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29 January, 2017

Executive Summary:

Fixed Income: During the week, T-bills were undersubscribed for the 5th week running, with overall subscription coming in at 76.6%, compared to 82.5% recorded the previous week. Investor preference has shifted more towards the shorter term paper, with the 91-day T-bill being oversubscribed. Yields on the 91-day and 182-day T-bills remained unchanged during the week, closing at 8.7% and 10.5%, respectively, while yields on the 364-day T-bill declined by 10 bps to 10.9% from 11.0% the previous week;

Equities: During the week, the Kenyan equities market was on a downward trend, with NASI, NSE 20 and NSE 25 losing 1.4%, 3.5% and 2.9%, respectively. East African Breweries Limited (EABL) released their H1?2017 results recording a flat core EPS growth of 1.8%, to Kshs 7.1 from Kshs 7.0 in H1?2016. The performance is attributed to a 6.3% decline in operating revenue coupled with a 12.0% decline in operating expenses, which resulted in a slight increase in operating profit of 2.2%;

Private Equity: Fundraising activities for private equity investment in Africa have continued as the European Union (EU), the International Fund for Agricultural Development (IFAD) and the National Social Security Fund (NSSF) Uganda, have jointly launched the yielding Uganda investment fund. On the exit front, Southern Africa clean energy and resource efficiency specialized fund manager exited some of its renewable energy investments held in its Evolution I fund portfolio;

Real Estate: There is increased appetite for commercial office space away from the CBD as companies seek grade A office space and a high quality business environment while the hospitality sector records increased development driven by the recovery of travel tourism and growth of MICE tourism;

Company Updates

  • On Monday 23rd January 2017, our Investment Analyst Caleb Mugendi, discussed East Africa Breweries Limited (EABL)?s disposal of non-core assets to shore up capital and commodity price movements in the Kenyan market. Watch Caleb on CNBC
  • On Saturday 28th January, 2017, Cytonn Real Estate held an Open Day at their comprehensive lifestyle development project in Karen, christened "The Amara Ridge" which is 100% sold. The aim of the open day was to interact with the buyers and other stakeholders to show case the progress made so far.  See Event Note
  • Cytonn Private Wealth held a wealth management training focused on how structured yield products can achieve high yield returns as high as 18% per annum for investors, while providing both liquidity and principal protection. The training illustrated to participants how they can come together in a private structured vehicle, allocate half of their portfolio to investment grade real estate targeting to deliver about 26% per annum return, and then allocate the other half to negotiated wholesale bank deposits for 10% per annum return, and achieve a blended portfolio return of 18% per annum. See Event Note
  • For recent news about the company, see our news section here
  • In a bid to continue showcasing the real estate developments by our real estate development affiliate, Cytonn Real Estate, we shall be organizing site visits every two weeks right after the Cytonn Private Wealth Management Trainings. If interested in attending the Wealth Management Training, click here for booking. If interested in attending the site visits, kindly email clientservices@cytonn.com
  • We have 12 investment-ready projects, offering attractive development returns and buyer's targeted returns of around 25.0% p.a. See further details here: Summary of investment-ready projects
  • 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:
    • The Alma, which is now 55.0% sold and has delivered an annualized return of 55.0% p.a. for investors who bought off-plan. See The Alma.
    • Amara Ridge is currently 100.0% sold. See Amara Ridge
    • Following the completion of sales for Amara Ridge, we are currently looking for land in Karen for our next development. Contact us at res@cytonn.com if you have any land for sale or joint ventures in Karen
  • We continue to beef up the team with the ongoing hires: Careers at Cytonn

Fixed Income

During the week, T-bills were undersubscribed for the 5th consecutive week, with overall subscription coming in at 76.6%, compared to 82.5% recorded the previous week. There is continued preference for shorter term papers as seen from the subscription rates of the 91, 182 and 364-day papers which came in at 146.0%, 84.6% and 22.3%, from 123.3%, 93.1% and 44.6%, respectively, the previous week. Despite the low subscription rates, the government has remained disciplined and is not accepting expensive money from the market as can be seen by an acceptance rate, which came in at 74.4% of the total bids received. Yields on the 91-day and 182-day T-bills remained unchanged during the week, closing at 8.7% and 10.5%, respectively, while yields on the 364-day T-bill declined by 10 bps to 10.9% from 11.0% the previous week.

Last week, the Treasury re-opened a bond, FXD 2/2007/15 with an effective time to maturity of 5.4 years, seeking to raise Kshs 30.0 bn for budgetary support.  The auction was however cancelled, an indication that either (i) investors bid at yields which the CBK considered unrealistically above market, or (ii) subscription rates for the bond were low as a result of the tight liquidity that has characterized the money market since the beginning of the year. The tight liquidity in the money market has been mainly as a result of CBK mop up activities in order to support the shilling. This is the second time since the beginning of the year that we have seen CBK cancel an auction, following the auction for a 364-day T-bill that was cancelled at the beginning of the year.

Liquidity remained tight in the market leading to the Central Bank of Kenya (CBK) participating in the reverse repo market, injecting Kshs 10.0 bn during the week at an average rate of 10.1%. The interbank rate however remained stable at 8.3% and the volumes transacted increased to Kshs 15.9 bn from Kshs 12.7 bn transacted the previous week; the interbank rate is often determined by the liquidity distributions within the banking sector as opposed to the net liquidity position in the interbank 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-bond Interest


Reverse Repo Maturities


Reverse Repo Purchases




Repos Maturities


OMO Tap Sales


Total Liquidity Injection


Total Liquidity Withdrawal



Net Liquidity Injection


According to Bloomberg, the yields on the 5-year and 10-year Eurobond decreased week on week by 20 bps and 10 bps to 4.2% and 7.3%, from 4.4% and 7.4%, respectively, the previous week. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.6 percentage points and 2.3 percentage points for the 5-year and 10-year bonds, respectively, due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination.

The Kenya Shilling depreciated against the US Dollar by 10 bps during the week to close at Kshs 104.0 from Kshs 103.9 on account of increased demand from importers, mainly in the crude oil and retail segments. On a year to date basis, the shilling has depreciated against the dollar by 1.4%. In recent months, we have seen the forex reserves reduce to USD 6.9 bn (equivalent to 4.5 months of import cover), from a peak of USD 7.8 bn in October 2016 (equivalent to 5.2 months of import cover). As stated in our Cytonn Weekly #45, this is concerning as the rate of decrease in the forex reserves could be an indication that the CBK is using reserves to support the shilling. However, it is important to note that if the reserve levels drop too low, the government can access the IMF credit facility, comprised of a USD 989.8 mn 24-month Stand-By Agreement (SBA) and USD 494.9 mn 24-month Stand-By Credit Facility (SCF), bringing the combined facility to USD 1.5 bn. Despite the government having access to this facility, we note that adding USD 1.5 bn to the reserves will only improve the reserve position by 1.0 month of import cover, which still will not be sufficient for a net importing economy like Kenya given the export and import structure. In our view, in order to achieve long term stability of the shilling, the government needs to work on (i) the country?s import and export structure, (ii) promoting tourism in order to attract foreign inflows, (iii) setting up processes that encourage diaspora remittances, (iv) reducing the fiscal deficit in order to reduce appetite for dollar denominated debt, and (v) improving the business environment in order to attract more foreign investments into the country.

The International Monetary Fund (IMF) completed the first review under the Stand-By Agreement/Standby Credit Facility (SBA/SCF) Agreement this week. The agreement was approved on 14th March, 2016 and made available USD 0.8 bn at the time, and the balance in four tranches upon completion of semi-annual program reviews. The government still maintains that it does not intend to use the facility unless an actual balance of payment issue arises. During the review, the IMF noted that (i) the economy performed better in 2016 than in 2015 with GDP growth for the first 3 quarters averaging 5.9% from 5.4% in a similar period in 2015, (ii) inflation was maintained within the government target range of 2.5% - 7.5% and the current account deficit narrowed by 10.4% y/y in Q3?2016, and (iii) the outlook still remains positive in terms of economic growth and resilience to external shocks. However, the IMF was concerned about the interest rate cap and its negative effect on private sector credit growth and banking sector earnings. The IMF noted the following:

  • It would be necessary to repeal the Banking (Amendment) Act, 2015 in the near term as maintaining it might end up taking a toll on Kenya?s financial stability;
  • The Central Bank of Kenya (CBK) needed to work on increasing transparency and competition within the banking sector;
  • In order to strengthen the effect of fiscal policy, the government needs to embark on reforms in public financial management in order to control public expenditure.

Given the expected Fed rate hikes during the year, the expected widening of the current account deficit due to recovery of oil prices and the increased perception of risk as we head into the election, we expect the shilling to come under pressure and in turn, the government might have to tap into the IMF facility to protect the shilling. In our view, the IMF facility might not be sufficient to completely support the shilling but would help in protecting the shilling in case of adverse currency volatility.

The Monetary Policy Committee (MPC) is set to meet on Monday 30th January to review the prevailing macroeconomic conditions and give the direction of the Central Bank Rate (CBR). In their previous meeting held in November 2016, the MPC maintained the CBR at 10.0% on account of (i) the stability of the foreign exchange market despite volatility in global financial markets and the seasonal increase in demand for dollars by corporates financing dividend payments, (ii) the inadequacy of available data to facilitate conclusive analysis of the impact of the interest rate caps on monetary policy and the economy at large, and (iii) the strong economic growth exhibited by a growth of 6.2% in H1?2016 compared to 5.9% in H1?2015. We expect the MPC to maintain the CBR at 10.0% since, (i) inflation, though expected to increase, is expected to remain within the government target range of 2.5% - 7.5%, (ii) the currency despite being under pressure can so far be supported by the forex reserve and the stand-by facility from the IMF, and (iii) economic growth might be delicate this year hence the MPC is expected to maintain an expansionary stance. See MPC Note

The Kenya Revenue Authority (KRA) is 10.6% behind its revenue collection target having collected Kshs 591.7 bn, which is 39.4% of the full year target of Kshs. 1,500.5 bn, against a 50.0% half year target of Kshs 750.3 bn; as compared to 6.6% behind schedule for the 2015/16 financial year. Even with a revised target as per the Budget Review and Outlook Paper (BROP), which puts the revenue collection target at Kshs 1,456.3 bn, they will still be 9.4% behind target. We do not expect KRA to meet their revenue collection target given the low earnings growth rate, which we project at 8.0% this year and will largely be driven by lower earnings growth from the banking sector. Low revenue collections will lead to more pressure on the government to borrow from the domestic market in order to plug in the budget deficit, which will, lead to an upward pressure on interest rates.

The Annual Public Debt Management Report for the year ended June 2016 was tabled in Parliament during the week by the Treasury Cabinet Secretary. The report highlighted the country?s widening debt position as at the end of the fiscal year 2015/16. Such a situation is very worrying as the rate of increase is high and now the country?s debt to GDP ratio is at 54.9%, which is above the 50.0% threshold for frontier markets as recommended by the IMF. Below is a summary of the key changes:

Summary of Changes in Kenya?s Public Debt

Values in Kshs tn unless stated otherwise




y/y change

GDP at market prices (KNBS)




Total public debt (National Treasury)




Total debt to GDP




Domestic public debt




Domestic public debt to total public debt




Domestic public debt to GDP




Foreign public debt




Foreign public debt to total public debt




Foreign public debt to GDP




Public debt service to revenue




Key points to note from the report include:

  • The Treasury expects Kenya?s total debt burden to rise further to Kshs 3.8 tn by June 2017 and hit Kshs 5.3 tn in 2020;
  • Total public debt annual growth of 27.9% outpaced GDP (at market prices) growth of 14.5%, an indication that we are still borrowing more to finance recurrent expenditure as opposed to development expenditure;
  • Financial institutions were the biggest holders of domestic debt with local commercial banks and non-bank financial institutions holding 51.1% and 43.4% of the total domestic debt of Kshs 1.8 tn, respectively.

The United States Federal Open Market Committee (FOMC) is set to meet on 1st February, 2017 to assess the current state of the US economy and shed light on a possible rate hike. During the Fed?s previous meeting held on 14th December, 2016, the committee decided to raise rates to a band of 0.50% - 0.75%, from 0.25% - 0.50% previously based on a (i) strong economic growth in the country of 3.2% during the third quarter of the year, (ii) the economy running at full employment and (iii) inflation rising closer to the 2.0% federal target at 1.6% as at October 2016. In addition to raising rates by 25 bps during the meeting, the Fed highlighted plans to accelerate its rate-hiking pace, hinting at 3 rate hikes in 2017 on expectations of an improved economic performance this year. With President Trump keen on an expansionary program with a key focus on job creation despite the US economy nearing full employment, key focus will be placed on economic trends in the US. We expect the Fed to maintain the rates at between 0.50% - 0.75%, as the Fed takes a wait-and-see approach following their previous decision to raise rates and new reforms by the new government.

The Government is ahead of its domestic borrowing for this fiscal year having borrowed Kshs 155.2 bn for the current fiscal year against a target of Kshs 136.9 bn (assuming a pro-rated borrowing throughout the financial year of Kshs 229.6 bn budgeted for the full financial year). It is important to note, however, that the government is in the process of revising its domestic borrowing target upwards to Kshs 294.6 bn, which will take the pro-rated borrowing target to Kshs 175.6 bn, implying that the government will fall slightly behind its borrowing target, especially in a tight money market liquidity condition that we are now experiencing. The government has only borrowed Kshs 45.8 bn from the foreign market against its foreign borrowing target of Kshs 462.3 bn, and the Kenya Revenue Authority (KRA) which has already missed its first half of 2016/17 fiscal year revenue collection target by 10.6%, is expected to miss its overall revenue collection target of Kshs 1.5 tn for the current fiscal year. This creates uncertainty in the interest rate environment as the government might have to plug in the deficit by borrowing from the domestic market, a move that may exert upward pressure on interest rates. It is due to this that we think it is prudent for investors to be biased towards short-term fixed income instruments.


During the week, the Kenyan equities market was on a downward trend, with NASI, NSE 20 and NSE 25 losing 1.4%, 3.5% and 2.9%, respectively, taking their YTD performances to (8.3%), (11.7%) and (11.1%) for NASI, NSE 20 and NSE 25, respectively. Since the February 2015 peak, the market has lost 48.9% and 31.1% for NSE 20 and NASI, respectively. This week?s performance was attributed to losses by large cap stocks such as Equity Group, KCB Group and DTB, which declined by 6.7%, 9.4% and 3.5%, respectively, despite a 1.4% gain by Safaricom.

Equities turnover decreased by 5.2% to close the week at USD 27.1 mn, from USD 28.6 mn the previous week. Foreign investors remained net buyers with net inflows of USD 5.0 mn, an increase of 506.5% compared to a net inflow of USD 829,000 recorded the previous week. Foreign investor participation decreased to 71.4%, from 87.1% recorded the previous week. Safaricom, EABL, BAT, Kenya Re and KCB were the top five movers for the week, jointly accounting for 80.4% of market activity. We expect the Kenyan equities market to be flat in 2017, driven by slower growth in corporate earnings and neutral investor sentiments. The low valuations may offer some support to the market especially from long-term investors who are taking advantage of these attractive entry levels.

The market is currently trading at a price to earnings (P/E) ratio of 9.8x, versus a historical average of 13.5x, with a dividend yield of 7.3%, versus a historical average of 3.6%. The current P/E valuation of 9.8x is only 18.1% above the most recent trough valuation of 8.3x experienced in December of 2011, which is the lowest point experienced in the market over the last more than 6 years. The charts below indicate the historical P/E and dividend yields of the market.

EABL released H1?2017 results

EABL released their H1?2017 results, recording a flat EPS growth of 1.8% to Kshs 7.1 from Kshs 7.0 in H1?2016. This was a result of (i) a 12.0% decline in operating expenses to Kshs 7.3 bn, attributed to an 18.5% decline in selling costs, which outpaced a 6.3% decline in operating revenue, and (ii) forex gains of Kshs 0.6 bn, compared to forex losses of Kshs 0.5 bn reported last year.

Key points to note include:

  • Operating revenue decreased by 6.3% y/y to Kshs 35.2 bn from Kshs 37.5 bn. This was mainly attributed to (i) poor performance of their Tanzania business whose revenues declined by 7.0% and accounts for 9.0% of total revenues, and (ii) a revenue drop in Kenya business, which contributes 72.0% of total revenues, following an increase in excise duty by Kshs 30.0 for every liter of beer in Dec 2015;
  • Operating expenses declined by 12.0% to Kshs 7.3 bn from Kshs 8.3 bn, owing to improved sales efficiencies such as a 18.5% decline in selling costs on account of procurement savings and a 9.8% decline in administrative costs during the period as the firm employed zero budgeting to enhance organizational effectiveness;
  • Operating profit increased by 2.2% y/y to Kshs 9.5 bn from Kshs 9.3 bn supported by 12.0% decline in operating expenses, despite a 6.3% decrease in operating revenue;
  • Profit after tax declined by 27.3% to Kshs 5.6 bn from Kshs 7.7 bn, attributed to a one-off gain of Kshs 2.2 bn from the sale of CGI (Central Glass Industries) in 2016. However, excluding the one off gain coupled with forex gains of Kshs 0.6 bn compared to forex losses of Kshs 0.5 bn reported last year, the profit after tax improved to Kshs 5.6 bn, a flat growth of 1.8%;
  • The total capital expenditure for the period amounted to Kshs 1.8 bn, a growth of 14.0% y/y and was channeled to (i) brewing house efficiency improvements, (ii) innovation to new brands such as Tusker Cider, (iii) non-tamper nip caps to support fight against counterfeits, and (iv) returnable packaging and new keg barrels to support growth;
  • The Board of Directors recommend the payment of an interim dividend of Kshs 2.0 per share.

Going forward, we expect sustained growth in earnings for EABL to be driven by, (i) enhanced capacity investments, (ii) accelerated spirits volume momentum and demand, (iii) drive for price advocacy to enhance affordability of its products in the market and fight competition, (iv) innovations of new products and rebranding across all market segments, and (v) development of its commercial capabilities to focus on the core businesses of the firm.

The Kenya parliament is soon expected to debate a proposal, Banking Act (Amendment) Bill, 2017, which seeks to set the criterion, duration of deposits and minimum interest threshold to be followed by State Agencies before funds can be deposited in commercial banks. In addition to the requirement for approval of all deposits by the Cabinet Secretary for the National Treasury, the bill also proposes a maximum duration of 21 days for deposits held at commercial banks, with the minimum deposit rate pegged to the prevailing T-bill rate. The bill also seeks to restrict the qualifying banks to only those in which the government and quasi-government agencies own at least 20.0% of equity, effectively making KCB Group, National Bank of Kenya, Consolidated Bank of Kenya, Development Bank of Kenya and the Post Office Savings Bank the only qualifying banks. This new bill comes just 4 months after the enactment of the Banking (Amendment) Act, 2015, which dictates banks? loan and deposit pricing framework, setting the rates at 4.0% above the CBR and 70.0% of the CBR for loans and deposits, respectively. This new bill, if passed, will negatively affect the banking sector in that it will lead to more skewed liquidity distribution among banks worsening the current imbalance that has seen the inter-bank rate rise to highs of 9.2% as at 20th January, 2017 from 4.1% reported in December. Most of the smaller lenders are finding it hard to attract deposits hence are turning to the Central Bank of Kenya (CBK) as the lender of last resort to meet their liquidity needs. Limiting deposits from government agencies will further worsen these banks deposit gathering capability and hence they are likely to face challenges. As highlighted in our Q3?2016 banking sector report, we continue to see a sector in transition that will further lead to realignment in the sector. Smaller banks, which will find it difficult to operate, will be candidates for acquisition by the large and stable banks. If this amendment is passed, we will not be surprised if the next move will be to regulate how qualifying banks can use the public sector deposits. Our view is that this bill interferes with the free movement and pricing of capital, and will have overall negative implications.

CIC Insurance Group has issued a profit warning for the financial year 2016 making it the 4th listed company to issue a warning after Sanlam Kenya, Sasini and Nairobi Securities Exchange (NSE). Despite having registered strong growth with improved quality of business in most of the business lines for H1?2016, the listed insurer?s overall business performance has negatively been affected by (i) the general decline in equities prices which has significantly devalued their equities portfolio, and (ii) adverse claims experienced in some lines of general business and a reserving policy change in life business. Given that we have seen 2 out of the 6 listed insurance companies issue profit warnings on the basis of a bear market, we expect the insurance sector to register subdued earnings given that they are generally loss making in their core business hence depend largely on investments in the capital markets to remain profitable.

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

  • ARM Cement retains a ?Buy? recommendation with a total potential return of 56.0%, having revised the target price downwards to Kshs 31.2 from Kshs 37.0 due to expectations of subdued earnings in 2017 and their Tanzania business, which continues to struggle as they have not yet completed the Tanga plant.
  • Barclays Bank has moved from a ?Hold? recommendation, with an upside of 7.8% to an ?Accumulate? recommendation with an upside of 18.0%, following a 9.5% w/w price decline
  • DTB Kenya has moved from a ?Lighten? recommendation, with an upside of 4.3% to a ?Hold? recommendation with an upside of 8.0%, following a 3.5% w/w price decline
  • Jubilee Holdings has moved from a ?Sell? recommendation with a downside of 0.6% to ?Lighten? recommendation with an upside of 0.2%, following a 0.8% w/w price decline
  • We have placed CIC under review given their profit warning. We shall be releasing a revised valuation

all prices in Kshs unless stated




Price as at 20/01/17

Price as at 27/01/17

w/w Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**



KCB Group***










Bamburi Cement






























Sanlam Kenya




















Stanbic Holdings










Equity Group










Kenya Re










HF Group










Co-op Bank




















I&M Holdings








































Standard Chartered***










Jubilee Insurance





























*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 remain "neutral with a bias to positive" for investors with short to medium-term investments horizon and are "positive" for investors with long-term investments horizon.

Private Equity

The renewable energy sector continues to exhibits outstanding performance as Inspired Evolution, a Southern Africa clean energy and resource efficiency specialized fund manager exited some of its renewable energy investments held in its Evolution I fund portfolio. Evolution I is a USD 90.0 mn fund that completed its final close in 2010. Three of the investments exited were acquired by an entity controlled by clients of TriAph Investments. These were: The 5.0 MW Slimsun Swartland Solar Park,80.0 MW Kouga Wind Farm and Indirect interest in Fifth Season, which holds a stake in the 75.0 MW Solar Capital De Aar solar photovoltaic project. Old Mutual Life Assurance Company acquired the fourth investment, Cookhouse Wind Farm, with a capacity of 138.6 MW. This successful exit has enabled Inspired Evolution to return Evolution I?s entire capital back to its investors all in just over six-years from its final close. Consequently, this milestone comes simultaneously with the first closing of Evolution II fund in the late December 2016, which raised USD 90.0 mn from international investors. Evolution II targets to raise USD 250.0 mn for its final close by end of 2017.

On the fund raising front, the European Union (EU), the International Fund for Agricultural Development (IFAD), and the National Social Security Fund (NSSF) Uganda have jointly launched the yielding Uganda investment fund. The objective of the fund is to provide long-term Capital to agribusiness entrepreneurs which will enable sustainable expansion and modernization of their operations, while at the same time providing good financial returns to investors. An initial USD 12.9 mn has been availed together with an additional USD 13.9 mn set to be raised by the fund manager to bring the total fund size to USD 26.8 mn. The fund is one of its kind where the EU is blending private equity and grants. The yielding Uganda investment fund is being arranged by Deloitte Uganda and Pearl Capital Partners Uganda (PCP, Uganda). PCP Uganda will be the fund manager and will issue capital investments ranging from USD 0.3 mn to USD 2.2 mn. This fund will be utilized to offer financial solutions using equity, semi-equity and debt to about 20 small and medium sized enterprises. With more investors engaging in agribusiness the sector is attracting private equity investments in the region due to the rising population growth, urbanization, increase in the middle income population and demand for quality, affordable agricultural products

The Carlyle Group, a global alternative asset manager is set to acquire a significant stake in Global Credit Rating (GCR), Africa?s largest credit rating agency. When the deal is closed, Carlyle Group will be the largest shareholder with around half the equity in the company while management and DEG will also remain invested in the business. GCR has a customer base of 400 customers across 20 countries providing analysis and rating services to insurance companies, financial institutions, corporations, public service entities and structured finance providers. Being the only agency to have a strong presence in multiple geographies across Africa, Carlyle Group is seeking to broaden the Pan-African ratings agency's services. The expansion of these services in African will be a major boost, as the African public market is growing with Angola and Ethiopia set to launch their stock exchange markets. This acquisition will be funded from the Carlyle Sub-Saharan African fund.  

Private equity investment activity in Africa has continued to increase, as evidenced by the increase in fundraising activity and deal volumes in the region. Preference is still skewed towards renewable energy, agriculture, financial services and technology sectors. We remain bullish on PE as an asset class in Sub-Saharan Africa given (i) the abundance of global capital looking for investment opportunities in Africa, (ii) attractive valuations in the private sector, and (iii) strong economic growth projections, compared

Real Estate

Businesses are setting up offices in upcoming business nodes such as Westlands and Upperhill, away from the Central Business District (CBD) with the aim of getting more space, convenience and a high quality business environment. This week, Kenya Investment Authority (KenInvest) opened a 2-floor one-stop shop at Old Mutual?s UAP Tower in Upperhill while Ecobank Transnational Kenya last week announced its relocation from its headquarters at Ecobank Towers, Muindi Mbingu street to Fortis Office Park, Off Waiyaki Way in Westlands after the sale of Ecobank Towers. Other companies that have relocated from the CBD include the ICEA Lion Group that sold the ICEA building to Jomo Kenyatta University of Agriculture and Technology (JKUAT) and shifted to its new offices along Chiromo Road. In addition to space and convenience, corporates and businesses are relocating out of the CBD due to:

  • Shortage of parking space and traffic congestion that make accessibility difficult thus affecting company operations
  • Unconducive environment for corporate organisations set up due to massive uptake of space by Universities and small scale retailers

In our view, office decentralization will worsen the performance of the commercial office sector in the CBD. In 2016 for instance, the commercial office market witnessed a 3.2% decline in yield and a 6.1% decline in occupancy compared to the commercial office market average of a 2.9% increase in yield and a 5.1% increase in occupancy. The CBD will thus have to be reinvented as a commercial office zone through improvement of infrastructure, and provision of specialized small offices or it will be relegated to playing mainly a retail function.

Below is an extract from our commercial offices report looking at performances of the various office nodes:

Cytonn Commercial Office Nodes Performance Change 2015-2016

Annual (%) Change of Key Performance Metrics Nairobi 2015-2016


Rent per Sq.ft "Kshs"

Price per sq.ft "Kshs"

Occupancy (%)

Rental Yields (%)






Mombasa & Thika Rd








































*CBD recorded a decline in occupancy and yields attributed to congestion and reduction in business      activity leading to lower demand in the market

Source: Cytonn Research 2016

To match the appetite for grade A offices, developers have increased supply with about 6 million square feet projected to be complete in 2017. In order to remain competitive, developers are now adopting unique green designs that provide open spaces, improved air circulation and adequate lighting to create a healthy working environment and promote efficient energy use. PDM Holdings, for example, just unveiled their grade A office block in Milimani dubbed ?Vienna Court?. The 120,000 square feet facility has been awarded a gold certificate for its Leadership in Energy and Environmental Design by embracing water recycling, solar shading, use of balconies and LED lighting. While construction using green technology is expensive, it will promote sustainable development and increase operational efficiency in the long term.

In the hospitality sector, hotel group, Carlson Rezidor announced plans to open 4 more hotels in Kenya, in addition to their Radisson Blue hotel in Upperhill. The global hotelier intends to open Park Inn Nairobi in Westlands by the end of April 2017, and 3 other hotels in Nairobi and the Coast thus deepening its presence in the country. Their latest brand, Radisson RED, to be launched in Nairobi will incorporate art, music, fashion and technology to attract tech savvy and young people. Bookings will be done through an app and clients will be able to access rooms through their phones. This indicates innovation and product diversification in the hospitality sector is likely to be the key differentiator going forward.

The interest in Kenya?s hospitality sector has been driven by growth of MICE (Meetings, Incentives, Conferences and Exhibitions) tourism, Kenya being a regional business hub and the recovery of travel tourism due to improved security and lifting of travel advisories previously issued against African countries due to the Ebola pandemic in West Africa and rampant terrorist attacks. According to the UNWTO (United Nations World Tourism Organization) tourism barometer advance release, lifting of travel advisories resulted in an 8% growth in the number of tourists visiting Africa reaching 58 million in the year 2016. Recovery of tourism will positively impact the hospitality sector through increased occupancy and revenues. We also project high demand for conferencing facilities during the campaigns and election period as government officials and political aspirants hold meetings for strategic and planning purposes.

Other highlights in the real estate sector this week include;

  1. Scrapping of National Environment Management Authority (NEMA) and National Construction Authority (NCA) charges previously at a minimum of Kshs 10,000 or between 0.1% and 0.5% of construction costs. This will spur development by reducing costs and increase compliance especially from non-institutional developers
  2. Digitalization and embracing of e-commerce in real estate to drive sales, as Certiorari, a real estate management firm signed a deal with Buy-Rent Kenya and will start cross-listing of properties on their site. E-commerce will enable a deeper market reach as prospective buyers/renters can easily get information from their homes or work places. With increasing internet penetration and a growing tech-savvy young middle class, firms will have to embrace technology to remain relevant
  3. Continued efforts to reduce congestion on roads in Nairobi as the second phase of expansion of Ngong? Road between Yaya and Dagoretti corner is set to start in July. In addition to expansion, the road will employ the rapid transit system that will not only create a lane to be used by public vehicles exclusively, but also use smart traffic lights as opposed to the current analogue systems that are time interval based. Other roads in the pipeline include the double decker highway linking JKIA with Rironi area, whose construction will begin next year. Infrastructural development will not only spur.

The real estate and construction industry will remain vibrant in 2017 driven by sustained demand for housing, growth and expansion of companies and SMEs, implementation of government directives to reduce construction costs and infrastructural development that will spur economic growth.


Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only, and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.