Cytonn Weekly #31

By Cytonn Research Team, Aug 7, 2016

Cytonn Weekly

Executive Summary

  • Fixed Income: Yields on Treasury Bills had mixed trends with the 91 and 364-day T-bills remaining flat at 8.3%, and 11.4% respectively while the 182-day T-bill came in at 10.7% from 10.5% the previous week. The Treasury this week released the ?Securities Issuance Calendar? for quarter 1 of the 2016/2017 fiscal year, a new initiative aimed at increasing liquidity, deepening the bond market and increasing market access to Kenyans;
  • Equities: During the week, the Kenyan equities market registered mixed performance with NASI and NSE 25 gaining by 1.1% and 0.2%, respectively, while NSE 20 shed 0.2%. CIC Insurance, KCB Group and Kenol Kobil released their H1?2016 results;
  • Private Equity: Investment in the energy sector continues to attract private equity activity in the Sub-Saharan region and this week the Rockefeller Brothers Fund committed to investing USD 10.0 mn in the Lekela Power Project;
  • Real Estate: More developers seek real estate financing through capital markets and this week, Superior Homes announced plans to list on the NSE, while market statistics point to sustained housing demand through increased mortgage uptake;

Company Updates

  • Situ Village, a Kshs 5.5 bn ground breaking coverage: Cytonn kicks off Situ Village development in Karen
  • Cytonn Real Estate, our development affiliate broke ground on one of its signature developments, ?Situ Village?, in Ololua Ridge, Karen on Monday 1st August, 2016. Situ Village is Kshs 5.5 billion integrated masterplan development comprising of 50 villas, 15 cottages, a commercial centre, a state-of-the-art clubhouse and multiple luxury facilities. For more information, please see the link: Situ Village. To invest in this development contact or .
  • Cytonn Investment Co-operative membership recruitment drive is still on. For more information, please see the link: Cytonn Cooperative. The Cytonn Co-operative is registered under The Co-operative Societies Act of Kenya, 2004. The co-operative allows the ordinary investor to access above average market returns that have previously been accessible only to our private wealth investors. To join, please contact us at or download the forms from the website on this link: Cytonn co-operative forms.
  • To invest in any of our current or upcoming real estate projects, please visit Cytonn Real Estate. We continue to see very strong interest in our products, particularly The Alma, which is now 50% sold and has delivered an annualized return for 55% p.a. for investors who bought off-plan. We have 12 investment ready projects, offering attractive development returns and buyer's returns of a minimum of 25% p.a. See further details here: Summary of investment ready projects
  • We continue to make improvements to our Diaspora platform with the recent launch of the Cytonn Diaspora website. Please visit for more details
  • Our CEO and Managing Partner, Edwin H. Dande, discussed the real estate outlook and opportunities with Debarl on AMLive NTV. Edwin H. Dande on AMLive NTV.
  • Our Chief Investment Officer, Elizabeth Nkukuu, CFA, discussed investing in stocks and bonds on Citizen TV. Elizabeth Nkukuu on Citizen TV.
  • Our Senior Investment Analyst, Duncan Lumwamu, discussed movements in the Kenyan markets with emphasis on the recent NASI rise. Duncan Lumwamu on CNBC Africa.
  • To continue to support our rapid growth, we are recruiting a Chief Operating Officer to oversee overall business operations within the company, working closely with the CEO and senior leaders. For more information, please see the link: COO Job Description. We also continue to beef up the team with several ongoing hires: Careers at Cytonn.

Fixed Income

During the week, T-bills were oversubscribed with a subscription rate of 219.6%, compared to 138.4% the previous week. This week saw a significant improvement in the performance of the 91-day T-bill with subscriptions rate of 379.4% compared to 93.5% last week. The jump in subscription level can be attributed to investors focusing on short-term papers as they anticipate rates to rise in the short-term. The subscription rate for the 182-day T-bill dropped but remained high at 210.9% from 219.3% last week as the subscription for the 364-day increased to 121.6% from 87.5% last week. Yields on the T-bills however recorded mixed trends with the 91 and 364-day T-bills remaining flat at 8.3%, and 11.4%, respectively, while the 182-day T-bill came in at 10.7% from 10.5% the previous week.

The 91-day T-bill is currently trading below its 5-year average of 10.0%, having witnessed a downward trend in the previous three months towards the close of the last financial year. The downward trend for the 91-day paper has reversed and we have seen a 127 bps increase over the last one month. The upward pressure on rates is as a result of Government borrowing given the new fiscal year, which has been characterized by an uptick in inflation.

The Central Bank Weekly report revealed that the interbank rate increased by 120 bps to 6.0%, from 4.8% the previous week, despite a net liquidity injection of Kshs 8.8 bn. The liquidity injection was as a result of Term Auction Deposit Maturities, and Government Payments each of Kshs 26.1 bn, and T-bill redemptions of Kshs 22.8 bn.  As highlighted in our Cytonn Weekly Report #28 the interbank rate is often determined by the liquidity distributions within the banking sector as opposed to the net amount. This is further an indication that all banks do not trade freely with each other in the market

Below is a summary of the money market activity during the week:

all values in Kshs bn, unless stated otherwise

Weekly Liquidity Position ? Kenya

Liquidity Injection

Liquidity Reduction

Term Auction Deposit Maturities


T-bond sales


Government Payments


Transfer from Banks - Taxes


T-bond Redemptions


T-bill (Primary issues)


T-bill Redemption


Term Auction Deposit


T-bill/T-bond Rediscounting


Reverse Repo Maturities


T-bond Interest




Reverse Repo Purchases



Repos Maturities



Total Liquidity Injection


Total Liquidity Withdrawal



Net Liquidity Injection


According to Bloomberg, yields for the 5-year and 10-year Eurobonds issued in 2014 declined week on week by 0.2% and 0.1% to 5.4% and 7.6%, respectively, from 5.6% and 7.7% last week, respectively. Since the mid ? January 2016 peak, yields on Kenyan Eurobond have declined by 3.4% and 2.1% on account of improving macroeconomic conditions. Political noise have also cooled off and the IEBC talks were concluded and the chief electoral officials agreed to step down. The investment community will now be keen on how the electoral body shall be reconstituted to oversee next year?s election with the hope that elections shall be smooth.

The Kenya Shilling was stable against the dollar this week, to close at 101.4, with dollar demand from importers in sectors like manufacturing and energy being matched by inflows from exporters. We expect the shilling to remain stable for the remainder of the year supported by (i) the high levels of foreign exchange reserves equivalent to 5.1 months of import cover, and (ii) improved diaspora remittances, with cumulative 12 months? diaspora inflows to May 2016 increasing by 11.1% to USD 1.6 bn from USD 1.5 bn in the year to May 2015.

The Treasury this week released the ?Securities Issuance Calendar? for quarter 1 of the 2016/2017 fiscal year. This is a new initiative aimed at increasing liquidity, deepening the bond market and eventually reduce spreads and increase market access to Kenyans. According to the press release by the Treasury, in the formulation of this calendar, the Treasury worked to implement the 4 main strategies of the Medium Term Debt Management Strategy to (i) lengthen the maturity profile of Government domestic debt which currently stands at 7.2 years, (ii) build liquidity among benchmark tenors of treasury bonds of 2, 5, 10, 15 and 20 years to support the secondary market, (iii) enhance the liquidity of T-bills to support Over the Counter (OTC) trading which is a key liquidity management feature in the money market, and (iv) improve transparency of Government security issuance by publishing the calendar on a quarterly basis. The Treasury also said they will employ re-opening and tap sales to ensure full subscriptions for both short term and medium term papers. We believe this initiative will be beneficial as it will result in transparency in the bonds market as investors will be able to plan appropriately. The move will also be beneficial to the Government as they will be able to plan their borrowing schedule by matching their maturity schedule with their borrowing targets.

Having met their collection target for the 2015/2016 fiscal year, the government has decided to revoke the 20% excise tax on locally assembled vehicles. The levy on locally assembled vehicles from Kenya Vehicle Assemblers (KVM), General Motors East Africa (GMEA) and Associated Vehicle Assemblers (AVA) was introduced last year with a flat rate of Kshs 150,000 per vehicle but was raised to 20% of the vehicles value in this year?s budget. Local assemblers claim that the levy has resulted in job cuts and significant business contraction. We are of the view that this tax was punitive to the industry as they are also subject to a 16.0% VAT and it is not achieving KRA?s objective of increased tax collections as it is leading to a significant contraction of the main business and hence less taxes. The law is yet to be amended but we believe the scraping off of the excise tax will offer the sector the much needed incentive to grow.

The government is ahead of its domestic borrowing for this fiscal year having borrowed Kshs 20.3 bn for the current fiscal against a target of Kshs 19.9 bn (assuming a pro-rated borrowing throughout the financial year of Kshs 229.6 bn budgeted for the full financial year). Interest rates have bottomed out and we are currently witnessing upward pressure on interest rates given government borrowing for the new fiscal year. It is due to this that we advise investors to be biased towards short to medium-term papers.


During the week, the market registered mixed performance with NASI and NSE 25 gaining by 1.1% and 0.2%, respectively, while NSE 20 shed 0.2%, with the YTD performance coming in at (13.8%), (6.0%) and (1.2%) for NSE 20, NSE 25 and NASI, respectively. The top movers for the week were Safaricom and BAT with turnover of USD 12.7 mn and USD 8.0 respectively, with Safaricom accounting for 33.8% of the total market turnover. The week saw some large caps such as DTB, Safaricom and BAT gain 4.5%, 3.9% and 2.0%, respectively while others such as EABL and Barclays lost 4.8% and 2.0%, respectively. Since the February 2015 peak, the market has been down 36.7% and 18.9% for the NSE 20 and NASI, respectively.

Equities turnover rose by 37.6% to Kshs 3.9 bn from Kshs 2.8 bn the previous week, with net foreign inflows of USD 8.5 mn, up from net inflows of Kshs 6.7 mn recorded the previous week. The YTD foreign inflows stand at USD 38.5 mn compared to net outflows of USD 76.4 mn the same period last year. We maintain our expectation of stronger earnings growth in 2016 compared to 2015, with an estimated growth of 12.5%, supported by a favorable macroeconomic environment. Given the low valuations, long-term investors should gradually be taking positions in the market.

The market is currently trading at a price to earnings ratio of 12.7x, versus a historical average of 13.7x, and the dividend yield of 4.7% versus a historical average of 3.4%. The charts below indicate the historical PE and dividend yields of the market.

CIC Group released H1?2016 results:

CIC Group released their H1?2016 results, recording an adjusted earnings per share growth of 48.2% to Kshs 0.12 in H1?2016, from Kshs 0.08 in H1?2015 against our projection of Kshs 0.15. This growth was driven by a 25.8% decline in net claims and policy holders benefits to Kshs 3.2 bn from Kshs 4.3 bn in H1?2015 while other operating expenses remained flat at Kshs 2.3 bn. Total expenses declined by 16.6% to Kshs 5.5 bn from Kshs 6.6 bn in H1?2015, effectively offsetting the 13.1% decline in total revenue. Key highlights include:

  • Gross written premiums declined by 9.6% to Kshs 6.3 bn in H1?2016 from Kshs 6.9 bn in H1?2015 driven by competition within the insurance industry that led to low uptake of CIC Groups?s insurance products, leading to a decline in their retention ratio to 80.2% in H1?2016 from 81.1% in H1?2015. Net earned premiums declined by 10.6% to Kshs 5.0 bn in H1?2016, compared to Kshs 5.6 bn in H1?2015
  • Investment income declined by 21.8% to Kshs 1.2 bn in H1?2016 from Kshs 1.6 bn in H1?2015, with investment income contributing 19.8% to the total income in H1?2016 compared to 22.0% in H1?2015. The decline in investment income can be attributed to the poor performance of both stock and bonds market during the H1?2016. Total revenue declined by 13.1% to Kshs 6.3 bn in H1?2016 from Kshs 7.2 bn in H1?2015
  • Total expenditure declined 16.6% to Kshs 5.5 bn in H1?2016 from Kshs 6.6 bn in H1?2015, translating to a combined ratio of 110.1%. This was as a result of 25.8% decline in net claims and policy holders benefits to Kshs 3.2 bn in H1?2016 from Kshs 4.3 bn in H1?2015
  • Profit before tax (PBT) grew by 48.2% to Kshs 399.0 mn in H1?2016 from Kshs 269.3 mn in H1?2015, while profit after tax (PAT) was up 75.5% to Kshs 367.4 mn from Kshs 209.4 mn in H1?2015. The disparity between PBT and PAT growths was as a result of a lower effective corporate tax which came in at 7.9% in H1?2016 compared to 22.2% in H1?2015.

Even though the adjusted EPS grew by 48.2%, CIC Group results were characterized by poor performance of the core business areas. Key metrics recorded poor results and the adjusted EPS growth can only be explained on account of cost reduction. Going forward, we expect CIC Group to continue tapping into the life business, to complement its general business. We also expect CIC Group to have a firm focus on property market and asset management as it seeks to diversify its revenue streams and grow the business. For more details on CIC Group H1?2016 earnings, please see our CIC Group Earnings Note H1?2016.

 KCB Group released H1'2016 results:

KCB Group released their H1?2016 results recording a core earnings per share (EPS) growth of 13.6% to Kshs 3.4 from Kshs 3.0 in H1'2015 against our projection of Kshs 3.2. The growth in EPS was driven by a 7.2% growth in operating revenue which outpaced a 1.8% growth in total operating expenses. Most of the company?s growth is largely from its Kenyan business which grew by 19.0%.

 Key highlights include:

  • Core earnings per share grew by 13.6% to Kshs 3.4 from Kshs 3.0 in H1'2015, driven by a 7.2% growth in total operating revenue which outpaced a 1.8% growth in total operating expenses
  • Total operating revenue grew at 7.2% to Kshs 32.9 bn from Kshs 30.7 bn in H1?2015. Net interest income increased by 15.9% to Kshs 22.5 bn from Kshs 19.5 bn in H1?2015, supported by a 22.4% growth in interest income despite a 42.1% rise in interest expense driven by high interest environment witnessed during the last quarter of the year 2015
  • Non-funded income (NFI) recorded a decline of 7.7% to Kshs 10.4 bn from Kshs 11.3 bn in H1?2015, below our expectation of a 9.6% growth. The decline in NFI was driven by a 9.5% decline in other fees and a 21.7% drop in forex income to Kshs 1.6 bn from Kshs 2.0 bn in H1?2015 due to continued impact of the South Sudan currency devaluation. NFI to total operating income declined to 31.6% from 36.7% in H1?2015. We continue to believe that NFI is one of the best growth opportunities for KCB Group if they are to focus on meaningfully leveraging their brand to fee businesses such as asset management, investment banking, and brokerage
  • Total operating expenses grew marginally by 1.8% to Kshs 17.8 bn from Kshs 17.5 bn on account of a 20.1% decline in loan loss provision (LLP) to Kshs 2.1 bn from Kshs 2.6 bn in H1?2015, resulting in a decrease in the cost to income ratio to 54.2% from 57.0% in H1?2015. Excluding LLP, operating expenses grew by 5.7% to Kshs 15.8 bn from Kshs 14.9 bn in H1?2015. KCB Group management noted that the decline in loan loss provision was occasioned by a higher provision in H1?2015 for South Sudan business, which was not the case in H1?2016
  • H1?2016 PBT growth came in at 14.3% to Kshs 15.1 bn, higher than our expectations of an 8.1% growth to Kshs 14.3 bn, while PAT increased by 13.6% to Kshs 10.5 bn from Kshs 9.2 bn in H1?2015.

Key to note is that KCB Group registered stronger growth in Kenya, compared to regional business as was demonstrated with Kenyan business growing deposit by 15.7% vs a decline of 2.0% for the overall group and an 11.0% growth in loans in Kenyan business unit compared to an 8.4% overall group growth. KCB should therefore concentrate on its more profitable and high growth markets and cut down on slow growth and high-risk regional markets like South Sudan; the regional expansion strategy is destroying shareholder value. The bank has rescheduled its plans for a rights issue to next year, subject to whether or not it will be needed, considering that they have already secured tier 2 capital of up to USD 20.0 mn. For more details on KCB Group H1?2016 earnings, please see our KCB Group Earnings Note H1?2016.

Kenol Kobil Group released H1?2016 results:

Kenol Kobil released their H1?2016 results recording a 30.6% growth in core earnings per share to Kshs 0.8 from Kshs 0.6 in H1?2015, driven by a higher gross profit margin which improved to 9.4% from 7.5% in H1?2015 driven by a 7.1% reduction in cost of sales which was higher than the 5.2% decline in revenues.

Key Highlights include;

  • Revenue declined by 5.2% to Kshs 36.9 bn from Kshs 39.0 bn in H1?2015 driven by lower crude oil prices compared to the previous year, despite a 23.0% growth in volume, which was mainly driven by increase in retail network stations
  • Gross profit was up 18.1% to Kshs 3.5 bn from Kshs 2.9 bn in H1?2015 driven by a 7.1% decline in cost of sales
  • Total operating costs increased by 31.7% to Kshs 1.9 bn from Kshs 1.4 bn in H1?2015 driven by the company providing for impairment of Kshs 400.0 mn against the KPRL yield shift exposure.  EBITDA margin increased to 6.3% in H1?2016 from 5.7% in H1?2015
  • Finance costs were down 74.2% to Kshs 98.0 mn from Kshs 379.5 mn in H1?2015 driven by cheaper financing and a decline in short term borrowing by 1.0% to Kshs 4.6 bn from Kshs 4.7 bn in H1?2015 leading to profit before tax increasing by 28.2% to Kshs 1.7 bn from Kshs 1.3 bn in H1?2015 while profit after tax was up 29.6% to Kshs 1.2 bn from Kshs 0.9 bn in H1?2015
  • Shareholders? funds were up 8.1% to Kshs 9.3 bn from Kshs 8.6 bn in H1?2015

Kenol Kobil has benefited from its restructure efforts it put in place two years ago, that has seen the company reduce its financing costs significantly while taking benefits from the closed hedging strategies that have since reduced forex loses. We expect Kenol Kobil to continue with its plans of rationalizing its upstream and downstream businesses going forward as it leverages on the expansive retail market in Kenya.

Last week the CBK released their bank supervision Annual report for 2015 which indicated that, Diamond Trust Bank (DTB) and Commercial Bank of Africa (CBA) had a market share of 5.3% and 5.6%, which is above the CBK benchmark of 5.0% for Tier I banks thus qualifying for Tier I classification. The two banks grew their customer deposit bases to Ksh 148.3 bn and Kshs 126.6 bn in FY?2015 from Kshs 122.0 bn and Kshs 102.1 bn in FY?2014 for CBA and DTB, respectively. DTB and CBA move to Tier I led to an increase in Tier I banks? combined market share to 58.2% in FY?2015 from 49.9% in FY?2014. Tier II banks? combined market share declined to 32.4% in FY?2015 from 41.7% in FY?2014. DTB moved up two ranks to seventh in 2015 from ninth in 2014. This move highlights the aggressive strategy by DTB to grow both the funding of its balance sheet and disbursement of loans. DTB is pursuing sustainable growth of its subsidiaries in Tanzania, Uganda and Burundi which contributed approximately 26.0% of the banks revenues in FY?2015.

This week, the members of the cabinet approved the application by Uchumi Supermarket for a Kshs 1.2 bn cash injection by the Government. The management of Uchumi intends to use the funds in settling part of Kshs 3.6 bn debt owed to suppliers. As much as the cabinet approved the application by Uchumi Supermarket, four key areas of concerns were raised by members of the Cabinet which include:

  1. Is the cash injection a loan? If so, then the cost of funding needs to be set and communicated to both parties;
  2. Will the cash injection be converted to equity effectively increasing the Government?s stake in the retailer above 14.6%? If so, price and other terms involved need to be agreed upon;
  3. Have the corporate governance issues surrounding Uchumi been addressed? Despite the change CEO, the Cabinet still supports the need to carry out a management audit to ascertain good management going forward; and
  4. Will the turnaround plan that Uchumi has in place work? The Cabinet needed the retailer to demonstrate the change the plan is expected to bring in order to scrutinize its viability.

We applaud the efforts by the government to support Uchumi?s recovery process but we believe that the concerns raised are material and should be resolved before the actual disbursement. However, we maintain the view that Uchumi?s success going forward will be hinged on its ability to (i) implement its turnaround plan, and (ii) pay off its suppliers to avoid winding up of the company.

Below is our equities recommendation table. Key changes from our previous recommendation are;

  • Barclays has moved from an ?Accumulate? recommendation, with an upside of 18.5% to a ?Buy? recommendation with an upside of 20.7%, following a 2.0% w/w price decline
  • I&M Holdings has moved from an ?Accumulate? recommendation, with a downside of 11.1% to a ?Lighten? recommendation with an upside of 4.1%, following a 6.9% w/w price increase.

all prices in Kshs unless stated




Price as at 29/07/16

Price as at 05/08/16

w/w Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**



KCB Group***




















Kenya Re


















































HF Group






























Co-op Bank










Equity Group




















CIC Insurance










CfC Stanbic




















Standard Chartered***










I&M Holdings










Jubilee Insurance










Pan Africa





























*Target Price as per Cytonn Analyst estimates

**Upside / (Downside) is adjusted for Dividend Yield

***Indicates companies in which Cytonn holds shares in

Accumulate ? Buying should be restrained and timed to happen when there are momentary dips in stock prices.

Lighten ? Investor to consider selling, timed to happen when there are price rallies

We are neutral with a bias to positive on Equities given the higher earnings growth prospects, supported by a favorable macroeconomic environment.

Private Equity

The Rockefeller Brothers Fund joined the investor consortium backing Lekela Power, the renewable energy joint venture between private equity firm Actis and developer Mainstream Renewable Energy, by committing to invest USD 10.0 mn. Lekela currently has 3 wind farms in South Africa, with a total capacity of 360 MW, and are looking to invest in four more wind farms in South Africa, a wind farm and two solar plants in Egypt, as well as wind farms in Senegal and Ghana with a goal to construct over 1.3GW of new power capacity across the continent by 2018.

The investment deal now totals USD 177.0 mn with the consortium providing USD 117.5 mn while Mainstream will be investing the balance, USD 59.5 mn. The group of investors providing USD 117.5 mn in equity funding include the International Finance Corporation (IFC), Missouri-based Ascension Investment Management and Sanlam, the South African financial services group. This deal will enhance the use of renewable energy across Africa, which would enable the continent to: (i) realize the enormous opportunities in the clean energy economy, (ii) be at the forefront of the global shift to renewable resources, and (iii) allow Lekela to continue to build its pipeline of wind and solar projects in Africa.

As per Preqin?s report on the infrastructure deals market in Africa, the energy sector continues to dominate infrastructure investments in Africa. The majority of African deals since 2013 have been for energy infrastructure at 60.0% as the emphasis on electricity generation and transmission in Africa intensifies. The majority of the energy deals at 92.0% were transacted for renewable assets, including the USD 2.8 bn Batoka Gorge Hydroelectric Project in Zambia, the largest infrastructure deal completed since 2013, as domestic and international fund managers attempt to harness the geographical potential for renewable energy in Africa. In 2016, 14 transactions have been completed so far, with an estimated aggregate deal value of USD 8.6 bn. The growth in this sector is being driven by the availability of geographical resources and space to accommodate development in renewable energy infrastructure, which has seen the industry to continue attracting further capital from international and domestic private equity firms.

Real Estate

The capital-intensive nature of real estate development has caused many developers to seek funding from local and international investors through the capital markets in Kenya. This week, Superior Homes Limited, the real estate developer behind the Green Park Estate in Athi River, announced plans to list on the Growth Enterprise Market Segment (?GEMS?) of the Nairobi Securities Exchange (?NSE?), subject to regulatory approvals. The funds raised will be used for expansion of their real estate deal pipeline, including construction of a 50-room luxury hotel in Elementaita. This will make it the second real estate company to list on the bourse, after Home Afrika, which listed in 2013.

Real estate firms are increasingly using the capital markets to raise capital, giving (i) investors the opportunity to invest in real estate development firms, and (ii) providing avenues for pooling resources to finance development projects. Other firms that have done this recently include:

  1. Stanlib, which issued an I-REIT in October 2015 - Funds were used to acquire the Greenspan Mall in Donholm for Kshs 2 bn, and;
  2. Fusion Capital?s ongoing issuance of a Kshs 2.3 bn D-REIT where Funds will be directed towards development of the Greenwood Park in Meru.

Superior Homes looking to list on the NSE, combined with the fundraising activities of Stanlib and Fusion, all are indicators of the financing opportunities available in the capital markets that real estate developers can take advantage of. However, the track record for real estate issuances have not been good so far, notwithstanding the fact that returns and prospects in real estate remain very attractive:

  1. The Stanlib I-REIT achieved only 29% subscription, and is now trading at Kshs 16.35, 18.25% below its issuance price of Kshs 20,
  2. Home Afrika went public in 2013 at Kshs 12.0 per share and is now trading at Kshs 1.25, which is 89.6% below its issuance price, and,
  3. The currently ongoing D-REIT offering by Fusion has been extended twice indicating failure to raise required amounts. There is little clarity on its closure which was scheduled for 4th August

For a successful offering, Superior Homes will need to address the unique challenges that the past offerings have faced.

Market statistics continue to indicate sustained demand for residential houses, but most of the demand is in the low to mid-income sector. As per a report released by CBK, there has been a marginal increase in mortgage uptake in 2015, reaching 24,458 loans as at December 2015, up from 22,013 in December 2014, recording an 11.0% annual growth compared to a 10.7% increase in 2014. The increased uptake was despite the increase in average interest rates from 15.8% in 2014 to 17.1% in 2015. There was an increase in the average mortgage loan size from Kshs 7.5 mn in 2014 to Kshs 8.3 mn in 2015. The trend of increase in mortgage uptake is likely to continue upwards, driven by high demand from the growing middle class and infrastructural development, which has opened up satellite towns for development, encouraging first time home owners to purchase residential units. The CBK report?s growth trend is in line with two more reports that were released recently:

  1. KBA Housing Price Index indicates that the average cost of houses across the country increased by 1.74% in Q2?2016 compared to a 1.4% rise in Q1?2016. The index attributes the growth to demand and supply dynamics, a stable macroeconomic environment with a growing financial sector and infrastructural development enabling gradual opening of new areas for development, and;
  2. Hass Consult?s Q2?2016 Property Report, which indicated a 3.6% q/q increase in property prices over house rents, which increased at 1.5%. The increase is largely in high-end areas such as Karen and satellite towns such as Athi River, and is more so for detached houses compared to apartments.

However, with the high interest rate environment in Kenya, increasing prices of real estate units means higher monthly payments for a mortgage and may lockout some buyers. A Kshs 8.3 mn mortgage at 17.1% for 20 years, for example, will require the homeowner to pay instalments of Kshs 122,376 per month. Assuming they can only spend a maximum of 40.0% of their income on mortgage repayment, the household income required to sustain this would be Kshs 306,000 per month. This indicates that a majority of Kenyans would be locked out of bank-financed housing. Prospective homeowners can however explore various options to lower the cost of home ownership, such as obtaining Sacco loans, fixed-rate mortgages, off-plan purchases or even tenant purchasing.

On the legal front, property transactions will resume following the appointment of Land Control Boards (LCB) in 10 Counties in Kenya, including Nairobi, Kajiado, Kiambu and Nakuru this week. Government had disbanded all LCB?s on corruption allegations in April 2016, but failed to meet its promise of reconstituting them in 2-weeks. In addition, on disruption of activities for digitalization of records, clarification was made that only the central registry will be affected. This comes as a relief to property dealers and developers who require the consent of land boards for sale, transfer, lease, partitioning and amalgamation of agricultural land. We therefore expect increased land transactions as developers and dealers aim to complete transactions that had been stuck and awaiting the LCB to re-open.

Research Note on Kisumu Real Estate Opportunity

Following our previous research, where we sought to identify the opportunities in the Kenyan counties, we are carrying out research in different counties in Kenya. We shall be releasing research notes as we progress towards a comprehensive report on the performance of the real estate sector in major counties in Kenya. This week, we started with a research note on Kisumu.

Kisumu is the third largest city in Kenya and the principal city in Western Kenya. It covers approximately 780 SQ/KM and has an approximate population of 434,661 people. The population is composed of locals, mainly of Luo, Kisii, Luhya, Nubian and Asian descents.

Kisumu City?s main suburbs are, Milimani, Riat and Kajulu, which are dominated by high-end residential developments while Manyatta, High-rise, and Airport are mid-end residential settlements. Nyamasaria, Nyalenda and Kibos areas are dominated by low-end residential developments. The CBD is the commercial hub dotted with malls, mixed-use developments and a number of hotels. The hospitality sector is also vibrant along the Lake Victoria shorelines, with hotels such as Acacia Hotel.

It has a pretty robust real estate sector whose performance is as highlighted below:

Summary Kisumu Market Performance




Mixed Use Developments












Mixed use developments have the highest yields of 9.6% and occupancy at 91%. Residential developments in Kisumu have low average yields of 4.8%, lower than the Nairobi market average of 5%, despite a high occupancy of 88%, as they charge lower rents compared to Nairobi.

Source: Cytonn Research

The ideal development in Kisumu is thus a mixed-use development encompassing retail and office blocks. The building ought to be in a prime location in the city and offer relatively good facilities such as lifts and sufficient parking. This is because most buildings in the city are old, and do not have upgraded facilities and this is the gap that exists in this market.

The market lacks fractional office space for sale, and this is a new area of opportunity for real estate investors.

The retail sector, despite having attractive yields of 9.0% is not ideal as the city has a large supply of retail space of 650,000 SQFT, against a population of 434,661 people with an additional 270,000 SQFT in the pipeline. For the comprehensive Kisumu real estate analysis, see our Kisumu Report.


Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.