By Research Team, Mar 21, 2021
During the week, T-bills recorded an oversubscription, with the overall subscription rate coming in at 115.0%, an increase from the undersubscription of 94.3% recorded last week as a result of improved liquidity in the money markets due to government payments. The interbank rate however increased during the week to 5.4%, from 5.0% last week. The highest subscription rate was in the 364-day paper of 150.8%, an increase from 121.9% recorded the previous week. The Energy and Petroleum Regulatory Authority (EPRA) released their monthly statement on fuel prices, the maximum wholesale and retail prices, indicating a 6.6%, 5.9% and 5.6% increase in petrol, kerosene and diesel, to Kshs 122.8, Kshs 97.9 and Kshs 107.7 per litre, from Kshs 115.2, Kshs 92.4 and Kshs 101.9, respectively, recorded in 15th February 2021;
During the week, the equities market was on an upward trajectory, with NASI, NSE 20 and NSE 25 gaining by 3.0%, 0.5% and 2.6%, respectively, taking their YTD performance to gains of 9.8%, 3.3% and 8.8% for NASI, NSE 20 and NSE 25 respectively. The equities market performance was driven by gains recorded by large-cap stocks such as Co-operative Bank, Equity Group, Safaricom and KCB Group, which gained by 7.3%, 4.1%, 4.0% and 3.5%, respectively. The gains were however weighed down by losses recorded by stocks such as EABL, Diamond Trust Bank (DTB-K) and Standard Chartered Bank, which declined by 3.0%, 2.0% and 1.1%, respectively. KCB Group and Co-operative Bank released their FY’2020 financial results which indicated a profit decline of 22.1% and 24.4% respectively;
During the week, the Kenya Mortgage and Refinance Company (KMRC), a treasury-backed lender, announced that it has so far advanced Kshs 2.8 bn in credit to mortgage lenders accounting for approximately 7.5% of the Kshs 37.2 bn they had planned to lend from September 2020. Student Factory Africa, a consortium of architects, partnered with Betonbouw B, a Dutch-based private equity firm to launch a 4,500-bed student accommodation hostel to be located next to Catholic University of Eastern Africa in Karen, at a cost of Kshs 5.0 bn. In the retail sector Kentucky Fried Chicken (KFC), a US fast food chain, opened a new branch in Mombasa County, in an expansion drive that saw it take up approximately 2200 SQFT of space in Mombasa Trade Centre. In Statutory Reviews, the Landlord and Tenant Bill of 2021 was tabled in Parliament with the aim of consolidating the laws relating to the renting of business and residential premises and regulating the relationship between the landlord and tenant in order to promote stability of rental transactions;
Real Estate Investments Trusts (REITs) are regulated collective Investment Schemes that largely invest in real estate. REITs managers source funds to build or acquire real estate assets, which they sell or rent to generate income. The income generated is then distributed to the investors. The property is held by a trustee on behalf of unit holders and professionally managed by a REIT manager.
For recent news about the company, see our news section here.
Money Markets, T-Bills & T-Bonds Primary Auction:
During the week, T-bills recorded an oversubscription, with the overall subscription rate coming in at 115.0%, an increase from the undersubscription of 94.3% recorded last week as a result of improved liquidity in the money markets due to government payments. The interbank rate however increased during the week to 5.4%, from 5.0% last week. The highest subscription rate was in the 364-day paper of 150.8%, an increase from 121.9% recorded the previous week. The subscription rate for the 91-day and 182-day papers also increased to 135.6% and 71.0%, from 108.8% and 60.8% respectively from the previous week. The yields on all three papers rose; with the 364-day, 182-day and 91-day papers increasing by 6.9 bps, 5.2 bps and 4.7 bps to 9.2%, 7.9% and 7.1%, respectively. The government continued to reject expensive bids by accepting only Kshs 23.3 bn of the Kshs 27.6 bn offered, translating to an acceptance rate of 84.4%.
In the money markets, 3-month bank placements ended the week at 7.9% (based on what we have been offered by various banks), while the yield on the 91-day T-bill increased marginally to 7.1%, from 7.0% recorded last week. The average yield of the Top 5 Money Market Funds increased by 0.3% points to come in at 10.2%, from 9.9% recorded last week. The yield on the Cytonn Money Market increased marginally during the week by 0.3% points to come in at 10.8%, from 10.5% recorded the previous week.
Liquidity:
During the week, liquidity in the money market remained stable but the average interbank rate increased to 5.4%, from the 5.0% recorded the previous week, attributable to the payments made towards the settlements of the recently issued bonds coupled with tax receipts which were partly offset by government payments. The average interbank volumes decreased by 1.1% to Kshs 12.9 bn, from Kshs 13.0 bn recorded the previous week. According to the Central Bank of Kenya’s weekly bulletin released on 19th March 2021, commercial banks’ excess reserves came in at Kshs 21.6 bn in relation to the 4.25% Cash Reserve Ratio.
Eurobonds performance:
During the week, the yields on Eurobonds were on an upward trajectory. According to the Central Bank bulletin, the yields on the 10-year Eurobond issued in June 2014, and the 10-year and 30-year Eurobonds issued in 2018 all increased to 3.3%, 5.7% and 7.6%, respectively, from 3.3%, 5.6% and 7.5%. The yields on the 7-year and 12-year Eurobonds issued in 2019 both increased by 1.7 bps to 4.9% and 6.5%, respectively.
Kenya Eurobond Performance | |||||
2014 | 2018 | 2019 | |||
Date | 10-year issue | 10-year issue | 30-year issue | 7-year issue | 12-year issue |
31-Dec-2020 | 3.9% | 5.2% | 7.0% | 4.9% | 5.9% |
29-Jan-2021 | 3.6% | 5.3% | 7.2% | 4.8% | 6.1% |
26-Feb-2021 | 3.3% | 5.4% | 7.4% | 4.7% | 6.4% |
12-Mar-21 | 3.3% | 5.6% | 7.5% | 4.9% | 6.6% |
15-Mar-21 | 3.3% | 5.6% | 7.6% | 4.9% | 6.6% |
16-Mar-21 | 3.3% | 5.6% | 7.5% | 4.8% | 6.5% |
17-Mar-21 | 3.3% | 5.7% | 7.5% | 5.0% | 6.6% |
18-Mar-21 | 3.3% | 5.7% | 7.6% | 4.9% | 6.5% |
Weekly Change | 0.0% | 0.1% | 0.1% | 0.0% | (0.1%) |
Monthly Change | (0.3%) | 0.2% | 0.2% | 0.0% | 0.3% |
YTD Change | (0.6%) | 0.4% | 0.5% | 0.0% | 0.6% |
Source: CBK Bulletin
Kenya Shilling:
During the week, the Kenyan shilling depreciated marginally by 0.2% against the US dollar to close at Kshs 109.9, from Kshs 109.6 recorded the previous week. This was mainly attributable to strong dollar demand from general merchandise manufacturers and energy importers, which outweighed dollar inflows from offshore investors and commodity exports. On a YTD basis, the shilling has depreciated by 0.6% against the dollar, in comparison to the 7.7% depreciation recorded in 2020. We expect continued pressure on the Kenyan shilling due to:
However, in the short term, the shilling is expected to be supported by:
Weekly Highlights:
Maximum Wholesale and Retail Fuel Prices
During the week, the Energy and Petroleum Regulatory Authority (EPRA) released their monthly statement on the maximum wholesale and retail prices for fuel prices in Kenya effective 15th March 2021 to 14th April 2021. Below are the key take-outs from the statement:
We expect an increase in the transport and fuel index which carries a weighting of 8.7% in the total consumer price index (CPI) as a result of the increase in fuel prices. The increase will have a ripple effect on other components of the inflation index like food.
Additionally, we expect the fuel prices in Kenya to increase in the next months as the global fuel prices are expected to continue increasing, having increased by 32.9% to USD 66.8 per barrel this week, from USD 50.2 recorded in December 2020 (OPEC Basket Price). The increase in the global prices is attributable to the expected rebound in economic growth and the continued reduction of supply by Organization of the Petroleum Exporting Countries (OPEC).
Rates in the fixed income market have remained relatively stable but we have seen an upward trend in the short-term papers’ yields. The government is 9.6% behind its prorated borrowing target of Kshs 396.5 bn having borrowed Kshs 358.5 bn for the financial year 2021/2021. In our view, due to the current subdued economic performance brought about by the effects of the COVID-19 pandemic, the government will record a shortfall in revenue collection with the target having been set at Kshs 1.9 tn for FY’2020/2021, thus leading to a larger budget deficit than the projected 7.5% of GDP. The high deficit and the lower credit rating will mean that the government might be forced to borrow more from the domestic market which will ultimately create uncertainty in the interest rate environment. In our view investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk.
Market Performance:
During the week, the equities market was on an upward trajectory, with NASI, NSE 20 and NSE 25 gaining by 3.0%, 0.5% and 2.6%, respectively, taking their YTD performance to gains of 9.8%, 3.3% and 8.8% for NASI, NSE 20 and NSE 25 respectively. The equities market performance was driven by gains recorded by large-cap stocks such as Co-operative Bank, Equity Group, Safaricom and KCB Group, which gained by 7.3%, 4.1%, 4.0% and 3.5%, respectively. The gains were however weighed down by losses recorded by stocks such as EABL, Diamond Trust Bank (DTB-K) and Standard Chartered Bank, which declined by 3.0%, 2.0% and 1.1%, respectively.
Equities turnover declined by 47.8% during the week to USD 15.5 mn, from USD 29.6 mn recorded the previous week, taking the YTD turnover to USD 243.2 mn. Foreign investors turned net buyers, with a net buying position of USD 0.4 mn, from a net selling position of USD 2.9 mn recorded the previous week, taking the YTD net selling position to USD 5.0 mn.
The market is currently trading at a price to earnings ratio (P/E) of 12.3x, 4.9% below the 11-year historical average of 12.9x. The average dividend yield is currently at 4.2%, 0.2% points below last week’s dividend yield which came in at 4.4%, and 0.1% points above the historical average of 4.1%.
With the market trading at valuations below the historical average, we believe that there are pockets of value in the market for investors with a higher risk tolerance. The current P/E valuation of 12.3x, is 59.5% above the most recent valuation trough of 7.7x experienced in the first week of August 2020. The charts below indicate the market’s historical P/E and dividend yield.
Earnings Release:
During the week, KCB Group and Co-operative Bank released their FY’2020 financial results. Below is a summary of their performance;
KCB Group FY’2020 Key Highlights | |||
Balance Sheet | |||
Balance Sheet Items | FY’2019 (Kshs bn) | FY’2020 (Kshs bn) | y/y change |
Government Securities | 164.9 | 208.8 | 26.6% |
Net Loans and Advances | 539.7 | 595.3 | 10.3% |
Total Assets | 898.6 | 987.8 | 9.9% |
Customer Deposits | 686.6 | 767.2 | 11.7% |
Deposits per Branch | 2.0 | 2.1 | 6.5% |
Total Liabilities | 768.8 | 845.4 | 10.0% |
Shareholders’ Funds | 129.7 | 142.4 | 9.8% |
Income Statement | |||
Income Statement Items | FY’2019 (Kshs bn) | FY’2020 (Kshs bn) | y/y change |
Net Interest Income | 56.1 | 67.9 | 21.0% |
Net non-Interest Income | 28.2 | 28.5 | 1.0% |
Total Operating income | 84.3 | 96.4 | 14.3% |
Loan Loss provision | (8.9) | (27.5) | 209.5% |
Total Operating expenses | (47.4) | (70.7) | 49.1% |
Profit before tax | 36.9 | 25.7 | (30.3%) |
Profit after tax | 25.2 | 19.6 | (22.1%) |
Core EPS | 7.8 | 6.1 | (22.1%) |
Key Ratios | |||
Ratios | FY’2019 | FY’2020 | % point change |
Yield on Interest Earning Assets | 10.9% | 11.1% | 0.2% |
Cost of Funding | 2.8% | 2.7% | (0.1%) |
Net Interest Margin | 8.2% | 8.5% | 0.3% |
Non-Performing Loans (NPL) Ratio | 11.0% | 14.8% | 3.8% |
NPL Coverage | 59.5% | 59.8% | 0.3% |
Cost to Income with LLP | 56.2% | 73.3% | 17.1% |
Loan to Deposit Ratio | 78.6% | 77.6% | (1.0%) |
Cost to Income Without LLP | 45.7% | 44.8% | (0.9%) |
Return on Average Assets | 3.1% | 2.1% | (1.0%) |
Return on Average Equity | 20.7% | 14.4% | (6.3%) |
Equity to Assets Ratio | 15.1% | 14.4% | (0.7%) |
Capital Adequacy Ratios | |||
Ratios | FY’2019 | FY’2020 | % point change |
Core Capital/Total Liabilities | 18.1% | 18.7% | 0.6% |
Minimum Statutory ratio | 8.0% | 8.0% | 0.0% |
Excess/Deficit | 10.1% | 10.7% | 0.6% |
Core Capital/Total Risk Weighted Assets | 17.2% | 18.2% | 1.0% |
Minimum Statutory ratio | 10.5% | 10.5% | 0.0% |
Excess/Deficit | 6.7% | 7.7% | 1.0% |
Total Capital/Total Risk Weighted Assets | 19.0% | 21.6% | 2.6% |
Minimum Statutory ratio | 14.5% | 14.5% | 0.0% |
Excess/Deficit | 4.5% | 7.1% | 2.6% |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our KCB Group FY’2020 Earnings .
Co-operative Bank FY’2020 Key Highlights | |||
Balance Sheet | |||
Balance Sheet Items | FY’2019 (Kshs bn) | FY’2020 (Kshs bn) | y/y change |
Government Securities | 117.80 | 161.89 | 37.4% |
Net Loans and Advances | 266.7 | 286.6 | 7.5% |
Total Assets | 457.0 | 536.9 | 17.5% |
Customer Deposits | 332.8 | 378.6 | 13.8% |
Deposits per Branch | 2.1 | 2.4 | 13.8% |
Total Liabilities | 376.2 | 444.9 | 18.3% |
Shareholders’ Funds | 79.3 | 90.7 | 14.4% |
Income Statement | |||
Income Statement Items | FY’2019 (Kshs bn) | FY’2020 (Kshs bn) | y/y change |
Net Interest Income | 31.3 | 36.3 | 16.1% |
Net non-Interest Income | 17.2 | 17.5 | 1.9% |
Total Operating income | 48.5 | 53.8 | 11.1% |
Loan Loss provision | (2.5) | (8.1) | 219.5% |
Total Operating expenses | (27.8) | (39.4) | 41.7% |
Profit before tax | 20.7 | 14.3 | (31.0%) |
Profit after tax | 14.3 | 10.8 | (24.4%) |
Core EPS | 2.1 | 1.6 | (24.4%) |
Key Ratios | |||
Ratios | FY’2019 | FY’2020 | % point change |
Yield on Interest Earning Assets | 11.8% | 11.4% | (0.4%) |
Cost of Funding | 3.5% | 3.0% | (0.5%) |
Net Interest Margin | 8.5% | 8.5% | 0.0% |
Non-Performing Loans (NPL) Ratio | 11.2% | 18.7% | 7.5% |
NPL Coverage | 51.8% | 50.3% | (1.5%) |
Cost to Income with LLP | 57.4% | 73.2% | 15.8% |
Loan to Deposit Ratio | 80.1% | 75.7% | (4.4%) |
Cost to Income Without LLP | 52.1% | 58.1% | 6.0% |
Return on Average Assets | 3.3% | 2.1% | (1.2%) |
Return on Average Equity | 19.2% | 12.5% | (6.7%) |
Equity to Assets Ratio | 17.1% | 17.1% | 0.0% |
Capital Adequacy Ratios | |||
Ratios | FY’2019 | FY’2020 | %point change |
Core Capital/Total Liabilities | 20.2% | 19.1% | (1.1%) |
Minimum Statutory ratio | 8.0% | 8.0% | 0.0% |
Excess/Deficit | 12.2% | 11.1% | (1.1%) |
Core Capital/Total Risk Weighted Assets | 16.3% | 15.4% | (0.9%) |
Minimum Statutory ratio | 10.5% | 10.5% | 0.0% |
Excess/Deficit | 5.8% | 4.9% | (0.9%) |
Total Capital/Total Risk Weighted Assets | 16.8% | 16.9% | 0.1% |
Minimum Statutory ratio | 14.5% | 14.5% | 0.0% |
Excess/Deficit | 2.3% | 2.4% | 0.1% |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our Co-operative Bank FY’2020 Earnings Note .
Asset Quality
The table below is a summary of the asset quality for the companies that have released
Bank | FY’2019 NPL Ratio | FY’2020 NPL Ratio | FY’2019 NPL Coverage | FY’2020 NPL Coverage |
Co-operative Bank of Kenya | 11.2% | 18.7% | 51.8% | 50.3% |
Stanbic Bank | 9.6% | 11.8% | 57.1% | 60.6% |
KCB Group | 11.0% | 14.8% | 59.5% | 59.8% |
Mkt Weighted Average | 10.5%** | 15.7%* | 58.8%** | 56.8%* |
*Market cap weighted as at 19/03/2021 **Market cap weighted as at 09/04/2020 |
Key take-outs from the table include;
The table below highlights the performance of the banks that have released so far, showing the performance using several metrics, and the key take-outs of the performance;
Bank | Core EPS Growth | Interest Income Growth | Interest Expense Growth | Net Interest Income Growth | Net Interest Margin | Non-Funded Income Growth | NFI to Total Operating Income | Growth in Total Fees & Commissions | Deposit Growth | Growth in Government Securities | Loan to Deposit Ratio | Loan Growth | Return on Average Equity | COF*** | YIEA*** |
Stanbic | (18.6%) | (3.4%) | (1.6%) | (4.1%) | 4.7% | (8.7%) | 44.9% | (18.7%) | 15.7% | 25.0% | 75.5% | 2.7% | 10.3% | 3.0% | 7.2% |
KCB | (22.1%) | 19.4% | 14.2% | 21.0% | 8.5% | 1.0% | 29.5% | (10.4%) | 11.7% | 26.6% | 77.6% | 10.3% | 14.4% | 2.7% | 10.5% |
Co-op | (24.4%) | 11.9% | 1.3% | 16.1% | 8.5% | 1.9% | 32.5% | 0.7% | 13.8% | 37.4% | 75.7% | 7.5% | 12.5% | 3.0% | 11.4% |
FY'20 Mkt Weighted Average* | (22.4%) | 13.8% | 7.8% | 16.0% | 8.0% | 0.0% | 32.6% | (7.9%) | 12.9% | 29.9% | 76.7% | 8.3% | 13.2% | 2.8% | 10.3% |
FY'19Mkt Weighted Average** | 8.9% | 3.2% | 3.4% | 3.4% | 7.3% | 17.4% | 37.4% | 18.4% | 12.7% | 19.4% | 75.0% | 12.8% | 18.4% | 3.2% | 10.4% |
*Market cap weighted as at 19/03/2021 | |||||||||||||||
**Market cap weighted as at 09/04/2020 *** COF means Cost of Funds; YIEA means Yield on Interest Earning Assets |
Key takeaways from the table above include:
Universe of Coverage:
Company | Price at 12/3/2021 | Price at 19/3/2021 | w/w change | YTD Change | Year Open 2021 | Target Price* | Dividend Yield | Upside/ Downside** | Recommendation |
Diamond Trust Bank*** | 75.3 | 73.8 | (2.0%) | (3.9%) | 76.8 | 105.1 | 3.5% | 46.0% | Buy |
I&M Holdings*** | 43.0 | 43.2 | 0.5% | (3.7%) | 44.9 | 60.1 | 6.3% | 45.4% | Buy |
Kenya Reinsurance | 2.6 | 2.7 | 1.9% | 14.7% | 2.3 | 3.3 | 4.2% | 28.7% | Buy |
Sanlam | 12.5 | 11.7 | (6.4%) | (10.4%) | 13.0 | 14.0 | 8.6% | 28.8% | Buy |
Equity Group*** | 40.0 | 41.7 | 4.1% | 14.9% | 36.3 | 43.0 | 21.6% | 24.8% | Buy |
Standard Chartered*** | 134.5 | 133.0 | (1.1%) | (8.0%) | 144.5 | 153.2 | 9.4% | 24.6% | Buy |
Britam | 7.2 | 7.3 | 1.9% | 4.6% | 7.0 | 8.6 | 0.0% | 17.5% | Accumulate |
NCBA*** | 24.9 | 25.0 | 0.4% | (6.2%) | 26.6 | 25.4 | 15.2% | 17.0% | Accumulate |
ABSA Bank*** | 9.4 | 9.4 | 0.2% | (0.8%) | 9.5 | 10.5 | 2.6% | 13.9% | Accumulate |
KCB Group*** | 40.0 | 41.4 | 3.5% | 7.7% | 38.4 | 46.0 | 2.4% | 13.7% | Accumulate |
Co-op Bank*** | 13.0 | 13.9 | 7.3% | 10.8% | 12.6 | 14.5 | 7.2% | 11.5% | Accumulate |
Liberty Holdings | 9.6 | 8.8 | (8.9%) | 13.8% | 7.7 | 9.8 | 0.0% | 11.9% | Accumulate |
Jubilee Holdings | 261.8 | 285.0 | 8.9% | 3.4% | 275.8 | 313.8 | 0.0% | 10.1% | Accumulate |
Stanbic Holdings | 83.0 | 85.3 | 2.7% | 0.3% | 85.0 | 84.9 | 4.5% | 4.0% | Lighten |
CIC Group | 2.3 | 2.3 | 0.0% | 8.5% | 2.1 | 2.1 | 10.9% | 2.6% | Lighten |
HF Group | 3.4 | 3.4 | 0.3% | 8.9% | 3.1 | 3.0 | 0.0% | (12.3%) | Sell |
*Target Price as per Cytonn Analyst estimates as at Q3’2020. We are currently reviewing our target prices for the Banking Sector coverage **Upside/ (Downside) is adjusted for Dividend Yield ***For Disclosure, these are banks in which Cytonn and/ or its affiliates are invested in |
We are “Neutral” on the Equities markets in the short term. We expect the recent discovery of a new strain of COVID-19 coupled with the introduction of strict lockdown measures in major economies to continue dampening the economic outlook. However, we maintain our bias towards a “Bullish” equities markets in the medium to long term. We believe there exist pockets of value in the market, with a bias on financial services stocks given the resilience exhibited in the sector. The sector is currently trading at historically cheaper valuations and as such, presents attractive opportunities for investors.
During the week, the Kenya Mortgage and Refinance Company (KMRC), a treasury-backed lender, announced that it has so far advanced Kshs 2.8 bn in credit to mortgage lenders accounting for approximately 7.5% of the Kshs 37.2 bn they had planned to lend from September 2020. KMRC were to raise funds from 19 financial institutions for onward lending, out of which so far only 5 have participated with KCB bank accounting for the bulk of the lending at 2.1 bn, followed by Housing Finance(HF) at Kshs 515.0 mn, while others included Stima Sacco at Kshs 69.0 mn, Tower Sacco at Kshs 30.0 mn, and, Bingwa Sacco at Kshs 27.0 mn.
The move by KMRC has enabled them refinance a total of 1,427 mortgages with their aim of boosting the number of mortgage accounts to 60,000 in the next five years. Mortgage accounts growth is currently being constrained by; i) tough economic environment with potential home buyers suffering from job losses and salary cuts, ii) the relatively low loan size provided by KMRC capped at Kshs 4.0 mn for residents within the Nairobi Metropolitan Area (NMA) and Kshs 3.0 mn for all other areas outside the NMA, and, iii) risk of default discouraging lending.
In terms of mortgage penetration, Kenya has continued to record a relatively low mortgage to GDP ratio which stands at 2.5% as at 2019, compared to other African countries such as Namibia at 25.4%. The low mortgage uptake has been low due to; i) the high interest rates and high deposit requirements, ii) soaring of property prices, iii) low-income levels making it hard to service loans, and, iv) lack of credit risk information for those in the informal sector leading to their exclusion.
The graph below shows mortgage to GDP ratios of different countries compared to Kenya as of 2019;
Source: Centre of Affordable Housing Africa
According to the Central Bank of Kenya, the number of mortgage accounts currently stands at 27,993 as of 2019, representing a 5.6% rise from 26,504 accounts recorded in 2018. With KMRC in place we expect that they shall continue providing secure, long-term funding to mortgage lenders thus increasing the availability and affordability of mortgage loans in Kenya which will boost the mortgage market and home ownership in Kenya. However, it is still not clear how KMRC will achieve their target lending rate of 7.0% given that even the government cost of borrowing for a 20-year period is currently at about 13.2% p.a.
The graph below shows the home ownership percentages of different countries compared to Kenya as of 2019;
Source: Online Research
Student Factory Africa, a consortium of architects, partnered with Betonbouw B, a Dutch-based private equity firm to launch a 4,500-bed student accommodation hostel to be located next to Catholic University of Eastern Africa in Karen, at a cost of Kshs 5.0 bn. The development set to break ground in April will occupy more than 12 acres of land with the first phase anticipated to be completed in 12 months, with a third of the financing provided by Betonbouw B while the rest will come from debt as talks for financing with the International Finance Corporation(IFC) are ongoing. The hostels will be the second branded hostels after Acorn Group’s Qwetu and Qejani.
Modern student housing continues to gain traction with investors aiming to cash in on their high returns amidst the high demand for student accommodation as a result of the growing number of students. As of 2020, the number of available student housing stood at 300,000 against a university enrolment of 509,473 according to the Kenya National Bureau of Statistics data with the exclusion of technical colleges. This implies that there is a huge deficit of student accommodation which has been accelerated by i) high land rates, iii) insufficient access to funding, and, iii) and inadequate expertise to build and manage student housing. Student accommodation has relatively high yields of 7.4% as per the Cytonn Student Housing Market Kenya Research compared to other real estate sectors like the residential and Mixed-use developments which have an average rental yield of 4.7% and 7.1% respectively. In our view, the move by Student Factory Africa is a move in the right direction to gaining high returns while providing green-certified purpose-built student accommodation.
The graph below shows performance of different real estate classes in 2020;
Source: Cytonn Research
During the week Kentucky Fried Chicken (KFC), a US fast food chain, opened a new branch in Mombasa County, in an expansion drive that saw it take up approximately 2200 SQFT of space in Mombasa Trade Centre, marking its first outlet in the county and raising its national branch count to 24. KFC started operations in Kenya in 2011 has 35 outlets in East Africa with the other shops located in Uganda and Rwanda. KFC, which operates locally through franchisee Kuku Foods East Africa, has also been reaping benefits from deliveries and its expansion is being supported by rising disposable household incomes, fast economic growth and a young population with upgraded tastes and preferences. In our opinion, Mombasa presents a viable opportunity for the fast-food industry as it is a tourist destination. The continued expansion of KFC and other restaurants is expected to result in increased uptake of retail real estate developments thus improving the overall performance of the retail sector.
During the week, the Landlord and Tenant Bill of 2021 was tabled in Parliament with the aim of consolidating the laws relating to the renting of business and residential premises and regulating the relationship between the landlord and tenant in order to promote stability in the rental sector. The key take-outs from the Bill include;
We expect the above provision to help in resolving landlord- tenant disputes by protecting both parties as widening of the mandate of the tribunal aims to protect tenants from landlords but creates some return challenges for the landlords especially if the houses have loans that one is servicing.
ILAM Fahari I-REIT released their FY’2020 earnings registering a 15.5% decline in earnings per unit to Kshs 0.82 in FY’2020 from Kshs 0.97 in FY’2019, driven by an 8.4% decline in total operating income to Kshs 347.5 mn, from Kshs 379.2 mn in FY’2019. Rental income declined by 0.9% to Kshs 341.2 mn, from Kshs 344.3 mn in FY’2019. Notably, the decline was mainly attributable to the COVID-19 impact on the retail and commercial office sectors which has led to rent rebates for struggling tenants thus, suppressing rental income growth. Distributable earnings declined by 6.7% to Kshs 134.4 mn, from Kshs 144.0 mn in FY’2019. The fund manager attributed the decline to the higher property expenses arising from a significant provision for bad debts as a result of non-performance of the anchor tenant at Greenspan Mall. This was partially offset by a reduction in fund operating expenses after the REIT Manager temporarily reduced their fees by 10.0% to cushion the investors during a particularly difficult year. The REIT recommended a Kshs 108.6 mn dividend distribution to its unitholders at Kshs 0.60 per unit. At the current price of Kshs 7.0, this translated to a dividend yield of 10.7%.
For a more comprehensive analysis, please see our ILAM Fahari I-REIT FY’2020 Earnings Note.
On the bourse, the Fahari I-REIT is currently trading at an average of Kshs 6.4 per share on a YTD basis, representing a 28.1% decrease compared to the same period under review in 2020 trading at an average Kshs 8.9. Since inception, the instrument has recorded a decline of 64.5% from Kshs 20.0 in November 2015 to Kshs 7.0 as at 19th March 2020
Our outlook for listed real estate is neutral with a bias to negative, attributed to continued lack of investor appetite in the instrument due to negative investor sentiments and negative performance of the office and retail sectors, coupled with low trading prices. However, we are of the view that some effort is being put by institutions such as Acorn to boost the REIT market having announced plans to launch a D-REIT and I-REIT in the next 3 years.
The real estate sector is expected to record improved performance supported by provision of relatively affordable mortgage facilities by KMRC with the aim of increasing home ownership and the expansion of international retail chains.
The Kenyan property market has witnessed significant growth over the past years, however in 2020, the real estate sector started on a rather high note but later the Covid-19 pandemic affected the performance real estate sector especially in terms of access to finance. Access to funds has been a key challenge for most real estate developers with most of them having relied on bank lending as a source of their funding. In order to bridge this gap, the real estate industry players have had to come up with various innovative products, e.g. joint venture models and structured products to raise capital. In helping bridge this gap and in a bid to further develop the Capital Markets, the Capital Markets Authority, CMA, in 2013 put in place REITs regulations that most developers can use to raise capital and we have seen some success stories already in the market. This regulatory framework has been in existence in Kenya for the past 8 years, and we have since done a topical on Real Estate Investment Trusts, REITs, as an Investment Alternative in 2019. This week, we update our topical by covering the following topics;
REITs are regulated collective investment vehicles which invests in real estate. REITs promoters source funds to build or acquire real estate assets, which they sell or rent to generate income. The income generated is then distributed to the investors as returns in investing in REITs. The property is held by a trustee on behalf of unit holders and professionally managed by a REIT manager. To help improve accountability and transparency within the REIT structure, there are four key parties who all work together to ensure that REITs interests are fully protected. These parties include:
The figure below shows the relationships between the key parties in a typical REITs structure;
Source: Capital Markets Authority
There are three main types of REITs and they include:
The regulatory framework, REITs was launched in Kenya in 2013, thus 8 years since inception in the Kenyan market. 8 years since the inception, the REITs market has remained underdeveloped with only one I-REIT, and no D-REIT with the Fusion Capital D-REIT, which was launched in 2016, having failed due to low subscription rates and the Cytonn D-REIT having failed due to conflicts of interest by the prospective bank Trustee. The current licensed REITs managers are 10 following the licensing of Acorn Investment Management by CMA in late 2020. Other examples of REIT managers in Kenya are; Cytonn Asset Managers Limited (CAML), Arcon Investment Management, Stanlib Kenya Limited Nabo Capital, ICEA Lion Asset Managers Limited, Fusion Investment Management Limited, H.F Development and Investment Limited, Sterling REIT Asset Management, Britam Asset Managers Limited, and CIC Asset Management Limited.
Acorn has made major strides with regards to investments in the REITs market and has since launched an investor road show for its Acorn Students Accommodation (ASA) REIT with the aim of establishing a D-REIT and an I-REIT in the next 2.5 years with an expected Internal Rate of Return of 18.0%. The development real estate investment trust (D-REIT) is expected to finance the student hostels whereas the Investment real estate investment trust (I-REIT) will be used to acquire property for rental income. The fund size for the two REITs is estimated at Kshs 4.0 bn for the D-REIT and Kshs 4.1 bn for the I-REIT in the initial fundraising. In their campaign, the organization plans to invest a total of 24.0% equity on the development of student accommodation D-REIT, and up to 67.0% in the I-REIT. In this regard, the firm announced that their anchor investor InfraCo, a private United Kingdom-funded injected Kshs 1.0 bn equity investment aimed at supporting their D-REIT and I-REIT.
Kenya has only one listed REIT i.e. the Ilam Fahari i-REIT, listed on the Nairobi Securities Exchange (NSE) which started trading in November 2015. However, Ilam Fahari I-REIT’s performance, has been on a downturn since November 2015 when it was first listed, an indication of the dwindling interest for the instrument by investors. The Fahari I-REIT is currently trading at an average of Kshs 6.4 per share since the year started, representing a 28.1% decrease compared to the same period under review in 2020 trading at an average Kshs 8.9. Since inception, the instrument has recorded a decline of 64.5% from Kshs 20.0 in November 2015 to Kshs 7.1 as at 19th March 2020.
The graph below shows performance of the Fahari I-REIT since inception;
Based on the above, we believe that in order for REIT Market to improve and make it more attractive to local and foreign investors, the following supportive frameworks need to be put in place;
The Australian REIT market was established in 1971 under the name Listed Property Trusts (LPTs) but was later renamed to Australian Real Estate Investment Trusts (A-REITs) after the Australian Stock Exchange Limited (ASX) decided to adopt the new naming convention in 2008. Australia is also receiving growing recognition as having the world's largest REITs market outside the United States with more than 12.0% of global listed property trusts listed in the ASX. The Australian REITs have grown to a market capitalization of $143.4 bn since its inception. There are currently 47 REITs listed on the Australian Securities Exchange (ASX). The ASX houses among the largest real estate groups in the world including the Goodman Group and the Scentre Group. The REIT market in Australia is highly corporatized given the large pools of pension fund cash due to compulsory saving in Australia. In Australia, listed REITs can be classified into a number of subsectors namely; i) Retail (45% of market capitalization of all REITs), ii) Office (12%), iii) Industrial (12%), iv) mixed use developments (27%), and v) Alternatives (4%). In the Australian market, there are two common REITS investment areas where people have focused on. These includes: i) the equity REITs which invests in and own properties and typically, income is generated through leasing out of properties and colleting rent, and, ii) mortgage REITs where investors are involved in the investment and ownership of property mortgages, these type of REITS loan money to the owners of real estate for mortgages and mortgage backed security and income is generated through the interests paid on the loan.
Some of the driving forces for the development of REITs in Australia Include:
The Kenyan REITs market has the potential to grow and this is possible if there is a supportive framework set up. Based on the case study of Australia, the following measures can be implemented to rejuvenate the REIT Market;
Generally, REITs are a good investment option as they provide investors the opportunity to participate in real estate projects. For Kenya, REITs are still at the initial stages with only one being listed, the Fahari I-REIT. One of the main factors affecting the performance of the REITs market is minimal investor knowledge on the instrument. However, the REITs market in Kenya has a potential for growth with increased government support, and public sector sensitization of the REITs.
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.