NAIROBI, KENYA, JANUARY 14TH 2019
Cytonn Investments has today released their 2019 Markets Outlook, which projects GDP growth for 2019 to come in between 5.7% to 5.9%, driven by the recovery of the agriculture sector and growth in the tourism, real estate and manufacturing sectors. “Our outlook for Kenya’s macroeconomic environment is POSITIVE, supported by expectations for strong economic growth at between 5.7%-5.9%, a stable currency, inflation rates within the government’s target, and stable interest rates in 2019. This conducive operating environment should support investments in the Equities market and Private Equity activity, where we have a Positive outlook in both asset classes, owing to the attractive valuations,” said Caleb Mugendi, Senior Investment Analyst at Cytonn. “We also expect monetary policy to remain accommodative and political stability in 2019. However, worries about Kenya’s debt sustainability, and the revenue collection capacity by the Kenya Revenue Authority against its Budgetary targets, have led to a build-up in short term risks, thus our view is that investors should be biased towards Medium Term Fixed Income Instruments,” added Caleb.
“Our outlook for Real Estate is NEUTRAL, as the slowdown in demand for property persists amid increasing supply. We expect a positive performance in sectors like Mixed Use Development, Land and Hospitality, and a negative performance in the Commercial Office sector and Listed Real Estate,” said Juster Kendi, Research Analyst at Cytonn. “In 2019, we expect the Real Estate sector performance to be shaped by focus on affordable housing, increased mortgage uptake and adoption of sustainable developments and technology. We note that the Real Estate sector is mainly constrained by high financing cost for both developers and off takers, and we expect the market to pick up should the interest rate cap be lifted, or should the government establish other financing methods such as tapping into capital markets and incentives for the mortgage market,” added Juster.
Below is a Summary of the 2019 Markets Outlook:
Key: Green – POSITIVE, Grey – NEUTRAL, Red - NEGATIVE
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Macroeconomic Outlook |
Market Outlook for 2019 |
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Macroeconomic Environment |
GDP Growth – Our outlook for 2019 is POSITIVE on GDP Growth. We project economic growth of 5.7% - 5.9% in 2019, supported by the recovery of the agriculture sector, growth in the tourism, real estate and manufacturing sectors with a focus on the “Big 4 Agenda”, Inflation - Our outlook for 2019 is POSITIVE on Inflation. We expect muted inflationary pressures and the inflation rate to average 5.4% over 2019, which is within the government target range of 2.5% - 7.5%, Currency - Our outlook for 2019 is NEUTRAL on the Currency. We project the Kenya Shilling will range between Kshs 101.0 and Kshs 104.0 against the USD in 2019, supported by the Central Bank of Kenya (CBK) in the short term through its sufficient reserves of USD 8.0 bn, increasing diaspora remittances, and an improving current account position, Interest Rates - Our outlook for 2019 is NEUTRAL on Interest Rates. We expect interest rates to remain relatively stable as the CBK continues to reject expensive bids amidst improved liquidity in the market. |
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Asset Class |
Fixed Income, Equities and Private Equity Outlook for 2019 |
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Fixed Income |
We do not expect upward pressure on interest rates due to increased demand for government securities, driven by improved liquidity in the market from the relatively high debt maturities, and as the government rejects expensive bids despite being behind their borrowing target. Our view is that investors should be biased towards MEDIUM-TERM FIXED INCOME INSTRUMENTS to reduce duration risk associated with long-term debt, as the yield curve is relatively flat on the long-end |
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Kenya Equities |
We expect investors to come in at attractive levels owing to the cheap valuations, with the market P/E at 11.6x, which is 13.4% lower than the historical average of 13.4x, and the market to register net inflows from foreign investors, as they repatriate funds from developed economies, which are expected to record economic slowdowns in 2019. We are thus POSITIVE for equities |
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Private Equity |
Sector specific drivers like the need for consolidation in the Financial Services sector, the demand for quality education in the education sector, and the untapped potential in credit extension for FinTech will continue to attract private equity (PE) investors, and we are POSITIVE on PE |
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Asset Class |
Real Estate Focus Area and Outlook for 2019 |
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Real Estate |
Residential Sector |
Our outlook for the residential sector is NEUTRAL and we expect the sector’s performance to remain flat with occupancy and transaction rates stagnating and only selected markets continuing to exhibit high returns |
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The opportunity is in undersupplied segments such as low-cost housing and selected markets such as Kilimani, Riverside, Thindigua, and Runda Mumwe, which recorded attractive returns of 11.5%, 11.6%, 13.8% and 14.8%, respectively, in 2018 |
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Commercial Office Sector |
Our outlook for the commercial office sector is NEGATIVE as it is constrained by oversupply, with the Nairobi region currently experiencing an oversupply of 5.3 mn SQFT, that is forecasted to increase by 7.5% to 5.7 mn SQFT in 2019 |
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Pockets of value remain, in differentiated concepts such as serviced offices that attract yields of up to 13.4% in markets such as Westlands, as well as areas with low office space supply such as Gigiri and Karen with a rental yield of 10.5% and 9.2%, respectively |
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Retail Sector |
Our outlook for the retail real estate sector is NEUTRAL. Returns are expected to soften as a result of the current retail oversupply at 2.0 mn SQFT. Occupancy rates are expected to decline by 2.9% points to 76.9% from 79.8% in 2018 leading to reduced yields of 8.7% from 9.0% in 2018. We expect the continued entry of international retailers and expansion of local retailers to cushion the market |
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The opportunity is in County Headquarters in markets such as Mombasa and Mt. Kenya Regions that have retail space demand of 0.3 mn and 0.2 mn SQFT, attractive yields at 8.3% and 9.9% and occupancy rates at 96.3% and 84.5%, respectively |
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Mixed Use Developments (MUDs) |
Our outlook for MUDs is POSITIVE as we expect an increase in performance driven by the convenience they offer to tenants thus have stable occupancies |
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The investment opportunity in the Nairobi Metropolitan Area is in areas such as Limuru road, Karen, Upperhill and Kilimani recording the highest rental yield returns of 9.7%, 9.4%, 8.7%, and 8.6%, respectively, in 2018 |
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Hospitality Sector (Serviced Apartments) |
Our outlook for serviced apartments is POSITIVE given the country’s political stability, continued marketing of Kenya as an experience destination, and improved air transport and flight operations We expect international arrivals to grow by 30% to approximately 2.6 mn in 2019 from 2.0 mn in 2018 |
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We expect occupancy rates in the serviced apartments sector to remain above 80.0% and result in a rental yield of above 7.0%. The investment opportunity is in areas such as Kilimani and Westlands markets with rental yields of above 10.0% |
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Land Sector |
Our outlook for land is POSITIVE with an expected capital appreciation of 4.9% in 2019 fuelled by the demand for development land, improving infrastructure and demographics |
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The investment opportunity in land lies in satellite towns such as Ruaka, Utawala, Ruiru and Thika, supported by high capital appreciation of 16.2%, 17.5%, 4.7%, 7.7% y/y capital appreciation, respectively |
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Infrastructure |
Our outlook for infrastructure is NEUTRAL as we expect reduced infrastructural activities due to the reduced budget allocation for 2018/19 attributable to the government’s financial constraints, given the country’s public debt which currently stands at 56.4% of the GDP |
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We however expect continued execution of the planned infrastructure development such as roads, sewer connection in Ruiru and Kitengela, water improvement programme and proposed light rail which will allow for higher density construction and boost real estate |
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Listed Real Estate |
Our outlook for the listed real estate is NEGATIVE as we expect the Fahari REIT to continue trading at low prices and volumes in 2019 due to poor investor sentiments on its returns |
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With the acquisition of an additional real estate asset in 2018, we expect growth in revenues and project 0.3% points increase in dividend yield to 6.8% from 2018 earnings (at a price of Kshs 10.25 per share as at 11th January 2019), from a 6.5% yield recorded from 2017 earnings |
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