Cytonn 2016 Business and Market Outlook

11th January, 2016

Table of Contents
I.

Introduction to Cytonn

II.

Global Markets Review

III.

Kenya Macroeconomic Review

IV.

Fixed Income Market Review and Outlook

V.

Kenya Equities Review and Outlook

VI.

Private Equity Review and Outlook

VII.

Real Estate Review and Outlook

I. Introduction to Cytonn

Client Focus drives the Team

Cytonn Investments Management Limited Team Members

2011

2012

201
3

Introduction to Cytonn Investments

Cytonn Investments is an independent investments management company

Our mission is that we work to deliver innovative & differentiated financial solutions that

2011
speak to our clients needs

Cytonn Investments is differentiated in several respects:

2012

1. Independence & Investor Focus: Cytonn is solely focused on serving the interest of clients,
which is best done on an independent investment management platform to minimize conflicts of
interest

201
2.
3

Alternative Investments: Specialized focus on alternative assets - real estate, private equity,
and structured products

3. Partnerships with Global Institutional Investors: Such as Taaleritehdas of Finland

4. Strong Alignment: Every staff member participates in ownership. When clients do well, the firm
does well; and when the firm does well, staff do well

Cytonns Corporate Structure Kshs 50 bn Under Mandate

Cytonn Investments

Kenya

Cytonn
Investments
Ltd

Cytonn Real
Estate

Independent
investment
management
company, serving
HNW & institutional
clients

Development affiliate
providing investment
grade real estate
development
solutions

United States

Cytonn
Diaspora

Private
Equity
Financial Services
Education
Technology

Diaspora platform
connecting investors
in the diaspora with
opportunities in the
East African Region

Cytonn
Investments
LLC
US advisory and
investment
management
company

Board of Directors
The board is comprised of 9 members from diverse backgrounds, each bringing unique skill-sets
Professor Daniel Mugendi Njiru serves as the Chairman of the Board of Directors

Prof. Daniel Mugendi,

Chairman

Antti Jussi Ahveninen,

Non-executive Director

Madhav Bhalla,
Non-executive Director

James Maina,
Non-executive Director

Nasser Olwero,
Non-executive Director

Mike Bristow,
Non-executive Director

Elizabeth N. Nkukuu,
Partner & CIO

Patricia N. Wanjama,
Partner & Head of Legal

Edwin H. Dande,
Managing Partner & CEO

Strong Management Team With Diverse, Global & Local Experience

Diverse experience in investments, finance, real estate and legal, with deep commitment to client servicing*

Edwin H. Dande,
Managing Partner & CEO

Elizabeth N. Nkukuu,
Partner & CIO

Johnson Denge,
Real Estate Services Manager

Boniface W. Gichimu,
Finance Manager

Patricia N. Wanjama,
Partner & Head of Legal

Robert M Mwebi,
Project Manager

Gaurang Chavda
Head of Private Wealth
Management

*For Bios of the Team, visit http://cytonn.com/the-team

Shiv Arora,
Head of Private Equity
Real Estate

Winfred Ndung'u,
Business Administration
Manager
8

Maurice Oduor,
Investment Manager

Beverlyn Naliaka,
PR & Communication

Cytonn Investment Solutions

We offer differentiated investment solutions in four main areas
The Teams expertise and market knowledge enable us to offer investors higher yields than the

2011Yield
High
Solutions

market average
Regular credit analysis, quick dealing capability and the large banking spread in the market
allow the team to capitalize on investment opportunities

2012
Real Estate
Investment
Solutions

Our unique strategic partnerships with Cytonn Real Estate, our development affiliate, enables us
to find, evaluate, structure and deliver world class real estate investment products for investors
Our platform connects global capital seeking attractive return with institutional grade
development opportunities in the East African region

201
Private
3Regular
Investment
Solutions

We understand that investors have varying financial goals. Our highly customized and simple to
understand investment products will enable you to achieve your investment objective
We offer solutions to both local investors, and those in the diaspora interested in the
investment opportunities back in Kenya and the region
Cytonn seeks to unearth value by identifying potential companies and growing them through

Private
Equity

capital provision and partnering with their management to drive strategy

We primarily invest in the Financial Services, Education and Technology sectors

Cytonn focuses on the highest returning Asset Class

Traditional investments returning 10% compared to 29% for real estate, & projected to continue

Per annum Return, 5 Year Average

35%
30%

29%

25%
20%

Average = 15.0%

15%

12.3%

10%

10.0%

9.6%

NASI

91 Day T Bill

5%
0%
Real Estate

10 Year Treasury Bond Yield

10

Global view of economic growth determines regions of focus

There is demand from global capital (light colours) looking for attractive returns (dark colours)

11

Key Themes driving our Property Development

A large housing deficit, growth of the middle class and demographic trends are just a few on the factors driving our thematic
investments in Real Estate
KEY THEME

REAL ESTATE SECTOR PROVIDING EXPOSURE TO KEY THEME

Master Planned
Communities

Commercial
Office Parks

Commercial
Mixed-Use

Suburban
Malls

Three Star
Hotels

1. Large Housing Deficit

2. Growth of Middle Class

3. Demographic Trends

4. Improved Infrastructure

5. Political Decentralization

6. Kenya as a Regional Hub

12

Cytonns strategy brings three key pillars together

Financing Capability

Development Capability

1. Creating Jobs
2. Growing the
Economy
3. Improving the
standards of living

Landowners
13

Deal pipeline overview 85% to low and mid-income housing

Kshs 49 Billion Deal Pipeline

Low to mid-income Housing

85%

Prime Residential and Mixed-use

15%

Masterplanned Development

High Density Integrated Mixed-use

Comprehensive Development

Gated Communities

Low to mid-income Modular Housing

14

Kshs 49 billion Deal pipeline details

Set 1: Real estate projects where the design, concept, agreements and funding are all secured, and have ground broken or in
the process of ground breaking

Set 2: Real estate projects where the Cytonn Real Estate team is in advanced stages of negotiations with the landowners, and
where consultants have been appointed to begin market research and concept design

all values in Kshs Millions unless stated

Projects
Concept

Project Size

SET 1
Amara Ridge

Gated community

Situ Village

Gated masterplanned community

3,050.0

The Alma

Middle-class residential development

1,600.0
5,275.0

Project Mombasa

High density mixed-use development

3,750.0

Project Juja

Middle-class gated community

3,832.0

Project Mount Kenya

Masterplanned development

1,200.0

Project Mavoko

Low to mid income masterplanned city

12,500.0

Project Lukenya

Low to mid income masterplanned city

22,500.0
43,782.0

625.0

Sub - Total
SET 2

Sub - Total

TOTAL

49,057.0

15

II. Global Markets Review

16

Global Market Summary

An overview of the economic data released during the month of December
Trade Balance in USD bns

Euro Area

U.S

U.K

China

Japan

Kenya

Current A/C* (% of GDP)

2.1%

(2.4%)

(5.5%)

2.1%

0.5%

(6.9%)

Trade Balance**

21.8

(42.4)

(4.6)

51.9

3.2

(2.1)

Manufacturing PMI***

53.2

51.2

51.9

48.2

52.6

55.5

Unemployment Rate

10.5%

5.0%

5.2%

4.1%

3.3%

40.0%

Inflation

0.2%

0.5%

0.1%

1.6%

0.3%

8.0%

GDP Growth rate

1.6%

2.1%

2.1%

6.9%

1.0%

5.8%

Central Bank Rate

0.05%

0.5%

0.5%

4.35%

0.10%

11.5%

*
Current A/C- is the sum of trade balance, earnings on foreign investments minus payments made to foreign investors
and net cash transfers
** Trade Balance- is the difference between a countrys imports and exports
*** PMI- Purchasing Managers Index- economic indicators derived from monthly surveys of private sector companies to
show manufacturing output. Above 50 indicates expansion in the sector

Source KNBS, tradingeconomics

17

Factors That Will Affect Global Markets in 2016

Monetary policy divergence set to disrupt global markets in 2016
1. Monetary Policy Divergence: Globally, the large developed markets are divided by;
i. The direction of monetary policy, as the US tightens by raising rates, and the Eurozone embarks on another phase of
zero rates and quantitative easing, with both policies aimed at spurring growth and inflation in their economies
ii.divided by region and sector, with the greatest signs of recovery in large, consumer driven markets such as the United
States
2. Declining oil prices: The Organization of the Petroleum Exporting Countries (OPEC) meeting in December was a key
highlight in 2015, as members failed to agree on reduction of oil supply. In as much as the decline in oil prices is
driven by over-supply, global demand has faltered in 2015 and showing no signs of recovery in 2016, largely
dominated by reduced Chinese manufacturing output, which has repercussions throughout the world
3. Chinas slowdown: A recent report by the IMF estimated that each 1% decrease in Chinas investment growth could
reduce global growth by 0.1%, 5 times greater than in 2000, showing the increased dependence on the worlds largest
economy by population. The biggest losers are expected to be (i) Eurozone economies who depend so largely on China
as a market for their manufactured capital goods products and services, (ii) Middle-East and West African countries who
depend on China as one of the largest consumers of oil
18

Regional Outlooks
US expected to continue on a monetary tightening path
United States:
US economy is strong and expected to remain on the policy tightening path, however (i) tighter financial conditions when it
comes to credit disbursement, (ii) weak global demand, and (iii) the strengthening US Dollar will probably keep GDP growth
in the low 2% area
Eurozone
The Eurozone growth is estimated to come in at 1.5% for 2015, and 2016 growth prospects are looking up on the back of (i)
increased stimulus by the European Central Bank (ECB), (ii) an increase in private investment, (iii) the notable strong growth
in the peripheral countries of Spain and Italy, and (iv) the increase in domestic demand given higher consumer confidence
and falling oil prices, which increase consumption expenditure.
China
China witnessed a significant slowdown in the industrial side of the economy in 2015, a trend that is expected to continue
into 2016, as the economy transitions to a services based economy, causing disinflationary effects on the global economy.
The services sector is expected to account for a much larger share of GDP, driving GDP growth in 2016 to estimates of 6.5%

19

III. Kenya Macroeconomic Review

20

Kenya Macroeconomic Review

The Political environment is set to have a major impact on the economy in 2016

2015 was a year characterized by a challenging macroeconomic environment, which saw GDP growth downgrades by
2011
the IMF, World Bank and the Treasury from 6.9%, 6.0% and 6.9% to 5.6%, 5.4% and 6.0%, respectively

This growth was ambitious and based on high government spending on infrastructural developments. However, during
2012
the year, the growth was deemed unachievable and hence the respective downgrades

2016, being a unique year as it precedes the Kenyan General Elections of 2017, the politics is bound to take the center

201
stage and be among the key determinants of spending and policy
3

We expect high level of government activities in their infrastructural developments as they race to make strides, which
they can leverage for votes. This includes roads, railways and airports at a national and a county level in Kenya, where
devolution has taken centre stage and placed the onus on county leaders to drive development in their elected areas

21

GDP Forecast
Kenyas 2016 GDP is expected at between 5.5%-6.0% supported by the Construction and ICT sector
We expect 2016 GDP growth to be between 5.5%-6.0% supported by;

2011
The commissioning of the 280 MW of geothermal and 20.4 MW of wind power
The government stepping up their infrastructural developments as a campaign move The switch from analogue to digital
which has led to a flurry of broadcasting licenses being issued
The tourism sector which is improve owing to government initiatives to eradicate extremism
2012

Agriculture and Financial Intermediation, which contribute to 24.9% and 5.4% to GDP, respectively, will grow at a slower
pace than 2015 given (i) the expectations of drought, which usually comes after an El Nino phenomenon, and (ii) the
expectation of a volatile interest rate environment which will affect the operations of the sector

7.0%

201
3
5.0%

GDP Growth
5.7%

6.0%

5.3%

5.4%

2014

2015E

5.8%

4.6%

4.0%
3.0%
2.0%
1.0%
0.0%

2012

2013

22

2016P

Monetary Policy Developments

The money supply is expected to increase owing to the high level of maturing government securities
Money Supply Growth (M3) (y/y)

Private Sector Credit Growth

1.0

Sep-15

Jul-15

May-15

Mar-15

Credit Amount (in trillions)

Jan-15

0.5
Nov-14

01-Oct-15

01-Jun-15

01-Feb-15

01-Oct-14

01-Jun-14

01-Feb-14

01-Oct-13

01-Jun-13

01-Feb-13

01-Oct-12

01-Jun-12

01-Feb-12

01-Oct-11

01-Jun-11

01-Feb-11

01-Oct-10

01-Jun-10

01-Feb-10

0.0%

01-Oct-09

5.0%

2.0

Sep-14

13.6%

10.0%

2.1 2.2 2.5

1.9 1.9 1.9 2.0
1.5

Jul-14

15.0%

1.6 1.7 1.7

May-14

Average = 17.5%

20.0%

1.6

Mar-14

25.0%

28.0%
26.0%
24.0%
22.0%
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%

Jan-14

30.0%

Actual Credit Growth y/y

Due to high redemptions at the start of the year in government instruments, we expect the level of money supply to
increase in the economy, which will boost liquidity though it will be offset by aggressive government borrowing to fund the
budget
In 2015, credit growth slowed owing to reduced demand following the increase in interest rates. However, we expect
credit growth to gain momentum going into 2016, and barring any volatility in the interest rate environment, the credit
growth rate should increase, especially to the private sector which had been crowded-out
23

Inflation Forecast
Kenyas Rate of Inflation is expected to be above the 7.5% CBK upper bound in 2016
Kenyas Inflation Rate vs the 91 Day T Bill

2011

25.0%

19.7%

20.0%

21.7%

20.6%

10.1%

15.0%

2012

10.0%
5.0%

8.0%

Nov'15

Sep'15

Jul'15

May'15

Mar'15

Jan'15

Nov'14

Sept'14

Jul'14

May'14

Mar'14

Jan'14

Nov'13

Sept'13

Jul'13

May'13

Mar'13

Jan'13

Nov'12

Sept'12

Jul'12

May'12

Mar'12

Jan'12

Nov'11

Sept'11

Jul'11

May'11

Mar'11

Jan'11

Nov'10

Sept'10

Jul'10

May'10

Mar'10

Jan'10

0.0%

201
Inflation
91-day T- bill
3
Inflation
has been stable during 2015, only spiking to a 16 month high in December owing to increase in food, beer and
cigarette prices due to the Excise Duty Bill

The major drivers of Kenyas inflation during the year 2016 will be: (i) El-Nino effects that will continue to be felt in
Q12016 and the expected drought thereafter will have an adverse effect on food prices and (ii) the expected 16% VAT
to be levied on all petroleum products as from September 2016
We expect the inflation rate in 2016 to rise and remain above the 7.5% upper bound

24

Kenya Shilling
The Kenya Shilling is expected to remain under pressure due to a strong dollar globally
Kenya Shilling against the dollar

2011

110

102.42

105
100

90.6
2012

95
90

30-Dec-15

2-Dec-15

4-Nov-15

7-Oct-15

9-Sep-15

12-Aug-15

15-Jul-15

17-Jun-15

20-May-15

22-Apr-15

25-Mar-15

25-Feb-15

201
3

28-Jan-15

80

31-Dec-14

85

Having depreciated by 13.0% in 2015, The Kenya Shilling is expected to be under pressure in 2016 from:
Strong dollar in the global market, and,
Given the current account deficit declining to 6.9% owing to reduced import bill due to low oil prices, we expect
the deficit to widen in 2016 given a large import bill as a result of the ongoing government infrastructural projects

25

IV. Fixed Income Market Outlook and Macroeconomic Summary

26

Secondary Bond Market Activity

2015 saw market turnover decline
Bond Turnover (in trillions)
0.60
0.50

Average = 0.41 tn
0.45

0.42

0.37

0.40

0.50

0.31
0.30
0.20
0.10
0.00
2011

2012

2013

2014

2015

Following the rise in rates, bond activity in the secondary market was subdued as evidenced by the decline in turnover
by 39.1%. We expect further subdued activities this year as we expect the volatility in interest rates to prevail

Source CBK

27

Corporate Bond Market Activity

2015 saw 6 corporates raise capital from the debt market
Companies that raised bonds
Company
Centum
Imperial Bank
Chase Bank
Family Bank
Real People
EABL
Total

Date
15-Jun-15
25-Aug-15
10-Jun-15
26-Oct-15
10-Aug-15
23-Mar-15

Bond Value KES bns

6.0
2.0
4.8
2.0
1.6
5.0
21.5

2015 saw 6 corporates come into the bond market to raise capital, cumulatively raising Kshs. 21.5 bn. We expect
subdued activity in the primary corporate bond market due to the uncertainty in the interest rates, as raising capital in
such an environment will be detrimental to the companies

Source CBK

28

Market Liquidity and Government Borrowing

Liquidity set to increase in 2016 on increased Treasury maturities
Government Domestic Borrowing Programme
100.0

Kshs Bn

80.0

2015 Average Monthly Borrowing = Kshs. 71.3 bn

56.2

60.0
40.0

63.8

50.1

38.4

32.5

37.2

17.9

20.0

2016 Average Target Monthly Borrowing = Kshs. 66.5 bn

61.6

33.4

25.3

15.0

28.6

23.5

22.1

30.0

34.4

25.2

2.3

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

T-Bill Total Maturity

Dec-15

Interbank & Repo Rates

30.0%
25.0%

Mar-16

Apr-16

May-16

Jun-16

owing to high maturities of Kshs. 310.3 bn in the 2 nd

20.0%

half of the 2015/2016 FY. The Government borrowing is

15.0%
10.0%

on track, having borrowed Kshs. 116.5 bn. Since the

5.0%

Interbank Rate

Source Central Bank of Kenya

beginning of the fiscal year, the government has

30-Dec

16-Dec

2-Dec

18-Nov

4-Nov

21-Oct

7-Oct

23-Sep

9-Sep

26-Aug

12-Aug

29-Jul

15-Jul

5.66%
1-Jul

0.0%

Feb-16

I-Bonds Partial Redemption

Liquidity in the money market is set to improve in 2016

25.84%

24.0%

Jan-16

Bonds Total Maturity

borrowed Kshs. 436.1 bn with redemptions of Kshs.

Repo Rate

319.6 bn

29

Yield Curve Developments

The average mark to market losses in 2015 stood at 14.6% owing to rising yields
Yield Curve Movements
20

19.0%

18
16
14

13.3%

12
10
8

10.6%

1Y

2Y

3Y

4Y

5Y

6Y

7Y

8Y

9Y 10Y 11Y 12Y 13Y 14Y 15Y 16Y 17Y 18Y 19Y 20Y 21Y 22Y 23Y 24Y 25Y 26Y
30-Sep-15
31-Dec-15
31-Dec-14

The yield curve evolved during the year, from a normal yield curve at the beginning of the year, to an inverted yield
curve (owing to the high interest environment and the desire of investors to keep short) then to a normalization of the
yields at the end of the year

In 2015 the average portfolio loss on mark to market bonds averaged 14.6% owing to rising yields

Source CBK

30

Fixed Income Market Outlook

Investors should remain short durations owing to uncertainty of interest rate movements
In 2016, we expect an upward pressure on interest rates as the government will be keen to meet their domestic
borrowing target and repay their obligations as they fall due
Liquidity in the money market is expected to increase given the high amounts of maturities of government securities.
However, investors will continue to demand significant premiums to invest in Treasury instruments, thereby exerting
upward pressure on interest rates

We maintain our recommendation that investors should be biased towards short-term fixed income
instruments due to uncertainty of rates in the current environment

31

V. Kenya Equities Review

32

Kenya Equities 2015 performance

NASI declined by 10.6% in 2015, breaking 3 years of gains
During 2015, the Kenya equities market performed poorly with NASI and NSE 20 shedding 10.6% and 21.0%,
respectively, as a result of declines in large cap stocks, while NSE 25 lost 2.2% since inception during the year
NASI Yearly Returns
2009
(3.5%)

200
180

2010
37.3%

2011
(30.1%)

2012
39.4%

2014
19.2%

2013
44.1%

2015
(10.9%)

160
140
120
100
80
60
40
20
0
1/2/2009

1/2/2010

1/2/2011

1/2/2012

1/2/2013

1/2/2014

1/2/2015

1/2/2016

During 2015, foreign investors recorded net foreign outflows of Kshs 670.4 mn, following sustained foreign inflows into
the market since 2011. The sustained foreign investors net outflow can be linked to a shift in global investor portfolio
flows based on the expected path of monetary policy tightening in the US that reduced their risk appetite for securities
in emerging and frontier markets and made the US market more attractive
33

0.0%

34

5.0%
1/2/2016

9/2/2015

5/2/2015

14.8x

1/2/2016

9/2/2015

2.0%
1/2/2015

9/2/2014

5/2/2014

1/2/2014

9/2/2013

5/2/2013

1/2/2013

9/2/2012

5/2/2012

1/2/2012

Average = 13.8x

5/2/2015

3.0%

1/2/2015

9/2/2014

5/2/2014

1/2/2014

4.0%

9/2/2013

5/2/2013

1/2/2013

9/2/2012

5/2/2012

1/2/2012

15

9/2/2011

5/2/2011

1/2/2011

9/2/2010

5/2/2010

1/2/2010

9/2/2009

5/2/2009

20

9/2/2011

5/2/2011

1/2/2011

9/2/2010

5/2/2010

1/2/2010

9/2/2009

5/2/2009

1/2/2009

1/2/2009

NASI Price to Earnings and Dividend Yield

NASI trades at a Lower PE than Historical average and dividend yield higher than historical average
NSE All Share Index P/E

25

12.9x

10

NSE All Share Index Historical Dividend Yield in %

6.0%

4.0%

Average = 3.3%
2.9%

1.0%

Factors That Will Affect the Equities Market in 2016

Corporate earnings growth will have a profound impact on the direction of the equities market
1. Corporate Earnings: Corporate earnings are expected to remain subdued in 2016, owing to the high interest rate
environment, depreciating shilling, inflationary pressures and a slowdown in credit growth. Hence, we expect earnings
for listed firms to grow in the range of 7.5% to 10.0% during the year

2. Foreign Investor Sentiment: Foreign risk appetite for securities in emerging and frontier markets has reduced
following the expected path of monetary policy tightening in the US that has made the US market more attractive. As
these risks have already been priced in, we expect Kenya to attract the same levels of investor flows in 2016 as 2015

3. Interest Rates: We expect upward pressure on interest rates in 2016, which will result in a decline in private sector
credit growth, stifling business expansions and resulting in lower revenue for firms

35

Factors That Will Affect the Equities Market in 2016 contd..

REITs offering expected to increase asset allocation to the equities market
4. New Listings: We dont expect any major listing at the Nairobi Securities Exchange in 2016. We expect an increase in
products offered, following the expected introduction of the futures exchange and derivatives trading at the bourse

5. Diversification of the Capital Markets: Following Stanlib Investments Kshs 3.6 bn REIT that started trading at the
NSE, we expect other property developers to issue more REITS in the future. This will thus increase asset allocation
towards the equities market

36

Equities Market Outlook

We turn Neutral on equities outlook from Neutral with a bias to negative
Equities Market Drivers

Outlook 2016
Key metrics are expected to be relatively favourable; inflation
Macro-economic
within single digit, 5.5%-6.0% GDP growth and currency
environment
within the range bound.
Stock market seem to be fairly valued, trading at a PE of
Corporate earnings growth 12.9x compared to historical average of 13.8x. Assumption of
and Valuations(P/E)
corporate earnings growth rate of approximately 10% gives a
forward P/E of 11.6x 11.9x compared to historical averages.
Flows out of Kenya as a result of US rate hike have been
Investor Sentiment
priced into the market and neutral stance on corporate
earnings means no large foreign investor inflows expected

Effect
Neutral

Neutral

Neutral

Flows into the equities market will be supported by;

(i) Relatively high expected GDP growth rate for the year at 5.5%-6.0%
(ii) Political stability in the country
(iii) An attractive valuation currently at a PE of 12.9x compared 14.8x at the same time last year

We revise our recommendation to NEUTRAL from neutral with a bias to negative on equities as the
market presents few pockets of value and valuations appear fair at 12.9x P/E

37

VI. Private Equity Outlook

38

Private Equity Outlook

We expect increased activity in the Sub-Saharan Africa region and in particular, Kenya
Private equity players have remained sector-focused all across their investments
This is expected to remain the trend in 2016, with the key focus sectors being:
Financial Services:
Financial services will be a key focus for most of the private equity funds. Despite a high level of financial inclusion in
Kenya, the sector still offers high growth opportunities driven by adaptions and innovation
The focus on financial services sector is driven by
(i)

a rapidly growing and entrepreneurial population and demand for credit in Kenya

(ii)

growing financial services inclusion in the region

(iii)

increased innovations around financial tools with the financial sector

(iv)

increasing ease of exit in the financial services sector

39

Private Equity Outlook

We expect increased activity in the Sub-Saharan Africa region and in particular, Kenya
Healthcare
Health remains a key area of focus in 2016. Kenya is currently underserved in healthcare driven by:
(i)

low level of investment into the sector

(ii)

relative high cost of medical services

(iii)

failure of the Government to provide basic services which has created room for private capital to drive growth.

Private equity involvement in this sector cuts across the whole value chain, from Dispensaries, Hospitals and Pharmacies.
Education
Education sector remains a lucrative sector for investment in Kenya. There is an increased interest in the private sector to
provide education in the country given the high reliance on government / public schools.
The growing middle class has remained supportive of the sector, with a desire to send their children to aspirational private
schools

40

Private Equity Outlook

We expect increased activity in the Sub-Saharan Africa region and in particular, Kenya
Information and Communications Technology
This is also a sector of interest, driven by a young and dynamic Kenyan population. Kenya has registered rapid growth in
ICT, driven by entry of global brands, entrepreneurial business offering services and a supportive regulatory framework.
We expect increased injection of private equity capital to drive further growth in this sector

We remain bullish on PE as an asset class given (i) the abundance of global capital looking for opportunities in
Africa, (ii) the attractive valuations in private markets compared to public markets, and (iii) better economic
growth in Sub Saharan Africa as compared to global markets.

41

VII. Real Estate Outlook

42

Real Estate Outlook - Drivers

We expect the major basis for real estate market in 2016 to be the growing middle class
As per the latest data released by KNBS, the real estate sectors year on year growth as at Q32015 was 5.4% with the
overall sectoral contribution to GDP remaining flat at 8%
v Huge Housing Deficit: There is an effective housing deficit of over 200,000 units per annum to cater for the low to middle
income market with Nairobi and its metro accounting for over 50%
v Infrastructure: Increased development along key infrastructural nodes, which have been brought about by the development
bypasses e.g. Ruaka and Karen are now attractive real estate development zones. The SGR and LAPPSET corridors will also
experience the same effect
v Widespread Economic Growth: Increased need for real estate development in devolved units to offer accommodation to the
SMEs and the County staff. This is further increased through the rapid growth of SMEs which employ up to 85% of the work force
and require space for office use
v Demographic Trends: Youth bulge (21 to 35 years), as well as rapid urbanization, have created an opportunity for
development which caters to their needs e.g. middle-income housing, and their lifestyle e.g. suburban retail malls
v Devolution and Political Goodwill: Devolution is assisting real estate development as it is placing onus on the County
governments to improve the real estate landscape, which has led to reduced bureaucracy and investment in infrastructure

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Real Estate Outlook - Sectors

Commercial Sector
Office yields have remained stable over the last couple of years ranging between 8 and 9% for prime offices and 7% for
grade B Offices. We expect development of Grade A offices to increase in 2016 as demand increases, they will also fetch
higher rents and selling prices due to increase in land value
Retail Sector
Retail developments have increased over the past few years driven by favorable demographic conditions. The average
uptake of retail space is 75%. In 2016 we expect to see a decrease in the rents as a result of increased supply. We
expect more international retail and investment groups to enter the Kenyan market as they explore attractive emerging
markets so as to tap into the growing middle class. We also expect to see an increase in the development of retail space
in the counties as well owing to the population increase brought about by devolution

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Real Estate Outlook - Sectors

Industrial Sector
Most industrial premises are owner built and hence uptake has not really been an issue. We expect developers to
construct more in the dormitory towns. We also expect land transactions to start taking off along the LAPPSET project as
it continues to take shape. The rates and uptakes will also rise as demand for warehousing, logistical assembly parks
and factory building rise with increased industrialization, improved infrastructure and the growing demand from the
neighbouring landlocked east Africa Countries. We also expect higher quality warehousing and factory building as the
construction sector grows
Hotel Sector
The industrys performance is declining though at a slower rate and this is an indication that the industry is recovering
from its plunge in 2012
Opportunities for hospitality industry are foreseeable as a result of:
(i)

The expansion of BOMAS of Kenya to become the largest conference facilities in Africa

(ii)

Expansion of the Malindi Airport to allow landing of larger planes and international flights

(iii)

The proposed launch of direct flights to the USA by May 2016

(iv)

Growth in local tourism and business travel

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Real Estate Outlook Rental Yields

Residential Sector:
2015 has seen vibrant residential real estate investment with many firms launching projects in various parts of the
country. We expect rental growth in some of the high-end rental markets like Kilimani to be low as the market nears
saturation point. We also expect the focus on low income housing to progress into this year as developers explore
satellite towns and alternative building technology in a bid to provide more affordable housing

Location
Westlands
Kilimani
Ruaka
Lavington
Rongai
Kitengela
Thika Rd
Karen
Langata
Kasarani

Type
Apt 3br
Townhouses
Apt 3br
Townhouses
Apt 3br
Apt 3br
Apt 3br
Villa (Modest)
Apt 3br
Apt 3br

Rental Income
per month
(Kshs.)
150,000
250,000
35,000
200,000
30,000
25,000
35,000
200,000
50,000
35,000

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Sale Price (Kshs.)

25,000,000
65,000,000
10,000,000
60,000,000
9,000,000
8,000,000
12,000,000
75,000,000
20,000,000
20,000,000

Yield (%)
7.20%
4.60%
4.20%
4.00%
4.00%
3.80%
3.50%
3.20%
3.00%
2.10%

Macroeconomic Summary
GDP growth and security are the only positive macroeconomic indicators for 2016
Macro-Economic Indicators

Outlook 2016

Effect

GDP

5.5%-6.0% expected growth in 2016

Positive

Upward pressure on rates in 2016

Negative

Inflation

To remain within single digit levels, but above CBKs upper bound of
7.5%

Neutral

Exchange Rate

Shilling to depreciate against major currencies

Negative

Remain subdued due to the high interest rate environment,

depreciating shilling and inflationary pressures.

Neutral

Investor sentiment

Flows out of Kenya from the rate hike have been priced into the
market, and neutral stance on corporate earnings means no large
foreign investor inflows

Neutral

Security

Expected to improve given Government initiatives to eradicate

extremism

Positive

2011

2012Interest Rates

201
3 Corporate Earnings

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Asset Allocation
In light of all the aforementioned factors, we recommend a balanced portfolio

2011

2012
10%
20%

40%

201
3

Fixed Income
Equities
Alternative Investments
Offshore investments

30%

48

Q&A
49