- GDP Growth: Cytonn is POSITIVE on GDP Growth. Kenya’s 2018 GDP growth to be between 5.3% and 5.5%, with growth supported by (i) the recovery of the agriculture sector, (ii) continued strong growth in the tourism & real estate sectors, and (iii) strong growth in the manufacturing and construction sectors. However, private sector credit growth, which remained low throughout 2017, averaging 2.4% in the 10-months to October, compared to a 5-year average of 14.4%, is expected to remain low in 2018, with banks finding it increasingly difficult to price for risk, following the capping of interest rates, coupled with the implementation of IFRS 9.
- Inflation: Cytonn is POSITIVE on Inflation. Inflation is expected to be stable in 2018, averaging at the upper bound of the inflation target coming in at 7.5% for 2018, primarily driven by improved weather conditions, reducing the cost of the food basket.
- Kenya Shilling: Cytonn is NEUTRAL on the Exchange Rate: Despite the expected increase in the value of oil imports should global oil prices continue to rise, the shilling shall remain supported by (i) declined food imports and improved agricultural exports as production improves due to improved weather conditions, (ii) the CBK’s foreign exchange reserves of USD 7.1 bn (equivalent to 4.7 months of import cover), and (iii) the continued weakening of the US Dollar. We project that the shilling will range between Kshs 102.0 and Kshs 107.0 to the USD in 2018.
- Fixed Income: Cytonn is NEUTRAL on Interest Rates. Expected upward pressure on interest rates, brought about by depressed revenue collection, and as well the government falling behind its total domestic borrowing target. Government shall continue rejecting expensive bids in the market. Investors should be biased towards short-to-medium term fixed income instruments to reduce duration risk. MPC projected to maintain CBR at 10.0% throughout 2018.
- Investment Grade Real Estate: Real estate shall continue to perform as an asset class and see continued growth, as a result of (i) political stability following the end of the electioneering period, (ii) economic recovery with the GDP projected to come in between 5.3% and 5.5%, and (iii) government incentives such as tax relief of 15% for developers putting up more than 100 affordable housing units p.a., the scrapping of the land title search fees, NEMA and NCA Levy, and digitization of the Lands Ministry. In terms of themes in real estate:
- Residential: Cytonn is POSITIVE on Residential: We expect the sector’s performance to improve in 2018 with the value of residential completions increasing by at least 13.9% as the market records increased investment activity following the conclusion of elections. The best areas to invest in apartments are Ridgeways and Kilimani due to high uptake and market returns of 18.4% and 15.4%, respectively, as well as ongoing infrastructural development. Juja and Runda Mumwe offer the best investment opportunity for detached units owing to high uptake and returns to investors of 17.3% and 12.0%, respectively.
- Commercial Offices: Cytonn is NEUTRAL on Commercial Offices: There is oversupply in the sector with the Nairobi region currently experiencing an oversupply of 3.2mn SQFT, that is forecasted to increase by 21.9% in 2018 to 3.9mn SQFT. Pockets of value remain, with an opportunity in Grade A Offices and Serviced Offices, with yields of 10.0% and 13.4%, respectively, and offices in the Gigiri area of Nairobi.
- Retail: Cytonn is NEUTRAL on Retail: Returns are expected to soften as a result of increased supply and the slowdown of traditional retailers such as Uchumi and Nakumatt. Occupancy rates are expected to decline by 0.8% points to 79.5% from 80.3% leading to reduced yields of 9.2% from 9.6%. There still exists a bright spot with the entrants of foreign retailers into the market.
- Hospitality: Cytonn is POSITIVE on Hospitality: Stabilising political situation, growth of MICE and domestic tourism, sustained international business and travel tourism, and marketing efforts will drive recovery with room occupancy expected to increase by 4.0% points, ADR by 11.0% and RevPAR by 20.6%.
- Mixed-use Developments: Cytonn is POSITIVE on Mixed-use Developments:Opportunity for the development of mixed-use developments, which encompass a live-work-play-invest mix for end-users of the development. With yields of 9.5%, the most attractive concept should consist of retail, commercial office, un-serviced apartments, serviced apartments and hotel, all in one comprehensive development.
Sub-Saharan Africa is projected to grow by 3.4% in 2018, higher than the expected 2.6% in 2017. The report attributes this to improved growth in commodity driven countries such as Nigeria and Angola, which are expected to grow by 0.8% and 1.5% in 2017 and by 1.9% and 1.6% in 2018, respectively, up from (1.6%) and (0.7%) registered in 2016, respectively, as oil prices and production improve, and the strengthening of Nigeria’s agricultural sector.
“We expect a relatively stable interest rate environment, with the MPC expected to maintain the CBR at 10.0% throughout 2018. The CBK has been disciplined in keeping interest rates at low levels by rejecting expensive bids in the market,” said Maurice Oduor, Investment Manager at Cytonn Investments. “However, there still exists upward pressure on interest rates, brought about by expected depressed revenue collection and the government falling behind its total domestic borrowing target,” added Maurice.
As per the report, the Kenyan equities market is expected to maintain the upward trend during 2018, driven by stronger investor sentiment due to expected improvement in corporate earnings growth, heightened regulation in public entities, following major regulatory changes in 2017 with regards to corporate governance, and strong economic growth. “Market valuation is currently at historical average levels, but at Cytonn we are seeing a huge opportunity in undervalued sectors, especially financial services, where investors can make attractive returns. We expect higher corporate earnings this year, at 12.0% compared to 8.0% in 2017, with the market being attractive for long-term investors” said Maurice.
“In private equity, sub-Saharan Africa remains positive and is expected to continue attracting global capital, with investors looking to invest in financial services, education and technology,” said John Ndua, Investments Analyst at Cytonn Investments. “The East African market remains a region of particular focus given the general improvement in the ease of doing business and a well-diversified economy, resilient to external shocks,” added John.
According to the report, the real estate market performance is expected to recover in 2018, driven by high and stable returns in the (i) residential sector, on the back of a high housing deficit and government incentives such as a 15.0% tax reduction for developers constructing more than 100 affordable housing units per annum, increased infrastructural development and increased focus by the government on affordable housing, (ii) hospitality sector driven by growth in MICE and domestic tourism and continued marketing efforts by the government, and (iii) the commercial sector, with opportunities in Grade A offices, Serviced Offices and Mixed-use Developments, which offer a live-work-play-invest opportunity to end buyers. The report highlighted Ridgeways and Kilimani as the best locations to invest in for residential apartment developments, due to high uptake, attractive market returns, as well as ongoing infrastructural development while Juja and Runda Mumwe offer the best investment opportunity for detached units owing to high uptake and returns to investors. For commercial offices, the most attractive investments are Grade A offices and Serviced Offices, which offer attract yields of 10.0% and 13.4%, respectively.
Cytonn Investments is an independent investment management firm, with offices in Nairobi – Kenya and D.C. Metro – U.S. We are primarily focused on offering alternative investment solutions to global and local institutional investors, individual high net-worth investors, and diaspora investors interested in the East-African region. Our investments are in real estate and private equity. Real estate investments are made through our development affiliate, Cytonn Real Estate, where we currently have over Kshs 82.0 billion of projects under mandate, across ten projects. In private equity we invest in banking, insurance, education, hospitality and technology. Our financial services investments in Sub Saharan Africa are made through our Cytonn Financial Services Fund (CFSF), through which we are the 9th largest shareholder in NIC Bank in Kenya. Investments in education and hospitality are made through Cytonn Education Services and Cytonn Hospitality, respectively.
Cytonn Real Estate is Cytonn’s development affiliate, which is focused on developing institutional grade real estate targeted at specific institutional, high net-worth and Diaspora investors. Collective, Cytonn Investments and Cytonn Real Estate manage over Kshs 82.0 billion of real estate projects under mandate, across ten projects.