Role of Talent in Our Economy, & Cytonn Weekly #29

By Cytonn Research Team, Jul 24, 2016

Cytonn Weekly

Executive Summary

  • Fixed Income: T-bill yields increased across all tenors with the 91, 182 and 364-day papers coming in at 7.9%, 10.2% and 11.0% from 7.6%, 9.9% and 10.9%, respectively. The Monetary Policy Committee (MPC) is set to meet on 25th July 2016 to discuss the current state of the economic environment and decide on any possible monetary policy action. In our view the MPC shall hold the CBR at 10.5%;
  • Equities: During the week, NSE 20 and NSE 25 closed on a downward trend, declining by 2.0%, and 1.2%, respectively while NASI gained by 0.2%. Kenya Airways released its FY?2016 results having recorded a loss of Kshs 26.2 bn;
  • Real Estate: Prime rents in Nairobi fell for the third consecutive quarter according to Knight frank?s report on Prime Global Rental Index but there was an upward trend in house prices, while Fusion Capital has registered an undersubscription on the Kshs 2.3 bn D-REITs hence has extended the closing date to 26th July 2016;
  • Private Equity: The education and technology sectors continue to attract private capital in Africa as IFC increases their equity stake in South Africa?s ADvTECH by 2.5% to 4.1% valued at USD 13.0 mn and DPI partners with Egypt?s B.TECH;
  • Focus of the Week: Having launched our Cytonn Young Leaders Program, this week, we examine the role of talent to the economy, and how it impacts the overall economic growth.

Company Updates

  • 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
  • Our Senior Investment Analyst, Duncan Lumwamu, discussed Kenya Airways? plans to suspend annual salary increments for the next two years and the financing of USD 2.0 bn Centum?s Amu Power project by Standard Bank on CNBC Africa. Duncan Lumwamu on CNBC Africa.
  • We 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 124.9% compared to 82.1% recorded the previous week. This was a significant improvement owing to an increase in subscription for the 182-day paper with a performance rate of 231.6% from 50.2% last week. The jump in subscription level can be attributed to investors locking their funds in short-term papers as they anticipate rates to rise in near-term. We note investors? preference to 182-day T-bill as it offered the most attractive effective annualized return, compared to the 91-day T-bill. The subscription for the 91 and 364- day papers dropped this week to 70.3% and 54.8% from 80.5% and 115.1%, respectively. Yields however increased across all tenors with the 91, 182 and 364-day papers coming in at 7.9%, 10.2% and 11.0% from 7.6%, 9.9%, and 10.9%, respectively.

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 are witnessing upward pressure on the rates due to Government borrowing given the new fiscal year, which has been characterized by an uptick in inflation.

This week, the government offered two bonds; the 5-year (FXD 2/2016/5) and the reopened 20-year (FXD 1/2008/20) with 11.9 years to maturity, to raise Kshs 30.0 bn for budgetary support. Yields for these bonds came in at 14.1% and 14.8%, in line with our recommendation as highlighted in Cytonn Weekly #28, where we advised investors to bid between 13.0% and 14.0% for the 5-year and between 14.0% and 15.0% for the 20-year bond. The Central Bank accepted Kshs 33.5 bn compared to the target amount of Kshs 30.0 bn. Investors demanded a premium of 0.5% and 0.1% above the market rate of 13.6% and 14.7% for the 5 and 20-year bonds, respectively. This was due to expectations of upward pressure on interest rates owing to (i) pressure on Government to finance the 2016/2017 budget, and (ii) relatively low liquidity in the money market.

The Central Bank Weekly report revealed that the interbank rate decreased by 220 bps to 4.2%, from 6.4% the previous week, due to improved liquidity levels in the money market which resulted into a net liquidity injection of Kshs 14.7 bn. The liquidity injection was as a result of Term Auction Deposit Maturities worth Kshs. 12.7 bn.  Of interest is the high T-bill rediscount that we saw this week showing that there must have been investors with a significant liquidity crunch. Usually the T-bill rediscounting rate is punitive to investors as it is calculated at 3.0% higher than the prevailing interest rate.

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 Rediscount


Term Auction Deposit


T-bond Interest


Reverse Repo Maturities


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 increased week on week by 0.1% each to 5.4% and 7.4%, respectively, from 5.3% and 7.3% last week, respectively. Since the mid ? January 2016 peak, yields on Kenyan Eurobond have declined by 3.4% and 2.2% on account of improving macroeconomic conditions and the recent cooling of political temperatures since the ruling coalition and the opposition coalition agreed on dialogue around electoral reforms, causing the opposition coalition to cease street protests. The investment community is keen that discussions will lead to a resolution to avoid any further chaos and disruption of economic activities.

The Kenya Shilling depreciated against the dollar by 0.3% this week, to close the week at 101.6, compared to 101.3 the previous week, driven by end month dollar demand from importers. The shilling was however supported by the Central Bank intervention in the foreign exchange market through the sale of dollars as indicated by the drop in dollar reserves to USD 7.83 bn from USD 7.84 bn. 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 Monetary Policy Committee (MPC) is set to meet on Monday 25th of July, to discuss the way forward with regard to monetary policy and possible actions on the Central Bank Rate (CBR). In their previous meeting, MPC cut the policy rate by 100 bps to 10.5% owing to improved and favorable macroeconomic factors characterized by falling inflation and a stable currency. A number of macro-economic indicators have changed since May 2016 MPC meeting as summarized in the table below;

Key Macro-Economic Indicators ? Kenya


Expectations at start of 2016/2017 Fiscal Year

Experience since the last MPC meeting on May 23, 2016

Going forward

Probable CBR Direction

(This month)

Probable CBR Direction (Last MPC Meeting)

Government Borrowing

Government is expected to borrow Kshs. 229.0 bn for the 2016/2017 financial year

The government to be on track with its borrowing schedule for the new fiscal year

We expect some pressure on government borrowing in the medium term due to the high level of maturities

Kenya Revenue Authority

KRA to miss the revenue collection target

The KRA did not meet their 2015/2016 fiscal year target of Kshs. 1.2 tn

We expect the KRA to continue missing their collection targets


Above the CBK target of 7.5%

Increased to 5.8% in the month of June driven by rising food prices

We expect upward inflationary pressure in the medium term as food prices consistently rise and due to the levy imposed on petroleum products which will trickle down to the transport sector and also indirectly affecting food prices

Exchange rate (USD/Kshs)

To remain stable supported by strong dollar reserves and improved foreign exchange inflows through improved diaspora remittances and tea exports

The shilling has depreciated 0.8% against the dollar

To remain stable supported by strong dollar reserves and improved foreign exchange inflows through improved diaspora remittances and tea exports

Banking Sector

We expect improved governance, following the closure of Imperial and Dubai Banks and consolidations within the banking industry

There has been consolidation in the banking sector with the acquisition of Giro, ECB and Oriental Bank by I&M, Mwalimu Sacco and Bank M

We expect continued strict governance and M&As within the banking sector


Liquidity expected to improve given high maturities of government securities

Liquidity has generally improved but in the past 2 weeks, liquidity has been tight owing to CBK mopping up liquidity through Repos to tame rising inflation

We expect liquidity to be tight in the short-term as CBK mops up liquidity to anchor inflationary expectations


With the above state of affairs in the money market environment, where 2 out of 6 indicators are pointing towards an upward pressure on interest rates while 4 are neutral, we expect the MPC to maintain the CBR rate at 10.5%. We believe that maintaining the CBR will be the best option so as not to stifle economic growth.

We are projecting inflation for the month of July to rise to within the range of 6.5% - 6.7%, driven by increases in fuel prices that will lead to an increase in transportation costs while having a pass through towards food production, and also the effect of a much lower base from last year. The government has introduced a Kshs 6.0 Road Maintenance Levy in the prices of super petrol and diesel, leading to a sharp increase in the pump prices during the month of July, 2016. However, we expect inflation to remain within the government target annual range of 2.5% - 7.5%, going forward to the end of the year.

Sovereign debt management was the main agenda this week as the 14th session of the United Nations Conference on Trade and Development (UNCTAD) in Nairobi putting the developed world at loggerheads with their developing counterparts. The disagreement was due to the European Union?s (EU) wanting to block the ?developing world-backed text?. This ?text? states how sovereign debt should be treated and which referred to debt restructuring as opposed to the EU debt management. Debt restructuring is being pushed by a group comprising of 77 countries while the other group comprising of 134 countries are advocating for the passing of a new legal regime for sovereign debt management. The current structure acts as a guarantee to lenders and therefore improves access to funds to the individual developing countries. We believe that the ratification of this regime will protect developing nations against hedge funds that have been buying bad debts and subsequently imposing prolonged debt payments periods with the affected countries by eventually paying more than the original debt which they defaulted on.

The government is ahead with its domestic borrowing for this fiscal year having borrowed Kshs 23.3 bn for the current fiscal against a target of Kshs 17.7 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 relatively low liquidity levels given the central bank?s mop up activities in the money market in order to anchor inflationary expectations. It is due to this that we advise investors to be biased towards short to medium-term papers.


During the week NSE 20 and NSE 25 closed on a downward trend, declining by 2.0%, and 1.2%, respectively while NASI gained w/w by 0.2%, with the YTD performance coming in at -12.8%, -8.4% and -4.9% for NSE 20, NSE 25 and NASI, respectively. This week?s performance is attributable to gains in Safaricom at 4.0% and declines in select large cap stocks with Co-op Bank, EABL and Equity Group losing 2.0%, 3.3% and 3.9%, respectively. Since the February 2015 peak, the market has lost 31.9% and 22.3% for NSE 20 and NASI, respectively.

Equities turnover rose by 19.5% to close at Kshs 3.8 bn from Kshs 3.1 bn the previous week, with the foreign investors being net buyers recording net inflows of USD 6.6 mn, compared to a net inflows of USD 217,000 recorded the previous week. 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 equities market is currently trading at a price to earnings ratio of 12.3x, versus a historical average of 13.8x, with a dividend yield of 4.8% versus a historical average of 3.4%. The charts below indicate the historical PE and dividend yields of the market.

KCB Group has announced the results of the scrip issue, recording a subscription rate of 54.0% raising a total of Kshs 1.6 bn out of the targeted Kshs 2.9 bn. In FY 2015, KCB Group declared final dividends of Kshs 2.0 per share with shareholders having the option of receiving Kshs 1.0 of the dividend per share in cash or converting the equivalent payout to shares at Kshs 38.0 per share. The undersubscription can be attributed to the fact that as at 17
th June 2016, the final day of exercising the option, the conversion price was 8.6% higher than the market price meaning that shareholders preferred to receive their scrip dividend in cash and buy the shares from market at a cheaper price. KCB Group is set to carry out a rights issue in the course of the year but details of this are yet to be revealed. The bank plans to raise a total of Kshs 10.0 bn of capital through issue of equity in 2016, and considering that they have already raised Kshs 1.6 bn through the scrip, KCB Group would be raising the remaining Kshs 8.4 bn balance in the upcoming rights.

Deacons, a popular clothing-line retail shop in Kenya, plans to list in the Nairobi Securities Exchange (NSE). The retailer is floating 123.6 mn shares at Kshs 15.0 per share on the Alternative Investment Market Segment (AIMS) of the NSE thus halting its trading on the over-the-counter (OTC) market. The OTC listing price in 2010 was Kshs 62.5 and since then, there has been a split of 2:1 and a bonus share issue of 1:1 in 2012. This brings an adjusted price to Kshs 15.6 and hence an indication that the shareholders are losing 4.0% based on the current offer price of Kshs 15.0. The funds raised from the OTC listing enabled Deacons to: (i) Increase the number of stores by 24.0% to 31 in 2015 from 25 in 2010, (ii) Expand regionally to Rwanda in 2011, and (iii) Introduce new brands to its portfolio including Babyshop in 2011 and Bossini in 2013. Through these activities, the company has managed to grow revenues by a CAGR of 24.2% from Kshs 116.1 mn in 2011 to Kshs 141.6 mn in 2015, albeit buoyed by high operating costs and hence narrow profit margins. Deacons? intention to list aims to enable the retailer to (i) discover its market value and an alternative exit option for its shareholders, (ii) have access to the liquidity the capital market provides for its future expansion strategies, (iii) realize growth for its investors, and (iv) increase the public?s awareness of its brand.

Swedfund International, Pinpoint Investments Limited, Old Mutual Life Assurance, Kestrel Capital Nominees, are among Deacon?s existing top ten shareholders. Having been operational since the late 1950s, brands such as Mr. Price, Babyshop, Angelo, 4u2, Reebok, Adidas, Bossini and Truworths have become household names in Kenya, Mauritius, Uganda and Rwanda ? the four markets in which it operates. The clothing and fashion industry continues to grow driven by: (i) The rising middle class population in Africa with 7 of the 10 fastest growing economies globally being in the continent and growing at more than 4.0% over the last 10 years, and (ii) rising spending power leading to rising consumption. Deacons is therefore set to gain from this and from: (i) The population?s preference for quality products as the middle class digress from settling for third rate products, and (ii) Brand consciousness brought about by increased awareness through the internet, cable TV and extensive western-world visits. To meet Africa?s rising demand for traditional-themed clothing as the population seeks to embrace their heritage, Deacons would have to consider venturing into this line of clothing.

KQ released FY?2016 results recording a loss per share of Kshs 17.5 from Kshs 17.2 in FY?2015 driven by a surge in costs with a 14.1% growth in fleet ownership costs and a 48.9% rise in finance costs, despite a 5.4% growth in revenue. Key highlights include:

  • Total revenue grew by 5.4% to Kshs 116.2 bn, from Kshs 110.2 bn in FY?2015, which is attributable to a 1.2% rise in number of passengers to 4.20 mn from 4.18 mn resulting in a 5.0% increase in passenger related revenue;
  • Finance costs grew by 48.9% to Kshs 7.0 bn, from Kshs 4.7 bn in FY?2015 as a result of a rise in foreign exchange losses by Kshs 9.7 bn brought about by the strengthening USD against the Kenya Shilling by 12.9% from Kshs 89.0 per USD to Kshs 100.5 per USD on average during the period.
  • Fleet ownership costs rose by 14.1% to Kshs 29.6 bn from Kshs 25.9 bn in FY?2015 due to impact of lease of aircraft and lease provision for aircraft leased out or sold, all in the last two financial years;

Despite this, KQ recovery strategy dubbed ?Operation Pride? has seen an increase in revenue by 5.4%, a 1.2% rise in number of passengers in light of a 4.0% reduction in available seats per KM and a 5% increase in revenue from passengers. Last week, KQ received a Kshs 10.0 bn bridging loan which Kenyan Treasury secured from the African Export-Import Bank (Afriexim Bank) in a bid to ease cash-flow constraints. The airline also laid off 80 employees in line with its cost cutting initiative to reduce payroll costs by approximately Kshs 2.0 bn per annum by downsizing its workforce by 15.0%. In our view, Operation Pride seems to be working supported by the Treasury ? Government bailouts. However, we still maintain that these are short term solutions and it is not clear that the long-term challenges that led to KQs financial problems have been addressed.

UAP Holdings plans to acquire all Old Mutual Kenya subsidiaries including Old Mutual Capital, OM Asset Managers, OM Life Assurance, Faulu Kenya, OM Securities and OM Properties before it lists on the Nairobi Securities Exchange as planned. In July 2015, Old Mutual Plc bought 60.7% of shares in UAP Holdings for Kshs 25.6 bn in a deal that saw a merger of both asset management and life insurance businesses. By acquiring the subsidiaries, the two companies will eventually merge forming only one asset management subsidiary and one life insurance subsidiary, subject to regulatory approval. Old Mutual Kenya will still remain a shareholder at UAP while still operating its subsidiaries in the region. The move is set to expand UAP?s countrywide reach and clientele base while still earning dividends for Old Mutual as a majority shareholder therefore qualifying as a mutually beneficial arrangement.

As highlighted in Cytonn Weekly #28, this week we publish our recommendation on British American Tobacco (BAT) Kenya. We recommend an Accumulate on BAT with a fair value price of Kshs 970.6, an 18.0% upside from the current price of Kshs 869.0 with a forward dividend yield of 6.3%. Our recommendation is based on;

  • Steady Dividend: Mature company paying out all earnings with stable growth in earnings
  • Steady state growth: BAT has reached a mature company state, with a flat growth in revenue driven by a steady growth in new number of customers, with customers up-trading in tastes. Export sales growth has grown steady, as the feeder markets? uptake increase.


  • Higher excise taxes and increased regulation: Increased regulation of the sector coupled with frequent excise tax increases will continue to hamper further growth. The Ministry of Health has recently passed new regulations which govern advertising for tobacco products as well as the size of health warnings on cigarette packages.

For details on the valuation, see our valuation note on: British American Tobacco (BAT) Kenya Valuation Note.

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

  • Equity Group has moved from an ?Accumulate? recommendation, with an upside of 15.5% to a ?Buy? recommendation with an upside of 20.0%, following a 3.9% w/w price decline
  • Jubilee Insurance has moved from a ?Sell? recommendation, with a downside of (0.5%) to a ?Lighten? recommendation with an upside of 4.6%, following a 4.9% w/w price decline
  • We have included  BAT (K) in our universe of coverage with an Accumulate recommendation.

all prices in Kshs unless stated




Price as at 15/07/16

Price as at 22/07/16

w/w Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**



KCB Group***










Kenya Re








































Equity Group








































HF Group










Co-op Bank




















CfC Stanbic










Standard Chartered***










Pan Africa










CIC Insurance










Jubilee Holdings










I&M Holdings





























*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 prospects, supported by a favorable macroeconomic environment.

Private Equity

International Finance Corporation (IFC) has acquired a 2.5% equity stake in ADvTECH valued at USD 13.0 mn, effectively valuing the company at USD 520 mn. This transaction resulted to an increase IFC?S total holdings in ADvTECH to 4.1% after an earlier acquisition of 1.6%. ADvTECH leads the private sector in the fields of education and resourcing in South Africa with a proven track record of expanding educational opportunities and improving skills for people entering the job market or seeking to improve their employment prospects. The new capital will be used to facilitate ADvTECH?s expansion strategy in Sub-Saharan Africa that entails: (i) increasing its schools and tertiary education programs, (ii) increase quality education or vocational training access for at least 30,000 additional students and (iii) provide new learning options for students leaving high school. The investment will also involve synergies in driving strategy with IFC providing ADvTECH with access to an invaluable network of in-country experts and education officials along with private and state education providers at schools and tertiary level as well as assisting the company to expand into new markets in Africa. This expansion will be driven by (i) Africa?s fast growing and youthful population which requires increased jobs and people with skills to fill them (ii) Existing gaps in the market with demand for quality primary, secondary and tertiary education (iii) A growing middle class with purchasing power.

Development Partners International (DPI), one of the leading African private equity specialists with US$1.1 billion under management, has through its ADP II fund concluded an investment and strategic partnership with Egypt?s leading household appliances and consumer electronics retailer, B.TECH, which will see the fund invest EGP 300 million in the company. B.TECH operates a fast-growing portfolio of 67 retail stores across 22 governorates in Egypt with a network of 362 wholesale dealers supported by three main warehouses and 57 after-sales service centers. B.TECH distributes leading household appliances and consumer electronics products including leading global brands such as Indesit, Ariston, Miele, Apple and Braun. B.TECH has consistently grown its business at an impressive 18% annualized sales growth over the last 5 years driven by (i) growing demand for consumer durables and electronics from Egypt?s middle class (ii) B.TECH?s market leading instalment payment system which has served over 700,000 Egyptians to date and (iii) a fast-growing online presence supported by an advanced warehouse and after-sales capability.

Real Estate

Prime rents in Nairobi fell for the third consecutive quarter according to Knight Frank?s report on Prime Global Rental index. The index, which tracks the performance of luxury residential rents across 17 key world cities, showed prime rents fell globally for a third consecutive quarter with rents falling on average by 0.5% in the year to march 2016. According to the report, prime rents for Nairobi fell 7.9% y/y in Q1 2016, ranking Nairobi last position among other cities. Over a four-year period rise in rent have been declining with Nairobi falling from position 1 in Q1 2013 at 24.20% Y/Y change to last position at -7.90% Y/Y Q1 2016 in the global ranking. This fall is attributable to increased supply and decrease in demand for housing, as most of demand for prime properties has mainly been from expatriates.  Thus Rents have trended lower as there is weakened demand from this segment of the market due to multinational firms downsizing as a result of adverse economic circumstances driven by low commodity prices such as slowdown in the oil industry. This trend is expected to continue with companies such as Coca-Cola announcing that it is reducing its operations in Kenya. Increase in housing supply in prime end homes also contributed to fall in rents as the market is stagnating at lower rental yields of 3%- 4% as compared to middle income markets at 5% - 6%.

The following is a summary of Quarter one rental performance over 4 years according to Knight Frank

Nairobi?s Prime Rents Performance


12 Month change

6 Month change

3 Month change






















Source: Knight Frank Prime Global Rental index report

Prime residential prices in Nairobi has also been on a decreasing trend in consistent to rents as from 2013 to 2015. However, prices bucked the trend and increased by 1.5% between December 2015 and March 2016, and 3.3% in the year to March 2016 ranking position 15 out of 32 cities according to Knight Frank. Usually, luxury rental and sales markets tend to move in same directions, with buyers targeting rental yields, price and capital appreciation. The increase in prices in 2015 to 2016 is driven by increase in land prices over time, with Nyari, Runda and Karen recording 6.28 fold, 5.28 fold, 6.48 fold respectively among others over a period of 8 years as indicated in Hass property House price Index Q1 2016 report. More so the consistent drop in prices has consistently attracted buyers hence the market is reacting to the demand at the current prices averaging Kshs 277,419 ? Kshs 341,819 per sqm in prime areas.

The following is a summary of Nairobi price performance over 4 years

Nairobi?s Prime Prices Performance


12 Month change

6 Month change

3 Month change






















Source: Knight Frank Global Cities Index report

The prices in this segment are growing at a slow rate but there is no expectation of a decline in the short to medium term. In our view the residential market in Kenya is still an attractive investment for both rent and sale markets given that only approximately 17% of Kenya?s population lives in their own homes, and there is a housing unit?s deficit of 250,000 units per annum against a supply of 50,000 housing units.  This opportunity is however more concentrated in the middle income class areas and satellite Towns and therefore investors should focus more into these markets to tap on total returns at minimum of 25%.

The following is a summary of returns in various market segments

Total Returns according to Zones


Average Yield

Average Capital Appreciation

Average Total Return





Upper Middle




High end




Lower Middle








 Satellite towns had the highest returns in Q1?2016 due to high capital appreciation rates driven by infrastructural development, and increased investment in these areas.

Source: Cytonn Research, Hass Consult Land Price Index Q1 2016

Fusion Capital has registered an undersubscription on the Kshs 2.3bn D- REITs hence has extended the closing date to 26th July 2016 from the initial date of 15th July 2016. The low subscription rates can be attributed to investor education as most of the participants in the capital market are yet to understand and embrace REITs as an investible asset class.  Fusion Capital?s extension of the dates is aimed at giving investors more time to apply for the D-REITS. The listing date for the D-REIT has also been pushed to 10th August 2016. For more information, please see Cytonn Weekly #27.

Role of Talent in Our Economy

To transition to a mid-income economy, a low-income but developing economy, such as Kenya, has to implement a myriad of economic growth initiatives in order to achieve sustained economic growth that will translate to higher incomes and better standards of living. Such initiatives include (i) a generally enabling business environment, (ii) open markets allowing for the free flow of labor, capital, goods and services, (iii) a stable and democratic system of governance based on the rule of law, and (iv) a highly educated, entrepreneurial and innovative pool of talent, among other initiatives. This focus note discusses the role of talent in growing our economy in the context of our own experience at Cytonn and makes some suggestions on how to deepen our talent pool to improve our economy.

Last week we officially launched our Cytonn Young Leaders Programme (?CYLP?), which is our core strategy for identifying, attracting and developing the very best talent we can get. Since inception two years ago CYLP has trained over 180 university graduates and we have made employment offers to 61 of these program participants. About 50% of our permanent staff is made of people we recruited straight out of college. This program has been one of the key drivers of our rapid growth, hence the decision to do a focus note on talent right after the CYLP launch. For more information about CYLP, see CYLP:

Talent, in the context of economic growth, can be defined as a group of people, such as employees of a company, who have an aptitude for particular tasks. People in an organization are referred to as talent because it is through their unique skill sets, commitment and hard work that the organization grows. A growing company employs more people, pays more taxes, and produces more relevant goods and services; all of which culminate into a growing economy with better standards of living.

The economic development of Singapore under the leadership of Lee Kuan Yew is famous as one of the greatest economic success stories in history. Singapore?s per capita GDP jumped from around US$ 500 in 1965, by a staggering 2,800%, to US$ 14,500 by 1991, the end of his rule; the GDP per capita has since continued to grow to US$55,000. Lee Kuan Yew implemented a lot of initiatives to make Singapore the most prosperous nation in Southeast Asia, and nurturing and attracting talent was one of the core initiatives. In his book, ?From Third World to First?, Lee Kuan Yew says, ?talent is a country?s most precious asset ? it is the defining factor.? In the 1950s and 1960s, the leadership focused on building an efficient, universal education system that would provide a skilled workforce for Singapore?s industrialization programme as well as to reduce unemployment rates. Lee Kuan Yew also saw the need to build a professional teaching force and internationally competitive local universities that would put Singapore on the world map. Singapore worked with its missions in Britain, the US, Australia, New Zealand and Canada to identify promising students in foreign universities and interest them with jobs in Singapore. Today, most of Singapore Universities are known internationally for high teaching standards especially in the field of science and mathematics. Singapore currently has an unemployment rate of 1.9% making it one of the lowest unemployment rates in the world with majority of the labor force being highly skilled and well educated.

While Singapore is different from Kenya, we can learn a great lesson that talent indeed promotes economic growth and talent can both be developed locally and also imported as case was for immigrants in Singapore.

The government of Kenya is already doing a lot to increase the talent pool, including:

  1. Introduction of free and compulsory primary education
  2. Promoting access to higher education by increasing the number of universities and tertiary colleges, while also increasing the intake periods to accommodate more students into tertiary education
  3. Providing loans and bursaries, through the Higher Education Loans Board and other devolved funds, to needy students to finance their university education, while maintaining affordable education in public tertiary institutions
  4. Effecting other programmes such as National Industrial Training Authority (NITA), Kenya National Volunteers Program (KNVP) and Kenya Youth Empowerment Program (KYEP) to help in developing skills that are relevant to the job market and hence reducing unemployment levels in the country.

However, the government and the private sector need a collaborative effort to do a lot more. We think the following may be helpful:

  1. Increase access to education in both secondary and university, by extending free education to secondary levels and making university education more accessible and affordable; this will need a more efficient student loan disbursement and collection effort
  2. Make it easier for foreign talent and immigrants to obtain work permits. The current system is too bureaucratic and makes it hard to bring in the much needed foreign talent and skills, which can enhance our productive capacity and create more jobs
  3. Have a clear and aggressive industrialization and manufacturing program, which will create jobs for graduates from technical institutes thereby reducing unemployment and increasing productivity which in turn leads to growth of the economy
  4. Create significant incentives for employers with strategic talent development programs, such as CYLP, which are focused on equipping raw talent from universities with productive skills
  5. Develop strategies with key Kenyan missions and embassies around the world to attract talented and skilled Kenyan diaspora back home to enable skills transfer. This may involve giving significant incentives to both returning skilled Kenyan diaspora workers and the companies they join
  6. Corporates should play a key role in terms of investing in training programs to increase the pool of skilled talent, by training and employing raw talent from universities, rather than competing for the limited pool of experienced talent. While this may seem like Corporate Social Responsibility, it is a strategic competitive advantage to corporates.

The Kenyan economy is on a growth trajectory given the prevailing macroeconomic stability, a young and growing population, and increasing ease of doing business. It is critical that we quicken our growth trajectory by investing heavily and over a sustained period of time, and as a national priority just as Singapore did, in nurturing and attracting talent. It is a strategic priority for the country and particularly for its private sector.


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.