Cytonn Weekly Update

By Cytonn Research Team, Feb 6, 2015

Cytonn Weekly

Executive Summary

  • Fixed income rates expected to decline marginally
  • Equities markets on a positive trajectory despite confusion of the implementation of the Capital Gains Tax in Kenya. Global markets sees strong equities performance due to stabilising oil prices, the quantitative easing in the Eurozone and a strong US economy
  • Alternative markets continues to perform well and the trend expected to persist in 2015

Fixed Income Update

Liquidity in the last week improved as government payments and redemptions offset remittances by banks in form of taxes. Secondary bond turnover increased by 34% last week and there was a positive uptake of the treasury bills as the 182-day and 364-day T-bills were oversubscribed. The oversubscription of the longer dated bills in our view is a likely signal that investor?s expects a decline in interest rates in the future hence the move towards longer term papers as also seen in the January Primary.

The Kenya Shilling once again arrayed mixed performance but this time it was in the opposite direction from the last weeks. The Shilling strengthened against the Dollar yet declined against the Euro, Pound and Yen. This is largely due to the slight weakening of the USD to the other currencies in the week. The Central Bank of Kenya was successfully granted a Kshs 65 billion loan facility by the IMF that is expected to cushion the country against any currency shocks.

The persisting deflationary pressures and the quantitative easing in the Eurozone are pushing down yields on government bonds, and the investment  grade Eurobonds by extension. Going forward spreads are expected to tighten and the yield curve to flatten across all maturities. Those holding convertible bonds will have a reason to smile in the coming months as the values of these bonds are expected to improve.

Equity Market Update

The Kenyan equities experienced positive performance with the NASI gaining by 1.4% to close the week at 168.19..Kenya Airways made a notable gain of 41% for the week to close at Kshs 11, a sixth month high boosted by positive investor confidence. This was attributed to falling oil prices and augmented by hope to an end of the Ebola enigma that has deprived the airline off Key West African routes.

In other news, net foreign inflows at the Nairobi Stock Exchange (NSE) reduced drastically in January, following the introduction of capital gains tax (CGT) to record a net outflow of Kshs 283 million, as compared to strong net inflows of Kshs 2.5 billion and Kshs. 1 billion recorded in November and December last year respectively. This comes at a time when talks between the stockbrokers and the Kenya Revenue Authority (KRA) hit a stalemate, thereby causing confusion and uncertainty over the implementation of the CGT.

Global stock markets rallied as investors raised their appetite for risky assets as they positively welcomed Greece?s sentiment to renegotiate its debt as well as a rebound in oil prices. In the U.S., stocks recorded higher gains as companies? quarterly earnings beat analyst estimates in companies such as O?Reilly Automotive and Pfizer and amidst news of a stronger than expected U.S. jobs numbers. European equities extended gains for the second week, with the heavily weighted Stoxx Europe 600 closing up 1.7%.

Real Estate Update

Real estate prices have been on the rise in most parts of the world. In the Eurozone, the month of January saw a hike in real estate prices mainly due to the expectation of the adoption of a quantitative easing policy by the ECB that would keep markets liquid and keep global interest rates low. Similarly, the US real estate market where it is reported demand outstrips supply for almost all property types; there are prospects of solid returns from real estate. This has been observed in the rise by 38.2% of the MSCI's benchmark U.S. REIT index since the end of 2013 to date.

Kenya is also experiencing rising real estate prices with the value of land estimated to have grown fivefold in Nairobi since 2007. Nakuru town is facing the same predicament of surging land and office space prices. Four years ago, an acre of land in the CBD was worth between Kshs 1 million and Kshs 5 million but it is now selling at between Kshs 100 million and Kshs 120 million depending on whether it is developed or not. The price increases can be attributed to investors? rush for business opportunities in the growing hub with reports indicating that a majority of the investors are from Nairobi having been driven out by escalating land prices in the capital city.

In our view, the surge in real estate prices is expected to continue especially with the growing economy and rising middle class that is propelling housing demand. The devolution of the government could also be a driver of real estate prices since the development of other urban areas will create Investment opportunities, hence increase demand for both houses and office space.

Private Equity Update

Norwegian private equity (PE) firm Norfund, which bought a 12.2% stake in Equity Bank from Helios, this past week disclosed that the transaction was done ex-dividend and as such, Helios will pocket the dividend earnings accrued from the entire 24.45% stake held prior to the sale. Helios has earned a total of Kshs 4.75 billion in dividends from Equity Bank since it bought into the lender in 2007. If Equity maintains a constant pay out, Norfund will earn at least Kshs 678.8 million in dividends from its 12.2% stake.

Further south, the South African Venture Capital Association released its Private Equity (PE) Performance Report and noted that PE returns were slightly lower than the Johannesburg All-Share Index (JSE-ALSI). Investments in PE delivered an annualized rate of return of 18.5% net of fees over the ten years to September 2014 while the JSE-ALSI returned 18.8% over the same period. The report that tracks the performance of a representative grouping of South African PE funds shows that PE returns compare favorably with listed markets and are ideal for the long-term investor.

Focus of the Week is Land Prices in Kenya

A report recently released by Real Estate firm, Hass Consult showed that land prices in Kenya?s main CBD - Nairobi suburbs rose the most compared to other assets. The report dubbed Urban Land rises as Kenya's Gold Standard showed that the prices of land had risen by 535% since 2007. This represents a five-fold margin in a span of seven years. An average price per acre that cost slightly over KSHS 30 million in 2007 is now more than KSHS 170 million today. The increase was attributed to an increase in infrastructure developments and high demand for commercial and high-density residential developments, which was propelled by a rising middle-income class in the country. Development activity in the city suburbs considered as the prime locations for residence and office location was as follows over the last seven years:

Upper Hill, which had the least development activity at 3.90%, was listed as the most expensive place to acquire land, where an acre of land averaged at KSHS 473,500,000 followed by Kilimani at KSHS 371,700,000 per acre.

The high prices have locked out many individual buyers leaving the door open for institutions and Investment Groups as the only ones that can acquire land at these high prices. Cytonn still believes that there is value to be derived from developing powerful concepts on the right sites and by ensuring that projects are developed on time and ensuring exit at the right time using the right exit route. Cytonn takes a thematic approach to development other than opportunistic and will largely deal with developments in these main sectors: Master planned communities, Office parks, Mixed used developments and Sub urban mall. The high prices of land are set to remain for the nearby future as the country continues to grapple with a shortage in housing that is worsened by a diminishing supply of prime land in the CBD area.


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'