The opportunity we offer clients is that instead of taking, say, Kshs. 100,000 to the bank and getting little to nothing for it, then we go borrow it for an all-in cost 15% to 18% cost of capital, you can lend it to us through CHYS / CPN and get the same rate that we would pay the bank. Which means, CHYS / CPN is the banker to our real estate development portfolio.
COVID 19 pandemic, which started as a health care crisis, has turned into an economic crisis, impacting all sectors, but aviation, hospitality and real estate have been especially hit. We invest in real estate and hospitality. In this environment, real estate, in particular, is struggling; (i) buyers of units have asked for more time to pay - we currently have over 1.6 bn receivable from buyers, (ii) sales have plummeted, and (iii) pace of construction is slow due to government directives.
Luckily for us, our real estate remains in very attractive locations, hence this is a temporary setback. Due to the aforementioned challenges, real estate developers are approaching their banks and getting their loans restructured through moratoriums on the principal and/or interest payments. For Cytonn Real Estate, we similarly have to approach our banker, CHYS / CPN for a one-year moratorium to preserve the portfolio through the pandemic.
CHYS and CPN are governed by a Board of Investor Representative, the Investment Manager in consultation with the Board of Investors obtained approval to restructure the loan book in the following two manners:
- To extend Principal Amounts for the entire portfolio for 12 months, with the view that that is the worst-case estimate for the pandemic period, this is consistent with the moratoriums that banks are giving real estate developments
- To Capitalize half of the interest payments during the extension period
This is consistent not just with what banks are doing for real estate portfolios, but with what other real estate funds are doing globally as demonstrated by the table below. (Kindly note that all our other portfolios – Money Market Fund, Equity Fund, Balanced Fund, Pension Funds and Africa Financial Services Fund are functioning normally.)
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Global Real Estate and High Yield Funds Affected By COVID-19 |
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Fund |
Source |
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BlackRock and Schroders latest to freeze property funds |
https://www.ft.com/content/b1e6ab9d-1dbc-44b2-90d9-e98b6d00060e
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Nordic high-yield bond funds block withdrawals |
https://www.ft.com/content/162e4d8e-6c23-11ea-9bca-bf503995cd6f |
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SJP gates £3.6bn property fund range |
https://www.ftadviser.com/investments/2020/03/19/sjp-gates-3-6bn-property-fund-range/
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AEW Core Property Trust Suspends Redemptions |
https://www.swfinstitute.org/news/78792/aew-core-property-trust-suspends-redemptions
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Irish Life and Zurich restrict investors from cashing in property funds |
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Canada Life suspends real estate funds until further notice |
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Some UK property funds ban withdrawals over coronavirus |
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Brazilian retail investors floored by real estate fund foray |
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While this pandemic was an unforeseen challenge, I believe our country and company will emerge stronger from this test. I also believe great companies are rising to the challenge through unwavering support of their employees, customers, and communities. Cytonn is one of those companies. Working side-by-side, we will successfully manage through today’s unprecedented challenges and get through this safely.
