures of a majority of potential clients, as they have had to cut back on spending, prioritizing essential spending only.

The average monthly charges for 2023 increased to Kshs 3,045 per SQM from Kshs 2,716 per SQM recorded in 2022, representing a 10.9% increase. This was attributed to increased costs of operations on the back of rising costs of essential commodities, electricity, fuel costs and energy. Consequently, the average rental yield increased to 6.8% in 2023, a 0.6%-points increase from the 6.2% recorded in 2022. The improvement in performance was primarily on the back of; i) growing popularity of Nairobi as a business destination, having being voted as Africa’s leading business travel destination in the 2023 World Travel Awards, ii) continued recovery of the Kenyan hospitality sector, iii) increased number of international tourist arrivals into the country as compared to a similar period in 2022, iv) the intensive marketing of Kenya’s tourism market through platforms such as the Magical Kenya platform among others, and, v) the sustained preference by various guests for extended stay options within the city. The table below shows the comparative analysis between 2022 and 2023;

Source; Cytonn Research

Section V:  Recommendations and Outlook 

Having looked at the various factors driving the hospitality industry and with a particular focus on the serviced apartments sector, including challenges and current performance, we conclude with a recommendation of existing investment opportunities in the sector, and outlook as depicted below;

Given that all of our key metrics are neutral, we have a NEUTRAL overall outlook for the serviced apartments sector. The Investment opportunity lies in Westlands, Limuru Road, Kilimani, and Kileleshwa-Lavington which performed the best among all the nodes, with rental yields of 10.2%, 8.2%, 7.7% and 7.2% respectively, compared to the market average of 6.8%.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor