Executive Summary

Global Markets Review: Economic growth improved in Q1?2017 among major economies, with China, the US and the Eurozone recording GDP growth figures of 6.9%, 1.4% and 1.9% compared to 6.7%, 1.1% and 0.5%, respectively, in Q1?2016. There was divergence in the monetary policy with the US Fed raising the Federal Funds Rate by 25 bps to a bound of 1.00% - 1.25% in June, marking the second rate hike this year, while the European Central Bank (ECB) maintained the base lending rate at 0.0% in April;

Sub-Saharan Africa Regional Review: According to Focus Economics Research, Sub Saharan Africa?s (SSA) GDP growth was estimated at 2.1% in Q1?2017, up from 1.7% in Q1?2016, driven by improvements in commodity driven countries specifically in metal & minerals, such as Mozambique, Cote d?Ivoire and South Africa. The stock markets exhibited mixed performance with Zambia being the highest gainer recording a 23.4% YTD performance followed by Nigeria at 19.6%, while the main losers were Rwanda and Tanzania, losing 4.0% and 3.7%, respectively. African currencies were relatively stable with the East African currencies depreciating by an average of 1.1% against the dollar in H1?2017 compared to an average depreciation of 5.1% in H1?2016;

Kenya Macro Economic Review: Kenya?s economy remains stable despite having registered a GDP growth of 4.7% in Q1?2017 down from 5.9% in Q1?2016. The decline in GDP is due to a slowdown in the agricultural sector and the financial services sector, which are attributed to the prevailing drought conditions and the slowdown in private sector credit growth, respectively. Kenya?s inflation averaged at 9.8% in H1?2017 from 6.2% in H1?2016, due to rising food and fuel prices;

Fixed Income: Yields on T-bills were on a downward trend, albeit relatively stable, in H1?2017, closing at 8.3%, 10.3% and 10.9%, from 8.6%, 10.5% and 11.0% for the 91, 182 and 364-day papers, respectively, at the end of 2016. The secondary bonds market recorded reduced activity in H1?2017, with turnover decreasing by 9.9% to Kshs 236.9 bn in H1?2017, from Kshs 262.8 bn recorded in H1?2016;

Equities: During H1?2017, the Kenyan equities market was on an upward trend, with NASI, NSE 20 and NSE 25 gaining 14.7%, 13.2% and 15.4%, respectively. Kenyan listed banks released Q1?2017 results, recording a decline in core earnings per share of 8.6% compared to a growth of 13.6% in Q1?2016, while insurance companies released FY?2016 results recording a growth in core earnings per share of 3.4% compared to a decline of 39.1% in FY?2015;

Private Equity: Financial Services, Technology, Energy and FMCG sectors witnessed high levels of private equity activity during H1?2017. This is evidenced by increased deal activity by global investors including The Carlyle Group, Toyota Tsusho, Catalyst Principal Partners, and Actis, among others;

Real Estate: Residential prices remained fairly stable during H1?2017, with asking prices increasing by 2.7% and 1.2% on average for apartments and detached units, respectively. The hospitality sector and industrial sector recorded increased activity while the commercial office sector slowed down in performance with rents and occupancies declining by 0.2% and 2.3%, respectively.

Company Updates

• On July 1^st 2017, Cytonn Investments donated 3,780 and 1890 kilograms of maize and beans respectively, and 450 litres of cooking oil to over 1,000 residents of drought-stricken Mbitini Location, Kitui County. See Event Note
• On June 17^th 2017, Cytonn Real Estate (CRE) launched one of its signature projects, RiverRun Estates, a Kshs 15.0 bn master-planned community project on 100-acres in Ruiru. See Event Note
• Cytonn Foundation, the CSR arm of Cytonn Investments on 9^th June 2017 announced a partnership with the Nairobi County Government that will see Friends Secondary School, Dandora, receive a facelift worth over Kshs 10.0 mn towards construction of four classrooms and an ablution block as well as refurbishment of some existing classes in its first phase of engagement. See Event Note

• On 2^nd June 2017, Cytonn Investment Co-operative Society Limited (Cytonn Co-op) held its Annual General Meeting (AGM). The Cytonn Co-op enables its members to grow wealth by creating a disciplined investment culture, coupled with the ability to access high returns. See Event Note
• On 15^th May 2017, Cytonn Real Estate (CRE) broke ground on one of signature projects, The Ridge. The Ridge is a Kshs 12.0 bn comprehensive, luxurious, mixed use development on 10 acres in Ridgeways, Nairobi, which will have residential apartments, retail and office space and serviced apartments. See event note here
• Cytonn Investments Management Limited, our Group Holding Company, released 2016 financial year results, posting strong balance sheet growth of 77% to Kshs 11.5 bn as at 31^st December 2016, from Kshs 6.6 bn as at 31^st December 2015. For more details, see the Consolidated Annual Statement for the Year Ended December 31st 2016

• During the first half the year we released a coupled of reports as highlighted below;
  • The Cytonn Corporate Governance Index Report - 2017 that analysed the the level of corporate governance of listed companies at the Nairobi Securities Exchange. See Cytonn Corporate Governance Index Report-2017
  • Nairobi Metropolitan Land Report that analyzed the performance of land in various regions in Nairobi Metropolitan Area. See Nairobi Metropolitan Land Report 2017
  • FY?2016 Insurance Sector Report that ranked Kenya Re as the most attractive insurance company in Kenya. See Cytonn FY?2016 Insurance Sector Report
  • Q1?2017 and FY?2016 Banking Sector Reports that ranked KCB Group as the most attractive bank in Kenya. See Cytonn Q1?2017 Banking Sector Report and Cytonn FY?2016 Banking Sector Report
  • Nairobi Commercial Office Report that analyzed the performance of the sector in 2016. See Event Note and the Cytonn Commercial Office Report 2017

• On 27^th March 2017, Cytonn Real Estate broke ground on its latest project, Taraji Heights, which is our second mixed-use development in Ruaka, Kiambu County, valued at Kshs 2.5 bn and sits on a 2.8-acre piece of land. See Event Note
• Cytonn Investments Chief Investments Officer and Head of Real Estate, Elizabeth N. Nkukuu was on KTN News discussing the performance of Kenyan economy and investments environment ahead of the August polls. See Elizabeth  Nkukuu on KTN News here
• Our Investments Manager, Maurice Oduor was on Citizen TV discussing the 2017 Corporate Governance Index Report. Watch Maurice Oduor on Citizen TV here

A. Global Markets Review

Introduction

Most global economies registered improved economic growth in the first quarter of 2017, with China, the US and the Eurozone registering growth of 6.9%, 1.4% and 1.9%, compared to 6.7%, 1.1% and 0.5%, respectively, in a similar period last year. The commodities markets saw increased activity, despite oil prices declining by 5.2% during H1?2017 to USD 49.9 per barrel from USD 52.6 per barrel at the end of December 2016, driven by increased oil production by the US, Libya and Nigeria, despite the decision by OPEC members to extend their oil production cut agreement up until the end of 2017.

Below is the summary of the key happenings in H1?2017 per region:

United States:         

The US Fed raised the Federal Funds Rate by 25 bps to a range of 1.00% - 1.25% in June, in line with our expectations of a 25 bps increase as per our Cytonn Weekly #24/2017, which marked the second time they have done so this year, following a similar hike in March. The decision by the Fed to hike rates was on the back of a decline in the unemployment rate to 4.3% in May from 4.5% in March, below the unemployment rate target of 4.5% and the lowest unemployment rate since May 2017. Despite this, the possibility of further rate hikes during the year are waning as core inflation moved marginally below the 2.0% target to 1.9% at the beginning of June from 2.2% in April. Despite this, we expect the Fed to hike rates once more in 2017, towards the end of the year, with market expectations that the Fed rate is more likely to be hiked in the December 13^th meeting.

The stock market has been buoyant, with S&P 500 having gained 10.1% in H1?2017, attributed to huge gains in the technology and financial services sectors, on optimism of pro-growth policies from the current Trump administration, despite the slow progress witnessed in implementing policies on tax cuts and fiscal infrastructure spending. In terms of valuations, the Cyclically Adjusted Price/Earnings (CAPE) ratio is currently at 29.9x, higher than the 10-year historical mean of 16.8x, an indication that the market is overvalued compared to historical levels, with the last time the ratio was at such levels was  during the Dot-com Bubble, which saw the valuation on technology companies sky-rocket.

We expect the US market to remain supported by a strong labor market that will spur consumption and economic growth in the economy. The key risk remains politics, with the Trump administration experiencing challenges in implementing some of its campaign promises, prompting the International Monetary Fund (IMF) to revise downwards the US GDP growth forecast for 2017 from 2.3% to 2.1%.

Eurozone:

The Eurozone is on the path to recovery, with the positive outlook in 2017 being positive, as the region expanded by 1.9% in Q1?2017 compared to 0.5% in a similar period last year, with growth picking up in Germany, Spain and Italy but slowing down in France. The labor market has also been on the recovery, with the unemployment rate dropping to 9.3% in April from 9.6% at the end of 2016.

The European Central Bank (ECB) recently met in June, maintaining the base lending rate at 0.0%, and the rates on the marginal lending facility and deposit facility at 0.25% and (0.40%), respectively. The current negative deposit rates are expected to persist in 2017 and impact growth positively by spurring consumption. Moreover, inflation fell below the ECB?s target of 2.0% to 1.4% in May, down from 1.9% in April, and this may serve to justify the bank?s continued quantitative easing initiatives.

The stock markets in Europe registered gains in the first half of 2017, with the EuroStoxx 50 index rising by 5.7%, while FTSE 100 gained 3.2%, primarily due to the technology sector. The gains have been supported by improved business sentiment and increased optimism in the Eurozone this year, due to stronger domestic demand, a weaker Euro and a pickup in manufacturing sector, with the Eurozone?s flash PMI rising to 57.3 in June, from 54.3 in January.

On the political front, the UK took part in a snap election in June, an election called earlier than required, as the Theresa May administration looked to strengthen its grip on the upcoming Brexit negotiations. The outcome was less seats as the Conservative party fell just short of majority, securing 318 seats of the 650 seats available, leading to a weaker position for current administration. In France, En Marche?s Emmanuel Macron tied down the presidency in May. Uncertainty prevails in the region as it remains to be seen which policies the new administrations will put in place and the impact the policies will have on trade, business and the economy at large, following the rise in populist movements in the global market.

Despite the uncertainty expected to be brought about by Brexit, elections in major economies and the migrant crisis, the region?s growth is expected to be supported by (i) an accommodative monetary policy, and (ii) private consumption driven by expected employment growth and higher wages.

China:

The Chinese economy grew by 6.9% in the first quarter of 2017, driven by (i) a pick-up in the pace of industrial production, (ii) an increase in private consumption, and (iii) increased investment in infrastructure. The Chinese Government expects the economy to slow down to 6.5% in 2017, from 6.7% in 2016, due to reforms expected to be carried out during the year, with the aim of dealing with the country?s huge debt build-up, which is currently at 304.0% of GDP.

Shanghai Composite gained 2.7% in H1?2017, as liquidity concerns were eased by the People?s Bank of China, injecting USD 16.0 bn into the economy through open market operations. Trade data in May indicated that exports rose 8.7% y/y, while imports increased 14.8% over the same period. The 14.8% increase in imports was supported by the construction boom that pushed imports for raw materials higher.  However, in the first five months of 2017, total imports amounted to USD 709.6 bn while total exports amounted to USD 853.3 bn leading to a trade surplus of USD 143.7 bn. Despite this, the continued implementation of structural reforms should help China overcome risks that include weak global demand for exports, falling investment in the manufacturing sector and a slowdown in credit growth.

China is keen on rolling out its ambitious economic plan, aimed at rebuilding ports, roads and rail networks and this initiative is expected to further enhance China?s blueprint in the global market. China?s importance to the global economy remains significant, with the country contributing a third to global GDP growth in 2016, hence any sway in the economy will lead to a ripple effect that will be felt worldwide.

B. Sub Saharan Africa Regional Markets Review

Sub Saharan Africa (SSA) growth was strong at the beginning of 2017 with the region?s GDP growth estimated to have increased to 2.1% in Q1?2017, from 1.7% in Q1?2016 driven by improvements in mining countries such as Mozambique, Cote d?Ivoire and South Africa as metal & mineral prices gained by 5.2% during the quarter. Going forward, SSA?s economic performance is still expected to improve in 2017, with growth projected to come in at 2.7% in 2017 and 3.5% in 2018, according to the International Monetary Fund (IMF), up from 1.5% in 2016, with growth driven by growth in countries like Mali, Senegal and Ethiopia whose economies are not driven by extractive commodities. Growth in these countries is expected to be driven by service sector and government investment in infrastructure. Most East African countries are expected to experience a decline in GDP growth mainly driven by expected declines in the agricultural sector due to negative effects of the drought, as already seen in the decline in Kenya?s Q1?2017 GDP growth to 4.7% from 5.9% in Q1?2016.

Below is a review of the key economic drivers during H1?2017:

Commodity Prices

Global commodity prices have experienced declines during H1?2017, contrary to expectations of a recovery. Most commodities lost in H1?2017, namely energy, metals & minerals and agriculture, whose prices have declined by 6.0%, 1.8% and 0.2% YTD, respectively, according to the World Bank Commodity Prices Index. Oil prices have also declined by 5.2% YTD to USD 49.9 per barrel from USD 52.6 per barrel, owing to oversupply from the US shale oil market and African countries such as Nigeria and Libya. The decline in commodity prices is set to take a toll on economic growth of commodity-driven economies. Oil importing countries such as Kenya are likely to benefit from this with lower local prices and improvements in their current account balances. Below is a chart showing the performance of select commodity prices, with (17.4%), (3.2%) and (1.0%) for energy, metals & minerals and agriculture performance, respectively, over the last 2-years.

Currency Performance

Regional currencies registered mixed performance during H1?2017, with most gaining against the dollar YTD. East African currencies have all depreciated against the dollar, losing an average of 1.1% YTD and 3.2% in the last 12 months, driven by increased food imports during the drought period and increased oil imports as importers took advantage of the lower global oil prices that were expected to rise. Key to note is that most currencies that appreciated against the dollar also experienced gains in their stock market indices as their near term outlooks remained positive and dollar flows from investors increased. This goes to show how SSA capital markets have a lot of foreign investor participation. Below is a table showing the performance of select African currencies.

African Eurobonds

Yields on African Eurobonds have continued to decline, shedding 1.0% points on average in H1?2017 highlighting the improved investor sentiment owing to improving macro-economic conditions and a relatively stable political landscape. During the half year period, (i) Nigeria successfully raised USD 1.0 bn through its third Eurobond at a yield of 7.9%, with a tenor of 15-years, recording more than 7.0x subscription level, and (ii) Senegal issued its fourth Eurobond, a new 16-year Eurobond, recording a subscription rate of 845.5% and a yield of 6.3% as investors banked on stability in the political scene and economic growth. This indicates the high appetite for frontier markets securities, which are offering attractive returns compared to developed economies. Below is a graph depicting the Eurobond performance of select African sovereign bonds.

Equities Market Performance:

Majority of the SSA stock markets recorded positive returns during H1?2017 attributable to renewed investor interest following attractive valuations of most stocks in these countries making them attractive to long-term investors. The Nigeria All Share Index was of particular interest to investors as investors remained positive about an improvement in macro-economic conditions in the country especially with the expected recovery of oil prices. Below is a summary of the performance of key exchanges:

We maintain our view that infrastructural spending, stable commodity prices, and political stability will be the key drivers for Sub-Saharan Africa region growth.

C. Kenya Macroeconomic Review

Kenya?s macroeconomic environment has remained relatively stable in the first half of 2017, supported by (i) continued investment in infrastructure and real estate, (ii) a stable interest rates environment following the enactment of the Banking (Amendment) Act, 2015, and (iii) a relatively stable currency, having weakened by only 1.1% in H1?2017. The positive outlook on economic growth is, however, set to be adversely affected by the ongoing drought, political risk in the run up to the August General Elections and global strengthening of the dollar, which may lead to weakening of the shilling. Below we discuss the key economic activities that shaped the local economic environment in the first half of the year and a summary on the seven macroeconomic indicators we track.

Provisional GDP growth estimates released by Kenya National Bureau of Statistics (KNBS) for Q1?2017 indicate that Kenya?s economy expanded by 4.7% down from 5.9% in Q1?2016, largely attributed to a contraction in agricultural activity due to the ongoing drought and a deceleration on credit uptake to 3.0% in March 2017 and the lowest in 8-years from a high of 17.0% in 2016, affecting financial services negatively. For a more comprehensive analysis on the economic growth review, see Kenya Q1?2017 GDP Review and Outlook.

Kenyan National Treasury released the fiscal year 2017/18 national budget of Kshs 2.3 tn, with a 72:28 split between recurrent & county allocation and development expenditure from a split of 67:33 in fiscal year 2016/2017 for recurrent & county allocation and development expenditure, respectively. The budget will be funded by 77.1% in taxes amounting to Kshs 1.7 tn, 13.9% of domestic borrowing worth Kshs 317.7 bn, and the remaining 9.0% will be funded through foreign borrowing amounting to Kshs 206.0 bn. The funding structure has been changed from the last fiscal year where the budget was funded by, 70.2% in taxes amounting to Kshs 1.5 tn, 12.7% of domestic borrowing worth Kshs 284.7 bn, and the remaining 17.1% was funded through foreign borrowing amounting to Kshs 382.7 bn. The Kenyan budget has always been expansionary and given that Kenya is a developing country, this leads to a huge budget deficit usually bridged through debt, resulting in a rising debt-to-GDP ratio, currently at 52.6% from 50.3% in December 2016. We are of the view that the government should put in place structural measures to ensure that budget policy items are well implemented to support economic growth. For a more comprehensive analysis see the Cytonn Q1?2017 Markets Review.

The Kenya Shilling depreciated against the US Dollar by 1.1% in H1?2017 to close at Kshs 103.7 from Kshs 102.5 at the end of 2016, mainly due to heightened dollar demand from oil and retail importers. This week, the Kenyan Shilling remained relatively stable against the dollar to close at Kshs 103.7.  In our view, the shilling should remain relatively stable in the short term, supported by, (i) the high forex reserve level currently at USD 8.0 bn (equivalent to 5.3 months of import cover), (ii) the IMF precautionary credit facility of USD 1.5 bn (equivalent to 1.0 more month of import cover) that Kenya can utilize to stabilize the shilling in case of adverse movement in the forex market, (iii) increased diaspora remittances that grew by 6.2% to Kshs 44.7 bn in Q1?2017, from Kshs 42.1 bn in Q1?2016, and (iv) declining global oil prices given that Kenya is net oil importer.

The inflation rate during H1?2017 rose to 9.2% in June from 6.4% in December 2016, averaging 9.8% during the half year period compared to 6.2% in H1?2016. The rise in inflation was driven by (i) an increase in food prices, which rose 15.8% during the first half of the year, on account of the prevailing drought in the country, and (ii) fuel prices, which rose 3.9% in the first six months of the year. We expect inflationary pressures to ease in the second half of 2017, but to average about 9.5% for the year, which is above the upper bound of the government target range of 2.5% - 7.5%.

The Monetary Policy Committee (MPC) met thrice in H1?2017, and in all the meetings the MPC decided to maintain the CBR at 10.0% backed by, (i) stable macroeconomic conditions despite the rise in inflation to 11.7% in May, (ii) a stable foreign exchange market due to a narrowing current account deficit, the high foreign reserves and the precautionary credit facility available from the IMF, and (iii) a resilient and stable banking sector; with the average commercial banks liquidity ratio and capital adequacy ratio at 44.4% and 18.8% above statutory requirements of 20.0% and 14.5%, respectively, as at April 2017. Going forward, we expect the MPC to maintain the policy rate but also to take note of the impact of the interest rate cap on private sector credit growth and economic growth in setting the direction of the monetary policy.

Macroeconomic Indicators Table

The table below summarizes the various macroeconomic indicators, the expectation at the beginning of 2017, the actual H1?2017 experience, and the impact of the same, and our expectations going forward:

Of the seven macroeconomic indicators that we follow, 2 have changed: (i) inflation has turned negative from neutral mainly because of escalation in food prices and we expect the rate to average above the upper bound of 7.5% set by the government, and (ii) exchange rate has turned neutral from negative mainly because of support on the shilling by the Central Bank. The rest of the indicators remained unchanged at neutral. The net effect is neutral because of the 7 indicators, 6 are neutral and 1 is negative, the same position as at the beginning of the year, consequently, we can conclude that the operating environment for H2?2017 will remain stable, same as H1?2017, but economic growth in 2017 will decline from that which was recorded in 2016.

D) Fixed Income

During the first half of 2017, T-bills auction recorded an oversubscription, with subscriptions level coming in at 263.2% from 174.5% in the second half of 2016. Overall subscriptions for the 91, 182, and 364-day papers in H1?2017 came in at 154.0%, 184.5% and 131.2%, respectively. The 182-day paper was withdrawn from the auction market for 8 weeks in the months of March and April with the aim of managing maturities by spreading concentration risk evenly across all three papers. Yields on T-bills declined marginally in H1?2017, closing at 8.3%, 10.3%, and 10.9%, from 8.6%, 10.5%, and 11.0% for the 91, 182, and 364-day papers, respectively, at the end of 2016.

During the week, T-bills were undersubscribed, with overall subscription coming in at 73.1%, compared to 103.8% recorded the previous week, with the subscription rate on the 91, 182, and 364-day papers decreasing to 57.7%, 100.6%, and 51.7% from 83.7%, 120.4%, 95.2%, the previous week, respectively. The undersubscription in T-bills this week can be attributed to a liquidity crunch in the commercial banks due to tax remittances to the government leading their excess reserves to decline to Kshs 5.1 bn from 11.0 bn, the previous week. Yields on the 91, 182 and 364-day T-bills remained relatively unchanged during the week, coming in at 8.3%, 10.3%, and 10.9%, respectively.

The 91-day T-bill is currently trading below its 5-year average of 9.4%. The lower yield on the 91-day paper is mainly attributed to the low interest rates environment we have been experiencing, and we expect this to continue in the short-term given (i) the government is expected to meet its domestic borrowing target for the 2017/18 fiscal year, as capping of interest rates will make it easier for government to borrow from the domestic market, as institutions channel funds more actively towards government securities given the attractive risk return proposition on government securities relative to loans, and (ii) the government is expected to meet its foreign borrowing target in the 2017/18 fiscal year, with budget estimates projected to decline from Kshs 462.3 bn to Kshs 206.0 bn.

During H1?17, the Kenyan Government offered 9 Treasury bonds, distributed across the six months as indicated with details in the table below:

The acceptance rate on treasury bonds improved gradually in the first of the year, closing at 67.6% for the June offer up from 17.1% in February as the market adjusted to the efforts of the CBK to maintain the rates at low levels. The average subscription rate for bonds issued in H1?2017 came in at 145.6%, attributable to the high liquidity in the money market. We are of the view that investors should keep short due to the uncertainty around the interest rates environment.

In H1?2017, the money market was liquid, with a net liquidity injection at Kshs 51.7 bn. Due to this, the average interbank rate declined by 2.9% points to close at 5.3%, from 8.2% at the end of 2016.  The injection was as a result of (i) government payments of Kshs 700.7 bn, (ii) reverse repo purchases and repo maturities of Kshs 436.8 bn in total as the CBK participated in Open Market Operations (OMO) to boost liquidity earlier in the year, and (iii) T-bill redemptions of Kshs 398.1 bn.

Below is a summary of the money market activity in H1?2017:

The secondary bonds market recorded reduced activity in H1?2017, with turnover decreasing by 9.9% to Kshs 236.9 bn in H1?2017, from Kshs 262.8 bn recorded in H1?2016. Yields on government securities have been on a downward trend since the beginning of the year as highlighted in the yield curve below. On average, Treasury bonds listed at the Nairobi Securities Exchange recorded a gain of 3.2% during the period under review.

H1?2017 saw two corporate bond issues to raise capital;

• HFC Limited, the banking and mortgage lending subsidiary of HF Group, seek to raise Kshs 3.0 bn through a 1-year senior unsecured note program. The notes are being offered through private placement for one year with a pricing of 1.5% above the 364-day T-bill, which currently is at 10.9%,
• East African Breweries Limited (EABL), raised Kshs 6.0 bn through 5-year Medium Term Note (MTN), the second tranche of its previously existing Kshs 11.0 bn domestic MTN. The five-year note was priced at a yield of 14.2%, and was oversubscribed at 141.0% subscription rate.

For a more comprehensive analysis on the corporate bond issues see Cytonn Weekly #25/2017 for HFC Limited and Cytonn Weekly #10/2017 for EABL.

 Fixed Income Conclusions:

Rates in the fixed income market have remained stable, and we expect this to continue in the short-term, supported by:

1. The government is expected to meet its domestic borrowing target for the 2017/18 fiscal year, as reduced credit to private sector following the capping of interest rates will make it easier for government to meet its domestic borrowing target, as institutions channel funds more actively towards government securities given the more attractive risk / return proposition relative to private loans, and
2. The government is expected to meet its foreign borrowing target in the 2017/18 fiscal year, with budget estimates projected to decline from Kshs 462.3 bn to Kshs 206.0 bn, which is the amount that the government collected from the foreign markets for fiscal year 2016/2017.

Some of the factors that could put upward pressure on interest rates are:

1. The Kenya Revenue Authority (KRA) is expected to face challenges in meeting its overall revenue collection target of Kshs 1.7 tn for the 2017/18 fiscal year, due to the expected subdued corporate earnings growth for the FY?2017,

Overall, the possible deficit that is likely to result from depressed revenue collection, and the high inflationary environment that we are currently in, create uncertainty in the interest rate environment. Our view is that investors should be biased towards short-term fixed income instruments to reduce duration risk.

E. Equities

After struggling in the first quarter, the Kenyan equities market recovered in the second quarter bringing the first half gains for NASI, NSE 20 and NSE 25 to 14.7%, 13.2% and 15.4%, respectively, as a result of gains in prices of large cap bank stocks such as DTBK, KCB Group, Coop and Equity Group, which gained 35.6%, 31.3%, 28.4% and 25.8%, respectively. The significant gains were mainly in bank stocks because the market realized that they had overreacted to the negative effects of interest rate caps to the sector. The biggest loser among the top stocks by market capitalization was BAT, which lost 6.8%. Since the peak in February 2015, NASI and NSE 20 are down 13.9% and 34.4%, respectively.

Equity turnover during H1?2017 rose by 9.8% to USD 795.7 mn from USD 724.6 mn in H1?2016. Foreign investors were net sellers with net outflow of USD 5.0 mn compared to net inflows of USD 6.5 mn recorded in H1?2016. The foreign investor outflows during H1?2017 can be attributed to a subdued investor sentiment, with GDP growth declining to 4.7% in Q1?2017 from 5.9% in Q1?2016 and on the back decelerating private sector credit growth, despite the stable interest rates. We expect that investor sentiment to remain neutral despite the forthcoming general election, a factor that is likely to slow down activities at the Nairobi Securities Exchange.

The market is currently trading at a price to earnings ratio of 11.8x compared to 10.8x at the end of H1?2016 vs a historical average of 13.4x, with a dividend yield of 5.5% compared to 6.5% at the end of H1?2016 vs a historical average of 3.8%. The current P/E of 11.8x valuation is 21.4% above the most recent trough valuation of 9.7x experienced in the first week of February 2017, indicating substantial recovery since February 2017 and 41.8% above the previous trough valuation of 8.3x experienced in December 2011. The charts below indicate the historical P/E and dividend yields of the market.

During the first half of 2017, banks released FY?2016 and Q1?2017 results, while insurance companies released FY?2016 results. Insurance companies recorded an improved performance mainly as a result of change in valuation methodology for long-term insurance liabilities using the Gross Premiums Valuation method as opposed to Net Premiums Valuation method, effectively reducing provisions for future claims, while the poor performance in banks was primarily on the back of increased provisioning, which rose to 54.1% in Q1?2017 from 47.2% in Q1?2016.

Listed Banks Q1?2017 results:

Kenyan listed banks released their Q1?2017 results, recording a decline in core earnings per share by 8.6% compared to a growth of 13.6% in Q1?2016. The performance for Kenyan listed banks in Q1?2017 are as summarized below:

In summary, the banking sector is witnessing increased consolidation, following the implementation of the Banking (Amendment) Act 2015, which has resulted to banks recording a decline in core EPS by 8.6% and private sector credit growth slowing to 4.0% compared to 5.4% when the amendment came into play, while remaining prudent in terms of lending following rising non-performing loans and the capping of interest rates. We believe consolidation is going to continue in the sector as weaker banks are acquired by the more stable banks and foreign banks entering the Kenyan banking sector through acquisitions; acquisitions are happening at more attractive acquisition multiples, which have come down from earlier highs of 3.2x PBV to recent multiples of 0.8x. Below is table indicating the acquisitions that have taken place in the banking sector;

The banking sector has also experienced setting up new operations following the lifting of the moratorium to license new banks, which have seen the licensing of Dubai Islamic Bank Limited (DIB) and Mayfair Bank Ltd. Banks that have common significant shareholders are likely to merge and operate as one entity given the tough operating environment. All these are expected to lead to a more transparent, well-governed and efficient banking sector with fewer players, who are larger and more stable. For more information see our FY?2016 and Q1?2017 banking reports.

Listed Insurance Companies? FY?2016 results:

Listed Insurance companies released their FY?2016 results, recording a growth in core earnings per share of 3.4% compared to a negative growth of 39.1% in FY?2015. In our view, the insurance sector still struggles in the local market with low insurance penetration rates and the expected increase in capital following adoption of a risk based capital adequacy framework. In addition, rising levels of inefficiencies since 2014 with an increase in the average expense ratio to 56.3% in 2016 from 44.0% in 2014 remain a concern. We expect increased product innovation and operational efficiency to drive profitability and thus growth of the sector amidst the heightened regulation. The Insurance Regulatory Authority (IRA) is at the forefront of this initiative, pushing for (i) the observance of prudential guidelines, (ii) better corporate governance of insurance companies, (iii) increased transparency in financial reporting, and (iv) use of a risk-based approach to capitalization, with varying risk charges on respective investment options. See our Listed Insurance Companies FY?2016 Report.

Non - Financials

During the first half of 2017, non-financial large cap companies released their results as indicated below.

• Safaricom released FY?2017 results, recording a 27.4% growth in core earnings per share to Kshs 1.2 from Kshs 1.0 in FY?2016, driven by a 32.7% growth in M-Pesa revenue to Kshs 55.1 bn from Kshs 41.5 bn in FY?2016 and a 38.5% growth in mobile data revenue, which grew to Kshs 29.3 bn from Kshs 21.2 bn in FY? 2016. For more analysis see Cytonn Weekly#19/2017.
• Bamburi recorded a flat EPS growth of 0.3%, while BAT and NSE recorded EPS decline of 14.9% and 39.8%, respectively. For More Analysis on this see Cytonn Weekly #10/2017, Cytonn Weekly #8/2017 and Cytonn Weekly#12/2017, respectively.
• Centum Group released their FY?2017 results, recording a 16.5% decline in core EPS to Kshs 12.5 per share from Kshs 14.9 per share in FY?2016 attributable to a 67.4% drop in operating profit from its financial services subsidiaries to Kshs 0.2 bn from Kshs 0.6 bn in FY?2016. See Cytonn Weekly#24/2017 for more details.
• Nation Media Group released FY?2016 results, posting a 24.6% decline in earnings per share to Kshs 8.9 from Kshs 11.8 in FY?2015, attributed to a 5.7% decline in operating revenue compared to a 2.8% decline in operating expenses as highlighted in our Cytonn Weekly#14/2017
• ARM Cement released their FY?2016 results, recording a 3.1% decline in loss per share to Kshs 3.2 from Kshs 3.3 in FY?2015. This was driven by an 82.4% decline in net foreign exchange losses to Kshs 0.7 bn from Kshs 3.7 bn. See Cytonn Weekly #18/2017 for details on ARM Cement results.

Below is our Equities Universe of Coverage:

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

F. Private Equity

During H1? 2017, we witnessed high levels of private equity activity, with transactions being witnessed across all major sectors such as financial services, energy, FMCG and technology and telecommunication, combined with active fundraising activities being undertaken by major players in the African private markets space.

On the fundraising front:

During H1?2017, there was heightened fundraising activities, most notably;

1. Nairobi-based private equity firm, Catalyst Principal Partners raised USD 103.0 mn (Kshs 10.6 bn) from investors as it eyes more acquisitions of medium-sized companies in the region in sectors which include: (i) Consumer goods and retail, (ii) Financial and business services, (iii) Industrials, (iv) manufacturing and value-add processing, (v) Technology and telecommunications, and (vi) Healthcare and education service. Catalyst plans to raise a total of USD 175 mn (Kshs 18.1 bn). For more information, see our Cytonn Q1?2017 Quarterly Markets Review.
2. XSML, a fund manager active in Central and East Africa, announced its final close of the Africa Rivers Fund (ARF) at USD 50.0 mn. This is XSML?s second fund after the USD 19.0 mn, Central Africa SME Fund (CASF) and brings a total of USD 69.0 mn under XSML?s management. The fund made its first investment in May 2017 in Uganda in the transport and logistics sector through KARE Distribution (KARE), a company that deals in the distribution and wholesale of essential consumer goods such as locally produced cooking oil, water and detergent. For more information, see our Cytonn Weekly #21/2017.
3. Frontier Investments Management, a Danish private equity firm, raised USD 116.0 mn in the first close of its second fund, Frontier Energy II. The Fund is to finance green-field renewable energy projects across the Sub-Sahara Africa region. For more information, see our Cytonn Weekly #15/2017.

Financial Services

The financial services sector continued to attract capital in H1?2017, supported by the demand for financial services in the region. Some of the deals include:

1. Diamond Trust Bank Kenya Limited (DTBK) expressed their intention to acquire Habib Bank subject to approvals from DTBK shareholders and regulatory approvals from authorities in both Kenya and Pakistan. DTBK is to acquire the business, assets and liabilities of HBLK as a going concern. For more information, see our note detailing the acquisition plans,
2. CapitalWorks, a South African private equity firm, bought out AON?s shareholdings from 10 of its African operations for an undisclosed amount. CapitalWorks manages over USD 515.0 mn (Kshs 52.8 bn) in assets, and specializes in investing in Africa?s. For more information, see our Cytonn Weekly #8/2017.
3. Sanlam Group, through its subsidiary, Sanlam Emerging Markets, is set to acquire an undisclosed majority stake in PineBridge Investments East Africa Limited (PIEAL), subject to regulatory approval. This will see PIEAL rebrand to Sanlam Investments East Africa Limited (SIEAL). For more information, see our Cytonn Weekly #12/2017.

Financial services sector continues to attract private equity players driven by (i) improved regulatory frameworks, (ii) growth of the middle class population with increasing numbers seeking quality financial services, and (iii) innovation in the sector with integration of mobile technology.

Technology & Telecommunication

Deals in the technology sector over the first half of the year include:

1. The Carlyle Group acquired, through its Sub-Saharan Africa Fund, an undisclosed majority stake in Johannesburg-based CMC Networks (CMC), Africa?s largest managed connectivity provider, for over USD 100 mn (Kshs 10.3 bn). For more information, see our Cytonn Weekly #6/2017.
2. Craft Silicon, a Kenyan based multinational software development company providing customized software solutions for the financial sector, acquired an undisclosed minority stake in restaurant listing portal EatOut, valued at USD 0.5 mn (Kshs 51.5 mn). This is their second major investment in a Kenyan technology company as it also backed Safaricom in founding Little Limited, the taxi hailing app. For more information, see our Cytonn Weekly #21/2017.
3. Four investors: Google, Convergence Partners (Pan-African ICT-focused private equity firm), the International Finance Corporation (IFC), and Mitsui & Co, committed to invest USD 100.0 mn in CSquared, a Google broadband infrastructure company. For more information, see our Cytonn Weekly #20/2017.

Sub-Saharan Africa still exhibits potential in this sector with the three deals worth USD 200.5 mn. This can be attributed to a young and dynamic Kenyan population, entrepreneurial business offering services and a supportive regulatory framework.

Energy Sector

With an ever-growing demand for energy, both from commercial users and domestic consumers, there has been an increase in the number and value of investments into this sector, with a focus on oil. Deals in the energy sector over the first half of the year include:

1. French-owned oil and gas company Total completed the acquisition of Gulf Africa Petroleum Corporation's (GAPCO) assets in three East Africa markets, Kenya, Uganda and Tanzania, a transaction that is estimated to be worth USD 400 mn (about Kshs 41.2 bn). For more information, see our Cytonn Q1?2017 Quarterly Markets Review.
2. A South African pension fund, Public Investment Corporation (PIC) raised its stake in KenGen, Kenya?s largest power producing company, to 6.6% by acquiring an additional 85.1 mn shares (equivalent to a 1.2% stake) in the open market whose current share price is at Kshs 6.6, placing PIC as the second largest shareholder of KenGen after the Kenya National Treasury that holds a 70.0% stake. For more information, see our Cytonn Weekly #12/2017.
3. Anglo­ Dutch petroleum giant Shell finalized a deal to sell its remaining 20.0% shareholding in Vivo Energy for USD 250 mn (Kshs 25.8 bn) to Dutch firm Vitol Group, effectively valuing Vivo Energy Investments BV at USD 1.3 bn (Kshs 129 bn). Vitol now owns a 60.0% stake in Vivo, leaving Helios Investment with a 40.0% stake in the firm. For more information, see our Cytonn Monthly April/2017.

FMCG Sector

The FMCG sector is expected to continue witnessing increased activity from both local and global players given increase in demand for quality goods by the rising middle class. The first half witnessed the following deals:

1. Amethis Finance, a French based Private Equity (PE) fund focused on long term investment in Africa, and Metier, a South African PE fund, jointly acquired a 40.0% stake in Kenafric Industries for an undisclosed amount. For more information, see our Cytonn Weekly #8/2017.
2. Kenyan businessman Chris Kirubi begun the process of buying back the 51.0% stake of Haco Industries that he had sold to Tiger Brands for around Kshs 363.0 mn in 2008. He will pay an undisclosed premium to take total control of the Kenyan FMCG company from the exiting Tiger Brands. For more information, see our Cytonn Weekly #8/2017.
3. Distell Group Limited, a multinational brewing and beverage company based in South Africa, is now the majority owner of Kenya Wine Agencies Ltd (KWAL), after buying out investment firm Centum for an undisclosed amount. The acquisition of Centum?s 26.4% stake brings Distell?s stake in KWAL to 52.4% from a 26.0% stake acquired in 2014 for Kshs 860 mn, translating to Kshs 34.5 per share. For more information, see our Cytonn Weekly #14/2017.

This continued investment in the FMCG sector in Africa is driven by (i) increase in disposable income spent on consumables, such as beverages and processed food products in Africa, (ii) infrastructural developments, such as improved road and transport networks, (iii) ease of access to FMCG products and improved distribution networks, and (iv) growth in the retail sector.

Other Key PE Deals

1. In the automotive industry, Japanese multinational Toyota Tsusho, the global trading arm of Toyota Group acquired full control of Kenyan motor vehicle dealers, DT Dobie and CICA Motors, after buying all the shares from their parent company, CFAO Group. Toyota acquired a 97.8% stake in CFAO in December 2012 for USD 2.3 bn (Kshs 243.7bn), at a valuation of 18.9x P/E, and last month bought the remaining 2.2% for USD 54.0 mn (Kshs 5.4 bn) at a valuation of 23.6x P/E, which represents a discount of 44.5% to the market average of 34.1x P/E. For more information, see our Cytonn Weekly #2/2017.
2. Vumela Enterprise Development Fund, a fund managed by FNB Business Banking and Edge Growth, acquired a stake in Nova Pioneer, an independent school network based in South Africa. The investment is a USD 1.1 mn (Kshs 115.9 mn) debt investment into Nova Pioneer.  For more information, see our Cytonn Weekly #19/2017.

Exits:

Detroit-based General Motors exited the Kenyan market after the successful sale of its 57.7% stake in General Motors East Africa (GMEA) to Japanese firm Isuzu Motors for an undisclosed amount. For more information, see our Cytonn Monthly February/2017.

Private equity investments in Africa remains robust as evidenced by the increased deals and deal volumes in the region?s key note sectors; financial services, FMCGs, hospitality, energy and telecommunication services. The increasing investor interest is attributed to (i) positive demographics, such as rapid urbanization, a resilient and adapting middle class and increased consumption expenditure, (ii) the attractive valuations in private markets compared to global markets, and (iii) better economic projections in Sub Sahara Africa compared to global markets.

G Real Estate

Investment in the real estate sector continues to grow supported by (i) Kenya?s high GDP growth at 5.8% in 2016, making it an ideal location for local and international investors, (ii) high annual returns of above 20%, with 2016 returns at 25.8%, (iii) positive demographics such as high population growth at 2.6% p.a. against a Sub Saharan average of 2.3%, (iv) rapid urbanization at 4.3% p.a., versus a global average of 2.0%, (v) an expanding middle class, and iv) improvement in infrastructure opening up new areas for development.

The main challenges that have continued to face the sector include (i) high development land costs, (ii) high construction costs, (iii) low access to financing, and (iv) buyers adopting a wait-and see-attitude as a result of elections scheduled for August 2017, which has led to a reduction in transaction volumes in the market. Regardless of these, investors continue to bank on the sector due to its attractive returns. The most notable events in H1?2017 across all themes include:

Residential Sector

The residential sector recorded high levels of activity, mostly driven by the accumulated housing deficit of over 2 million units growing by 200,000 units annually according to the World Bank mainly in the lower middle and low-income segments.

Some of the residential developments launched during H1?2017 include;

1. The Ridge - A 10-acre luxurious development comprising of 1, 2 and 3 bedroom apartments, serviced-apartments and commercial spaces by Cytonn Real Estate in Ridgeways, Nairobi,
2. RiverRun Estates- A 100-acre mixed used development by Cytonn Real Estate with over 1,200 residential units in Ruiru, Kiambu,
3. Osten Terrace Gardens ? A gated community with 294 apartments and 6 maisonettes by Urithi Housing Cooperative in Joska, along Kangungo Road, and
4. Tatu Waters ? A project comprising 2,715 townhouses and apartments by Tatu City in Ruiru, Kiambu.

In terms of performance, apartments asking prices increased by 2.7% during H1?2017 while asking prices for detached units increased by 1.2% on average during the same period. Asking rents for apartments increased by 4.7% while asking rents for detached units declined by 1.9% on average during H1?2017. The higher increase in rental prices compared to asking prices can be attributed to sustained demand for rental housing, while asking prices remained fairly stable in most markets as buyers  adopt a wait and see approach due to the upcoming general elections.

Source: Cytonn Research

Source: Cytonn Research

We project lower residential sales volumes as we near the elections. However, after elections, we expect sales to pick up and launching of more projects across various parts of the country.

Commercial Sector

The commercial sector?s performance declined during the first half of 2017 as office rents and occupancies declined by 0.2% and 2.3% respectively while the retail sector struggled with closure of retail outlets. The industrial sector, however, experienced higher demand;

A) Office

The office market declined during the first half of the year as evidenced by the reduced occupancy rates, which declined from 88.7% in 2016 to 86.4% in H1?2017. Average asking rents declined by 0.2%, mainly as a result of increased supply of office space with businesses moving to the newly completed office buildings such as the UAP ? Old Mutual Towers in Upper Hill.

In terms of submarket analysis, Upper Hill, Mombasa Road and Westlands recorded the highest change in rental yields due to increasing vacancies as more office complexes are set up without demand to match the increasing supply. 

The key trends that shaped the sector during the period include:

• Relocation of firms from the CBD in search of high quality space. Such firms include  Ecobank, which moved its offices from Ecobank Towers in the CBD to Fortis Office Park in Westlands and KenInvest relocating its headquarters from Railways in the CBD to Upperhill in UAP ? Old Mutual towers
• Entry of Multi-national firms as Security Group Africa (SGA) opened a new head office in Nairobi, Tulip House, along Mombasa road
• Launching of major projects as construction began on The Pinnacle Towers, a mixed-use development  comprising of office, retail and hotel space in Upper Hill and;
• Green building as PDM unveiled a Class-A green building in Mililani ? Vienna Court.

B) Industrial

The industrial sector continued to experience steady demand for prime warehouse space with warehouses being developed in areas such as Athi River, Ruiru and Mlolongo that allow modern distribution and manufacturing functions. Africa Logistics Properties (ALP), for example, broke ground on their 50,000 square meters, Grade-A logistics and distribution warehousing complex on 22.0 acres in Tatu City with the aim of providing modern logistics services.

Despite the congestion, Baba Dogo continues to be the best performer with an average yield of 6.8% followed by Athi River with 6.6%. Rental rates for areas such as Athi River, increased slightly attributable to the fact that the area is becoming prime with the continued investments from private investors.

Source: Cytonn Research

The average yields for industrial parks increased slightly from Q1 2017, by 0.1% points to 5.9%. With the current efforts to improve infrastructure, areas along Mombasa Road are becoming attractive for industrial business. Plans are underway to upgrade the road to a six lane highway and thus, we expect this to impact on the rental yields positively as well as the occupancy rates.

C) Retail

The retail market has witnessed changes in H1?2017, with the closure of retail outlets that have been struggling to survive in the industry. The constraints are as a result of financial difficulties that have affected players in this segment. This has seen retailers such as Tuskys closing 2 of its branches and Nakumatt embarking on a move to shut its underperforming stores having already shut down its Haile Selassie, Ronald Ngala and Uganda, Katwe Branches. However, with the demand for space from international retailers keen on tapping into Kenya?s middle class, more malls are coming up especially in growing satellite towns. The largest mall in sub-Saharan Africa, Two Rivers Mall, opened in Ruaka in February with over 700,000 square feet of lettable office and retail space. We expect Kenya to continue being one of the most preferred commercial hubs in the region, especially for the office and retail sectors due to increasing disposable income resulting from the growing middle class.

Land Sector

Land has continued to attract developers and investors as land prices across all areas in the Nairobi metropolitan, have registered a 5-years CAGR of 19.4%, and a 5-years price change of 2.50x. In the period ending December 2016. Commercial zones such as Kilimani, Upperhill and Westlands recorded the highest capital appreciation at a CAGR of 24.3% in 2016, while site and service schemes in satellite towns such as Athi River and Syokimau recorded a 5-year CAGR of 20.4%. The land performance is positively affected mainly by planning regulations and trunk infrastructure such as sewer lines and road network. For more insight into the land sector see our Land Report 2017.The main activities in the first half of year in the land sector include;

A) Land Transactions

• Fusion Capital, in collaboration with Thika Royal Palms, unveiled Royal Palms which is a proposed gated community comprising of 70 eighth-acre plots on a 10-acre land for Kshs 2.3 mn each,
• Endeavour, the group behind Tatu City, expanded the master plan by buying an additional 2,500-acres of land adjacent to the master plan. The new master plan will now be on 5,000-acres, and,
• Uriithi Housing handed over a 1,200-land project in Malindi to its members who bought the land as a joint investment initiative.

B) Legal Environment

• The High Court stopped the Kenya Revenue Authority (KRA) from implementing laws that demanded that Capital Gains Tax be paid before property is transferred simultaneously with the payment of Stamp Duty following a lawsuit by the Law Society of Kenya (LSK),
• In April, the Cabinet waived fees for land title search, which has often been described as bureaucratic, and has caused delays characterized by cases of bribery, missing titles or duplicate titles, among others, and,
• The Land Ministry has lifted the ban on the renewal of land leases in a move to revive and unlock land deals, and gazette regulations that will guide the process going forward.

With implementation of favourable policies for investment in land and continued infrastructural development, increase in land value is inevitable and thus land will continue to be a preferred investment. Investors are likely to stay on the lookout for the next regions to receive infrastructural upgrade.

Hospitality Sector

The hospitality sector attracted investment mainly driven by the recovery of the tourism sector. According to the Kenya Economic Survey 2017 released in April 2017, by the end of 2016, the tourism sector recorded a 17.8% increase in revenue from Ksh 84.6 bn in 2015 to Ksh 99.7 bn in 2016. This is attributable to improved security among other factors such as diversification of the sector into conference tourism. The main highlights in the report include;

1. The number of international visitor arrivals recorded a 13.5% rise to 1.3 mn in 2016 from 1.2 mn guests in 2015,
2. Average bed occupancy remained relatively flat at 30.3% in 2016 from 29.1% in 2015,
3. The number of international conferences and delegates rose by 4.1% and 41.9% respectively in 2016, and
4. Local conferences and delegates increased by 17.4% and 14.5% respectively in the same period.

Source: KNBS Economic Survey 2017

Tabulated below are some of the major hotels that entered into the market in H1?2017  and those that have indicated to open in H2?2017.

In our view, the sector is greatly dependent on a peaceful election period in the coming month given that the high tourism season falls in mid-June through October and mid-December to February with the former recording higher occupancy levels. On the other hand, the increased supply of hotel rooms could lead to a decline in room rates.

Listed Real Estate- REITS

During H1?2017, the only listed I- REIT Fahari?s share price increased by 7.7% to close at Kshs 12.55 per unit, which is a 37.2% decline from Kshs 20 at the time of the listing in November 2015. The prices for the instrument have remained low averaging at 11.2% during H1?17 largely due to (i) opacity of the exact returns from the underlying assets, (ii) inadequate investor knowledge and lack of institutional support for REITS, and (iii) the negative sentiment following the poor performance of Fusion D-REIT, which was  undersubscribed in 2016.

Source: Bloomberg

In April 2017, Stanlib Fahari I-REIT released its earnings. The entity recorded a net profit of Kshs 109.0 mn and announced a dividend pay-out of 92.6% translating to Kshs 0.5 per unit translating into a dividend yield of 4.7%. While this is a move in the right direction as it ensures they comply with the requisite regulations, the returns are not attractive enough to spur investment in the instrument compared to direct investment in real estate, which delivered higher returns, with retail buildings like the underlying assets for the REIT offering yields of 10.1% p.a. In our view, we expect the Fahari I-REIT to continue recording subdued performance and trade in low volumes.

Our outlook for real estate remains positive in 2017, driven by the high returns being earned in the sector, the huge housing deficit, and infrastructural developments in the country and largely in Nairobi Metropolitan Area. The sector is likely to record subdued activities in the run up to elections, however, we expect activities to pick after the elections.