Speech by Edwin H. Dande at the IQSK Gala Dinner on 1st December 2017.
4 years ago, we used to hail taxi cabs by going to a line where taxis are lined up and negotiating with the taxi driver. You had to state where you are going. In most cases, they would ask you, “Where is that?” After narrating the location, you had to haggle about the price. Once you agreed on the price, they would probably confirm whether you had exact change. It was like a cartel, you had to agree with the taxi that was in front of the line.
Then came Uber, and all these discussions were gone, and not only gone, prices came down by almost 40 to 50%. It was not easy; the introduction of Uber this market was met with resistance and street protest, but today taxi hailing is a lot more efficient and the prices a lot more affordable. Uber delivered an impact to society and today it is the most used means of hailing taxis.
Banking in Kenya was historically deemed to primarily be a privilege befitting only for the middle to upper-income earners. Having a bank account was a status symbol. Then 13 years ago, Equity Building Society converted in a fully-fledged commercial bank. We all know the story. Until its conversion, Equity Building Society was “a provider of mortgage financing for the majority of customers who fell into the low-income population”. The society’s logo, a modest house with a brown roof, resonated with its target market and their determination to make small but steady gains toward a better life, seeking security and advancement of their dreams. For the establishment, the move from a building society focused on the low income and people of modest means seemed too high a reach. Banking was perceived to a preserve of multinationals. Over 13 years, Equity slogged on and today it is the largest bank by market capitalization and has been the subject of study at an Ivy League school, HBS.
And finally, is Mpesa;10 years ago money transfer was considered a preserve of the banks. Then came Mpesa and as usual, innovation is unnerving and it was resisted by the established banking players and story has it that at one point Mpesa was even shut down by the central bank. Fast forward 10 years later, Mpesa is the most commonly used way of money transfer in Kenya, nd has been the subject of study at another Ivy League school, MIT.
What is common among these three? I think the teams behind them saw something that didn’t seem to make sense and they had the burning desire to do something about it and change the status quo. The archaic way of hailing taxis didn’t make sense to Uber. That you had to go to the bank to transfer money didn’t make an impact to Mpesa and that only the mid to high end had financial access didn’t make sense to Equity.
For many years we looked at the returns investors were making and it did not seem to make sense. Investment grade real estate was returning roughly 20 to 25% per annum, and when we say investment grade, we mean real estate that is based on market research and we can reasonably tell the returns and the timing of those returns. It didn’t make sense that majority of investors had their monies in equities, fixed income, and bank deposits, collectively making 10 to 12% per annum over a 5 year period, yet they could make more than double those returns if they had access to real estate returns – either directly or through some investment that was backed by real estate.
So we started wondering how could we improve returns to investors, and it was simple; Develop the investment grade real estate that returns 25% and fund it with money directly from investors. If they are making 10 to 12% per annum, if we pay them 18% per annum, surely they would consider it. We tried to do this at our former platform and we met so much resistance. It felt like shuffling from audit commit, to risk committee, to various investment committees to board meetings, and finally we said to hell with this we shall go do this ourselves. With the benefit of high sight, we were plain stupid. It is like trying to build Uber as a department in Kenatco, Equity in Barclays or Mpesa in Posta, it can’t just happen.
So we formed Cytonn. On one hand, we offer our investors high yield returns, and it’s pretty simple, an investor with one million can take it to a bank and get negligible returns, at best 7%, if you go by rate cap regulations. A business would go borrow the same money and if you just look and KBA website, the average all-in cost for the borrowing is about 18%. So they take the money to the bank, they get at best 7%, I borrow the same money and I pay the bank 18%, what is I offered the investors the 18% directly, they would be crazy not to take it. I then take the 18% and go use it for developments, which I sell off-plan so that as the buyers of the units pay their contacts, I survive by liability. I just have to make sure that the real estate delivers way above 18%.
We have found that it works. It is called structured finance. Accessing finance by developing innovative financing structures (such as our Cytonn Cash Management Solutions and Cytonn Project Notes), which sit between those with capital hungry for yield and those with entrepreneurial ventures hungry for capital. Rather than spend ages seeking only bank funding, through structured finance, you can also seek funding directly from investors. This is the innovative way to finance real estate development.
And for investors, instead of spending time trying to get real estate backed returns through brick and mortar, an exercise wrought with myriad risks, you can just invest in structured products.
I see that is the future of real estate development finance and real estate investment.
So far, those with capital – such as banks, asset managers, and insurance companies, are busy looking for high yield returns in real estate. And those with high yielding developments are busy looking for capital. There is fragmentation or gap in between seekers of yield and providers of yield. That is why we formed Cytonn Investments to look for those with capital seeking yield and Cytonn Real Estate develops real estate that provides that yield. Essentially we coupled up real estate development by bringing together the two pieces. We are the only brand that has done that in this market.
As we get into our fourth year of operations, our alternative investment products have continued to gain acceptance in the market. Today we have over 10 projects supporting the returns promised to our 3,000 investors. We have also grown to be recognized as the leading / #1 alternative investment provider in Kenya, locally by Think Business and internationally, by International Finance Magazine. It is noteworthy that in 2017, only two financial institutions received the award in Kenya, Cytonn for Best Alternative Investment Provider and CMA for Most Innovative Capital Markets Regulator.
When we do this, it is not just about returns and development, it has an impact:
- We build comprehensive lifestyle developments that offer not just shelter, but they solve the typical infrastructure challenges by offering back up power, back up and reliable water, enough open spaces for kids to play, connection to main sewer or engineered sewer treatment solutions
- We create more jobs, grow the economy and uplift the standards of living. We have created directly or indirectly 1,500 jobs. 400 directly and another 1,000 through our Real Estate projects
We think that structured finance is the way forward to real estate finance and investments, that is why we have been at the forefront of the ongoing formation of the East African Forum for Structured Products. The Forum will do the following:
- Educate members on structured products – the regulatory frameworks, the key pillars
- Help members with the setting up of structured products
- Advocacy for structured products in the market
- Liaise with market players and regulators on structured product initiatives
- Represent industry players and stakeholders on structured products matters
- Educate members on the legal and regulatory framework for structured products
- Oversee that members put into practice common industry and global standards for structured products vehicles such as having a custodian, a reputable auditor, a legal advisor and product promoter
The association is currently at its nascent stages and is keeping the joining fee fairly modest. If you would like to join, it only costs Ksh. 1,000 to become an individual member and Ksh. 5,000 to become a corporate member. The board shall be made of up corporate members.
Thank you very much.