Executive Summary

• Global Market Review: There was slight slowdown in GDP growth in 2016 among major economies, with China, the US and the Eurozone recording GDP growth figures of 6.7%, 1.6% and 1.7% compared to 6.9%, 2.6% and 2.0%, in 2015, respectively. Global uncertainty continues to mount, as the UK followed through with invoking Article 50 of the Treaty on leaving the European Union, with major economies in the Eurozone bracing for elections, notably France and Germany, and the US Fed continues on its monetary tightening cycle;
• Sub-Saharan Africa Regional Overview: Sub-Saharan Africa (SSA), recorded the slowest growth in over two decades in 2016 at 1.5% compared to 3.4% in 2015, driven by a contraction in commodity dependant economies. Regions that are not commodity driven such as East Africa grew by 7.0%, much higher than the overall GDP growth in SSA. SSA?s economic performance is expected to improve with GDP growth projected to come in at 2.9% and 3.6% in 2017 and 2018, respectively, according to the International Monetary Fund (IMF). The stock markets and currencies performance were mixed but relatively stable during the quarter;
• Kenya Macro Economic Review: Kenya?s economy remains strong and the recently read budget is pro-growth, leading to a 2.4% increase in the 2017/18 budget to Kshs 2.3 tn from Kshs 2.2 tn previously. Kenya?s inflation rate continues to remain a concern as it increased to 10.3% in March from 6.4% in December 2016, due to increasing food and fuel prices;
• Fixed Income: Yields on T-bills were relatively unchanged during the quarter, closing at 8.8%, 10.5% 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 Central Bank policy remained unchanged in the quarter and there was a continued slowdown in credit to the private sector to 4.0% in March from 4.3% in December 2016;
• Equities: Q1?2017 saw NASI, NSE 20 and NSE 25 lose 2.1%, 2.3% and 1.7%, respectively. Most companies released weak earnings in the quarter, with the exception of Standard Chartered, Diamond Trust Bank and Sanlam, due to the tough operating environment in 2016; majority of banks and insurance companies recorded weak earnings growth for their FY?2016 numbers;
• Private Equity: Financial Services, Technology, Energy and FMCG sectors continue to witness increased private equity activity during the quarter. This is evidenced by increased deal activities by global investors including The Carlyle Group, Toyota Tsusho, TA Associates, and TPG, among others;
• Real Estate: In Q1?2017, the real estate sector performance remained stable, with appreciation being witnessed in the residential and land themes, as the retail and industrial themes remained steady amidst a softening in the commercial office sector. There was also increased investment in the sector by both the local and foreign investors owing to the favourable legal policies and attractive returns across all investment themes. Kenya continues being the preferred business hub in the region, evidenced by intent of multinationals to establish regional offices in Nairobi.

Company Updates

• On Monday 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 billion and sits on a 2.8-acre piece of land. See Event Note
• Our Chief Investment Officer, Elizabeth N. Nkukuu, CFA, discussed Kenya?s 2017/2018 pre-budget analysis. Watch Elizabeth N. Nkukuu on Citizen TV here
• Our Investment Manager, Maurice Oduor, discussed the pre-budget projections for Kenya?s 2017/2018 budget on Citizen TV (here), Kenya?s 2017/2018 budget winners and losers on Citizen TV (here) and the post-budget analysis of the 2017/2018 budget on Citizen TV (here)
• Our Head of Private Equity Real Estate, Shiv Arora, discussed projections of the 2017/2018 budget. Watch Shiv Arora on Citizen TV here
• Our Investment Analyst, Caleb Mugendi, discussed the 2017/2018 budget projections. Watch Caleb Mugendi on KBC here

A. GLOBAL MARKETS REVIEW

Introduction

Most of the global economies registered lower economic growth in 2016 with China, the US and the Eurozone registering growth of 6.7%, 1.6% and 1.7%, compared to 6.9%, 2.6% and 2.0%, respectively in 2015. The commodities markets remained vibrant with oil prices declining 7.0% during the quarter to USD 52.8 per barrel from USD 56.8 per barrel at the end of December 2016, driven by concerns of oversupply, despite expectations that OPEC members could extend their oil production cut agreement up until the end of 2017. The global stock market indices ended the quarter positive, with the MSCI World Index gaining 6.3% during the quarter as compared to 1.9% in the last quarter of 2016.

Below is the summary of the key happenings in the first quarter per region:

United States:

The US Fed raised the Federal Funds Rate by 25 bps to a bound of 0.75% - 1.00% in March, in line with our expectations of a 25 bps increase as per our Cytonn Weekly #10/2017. The decision by the Fed to hike rates was on the back of (i) relatively stable economic growth, with expectations of 2.1% growth in 2017 and 2018, despite GDP figures coming in at 1.6% in FY?2016, (ii) the continued strengthening of the labour market, given that the unemployment rate is at 4.7%, which is considered full employment level, and (iii) increasing inflation, with core inflation having hit a 2-year high of 1.8%, while headline inflation came in at 2.7%. In addition to this first hike of the year, the Fed is expected to hike rates twice more during the year, given the positive economic growth expected in 2017.

The stock market has been buoyant, with S&P 500 having gained 5.6% in Q1?2017, attributed to huge gains in the technology and financial services sectors, on optimism of pro-growth policies from the current Trump administration. In terms of valuations, the Cyclically Adjusted Price/Earnings (CAPE) ratio is currently at 29.1x, higher than the historical mean of 16.7x, an indication that the market is overvalued.

We expect the US market to remain supported by a strong labor market that will spur consumption and GDP growth in the economy. The key risk remains political as it is increasingly clear that the Trump administration may not be able to implement some of the campaign promises. 

Eurozone:

The stimulus package by the European Central Bank (ECB) seems to be bearing some fruits as the region saw an increase in the GDP growth with the 2016 growth coming in at 1.7% compared to the 0.7% average over the last five-years, and for the first time since 2008, grew faster than the US. The labor market has been recovering with the unemployment rate dropping to 9.6% at the end of the year from 10.5% in 2015. Despite the vote to exit the Eurozone in form of Brexit, the UK is still in discussions on how the actual exit will happen.

The ECB met in March and maintained 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 investment rates are expected to persist in 2017 and impact growth and investment positively, largely in the financial services sector. Moreover, inflation fell below the ECB?s target to 1.5% in March, down from 2.0% in February, and may serve to justify the bank?s quantitative easing initiatives.

The stock markets in Europe registered gains, with EuroStoxx 300 index rising 5.3%, while FTSE 100 gained 2.8%. This was supported by improved business sentiment in the Eurozone this year, on account of stronger domestic demand, a weaker Euro that boosted exports, and a pickup in manufacturing, with the Eurozone?s flash PMI rising to 56.2 in March, from 55.4 previously.

A key risk to the region comes in the form of political risk, with two of the region?s largest economies, France and Germany, set to hold elections in April and September, respectively, with both countries having been targets of violent attacks in 2016. Despite the uncertainty expected to be brought about by Brexit, elections in major economies and the migrant crisis, the region?s growth, albeit slow, is expected to persist on account of (i) an accommodative monetary policy, and (ii) private consumption driven by expected employment growth and higher wages.

China:

The Chinese economy grew by 6.7% in 2016 compared to 6.9% in 2015 and the average of 7.9% over the last five-years. The growth was supported by an increase in private consumption and a pickup in the industrial sector, boosted by a recovery in commodity prices and increased investment in infrastructure. According to the IMF, China is projected to grow at 6.5% in 2017, 30 bps above the 6.2% forecasted in October 2016, with expectations for 2018 maintained at 6.0%.

Shanghai Composite gained 3.8% in Q1?2017, while trade data in February indicated that exports fell 1.3% y/y, with imports increasing 38.1% over the same period, which saw China end up with a rare trade deficit of USD 9.2 bn, following a surplus of USD 51.4 bn recorded in January, as a construction boom pushed imports for raw materials much higher than expected. 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?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 recorded the slowest growth in over two decades in 2016 at 1.5%, compared to 3.4% in 2015. This was as a result of a slowdown in some of the largest economies in the region such as Nigeria and Angola, which contracted by 1.5% in FY?2016, due to heavy reliance on oil, given the lower oil prices that prevailed in 2016. However, as highlighted in our Annual Market Outlook 2017, Sub Saharan Africa?s economic performance is expected to improve in 2017, with growth projected to come in at 2.9% and 3.6% in 2018, according to the International Monetary Fund (IMF). The East Africa region is expected to deliver the highest growth rate in 2017, supported by infrastructural expenditure. Sub-Saharan Africa?s projected 2017 growth rates per region are highlighted in the table below.

Below is a review of the key economic drivers during the quarter:

Commodity Prices

Global commodity prices have been stable but are expected to rise going forward. Most commodities registered gains in Q1?2017, namely metals, agriculture and select energy sources such as coal, whose prices were up 5.9%, 2.4% and 1.5%, respectively, according to the World Bank Commodity Prices Index. However, oil prices declined by 7.0% owing to oversupply from the US shale oil market. The recovery in commodity prices will consequently enhance the stability of the commodity-dependent economies such as Nigeria, Ghana, and other oil and metal exporting nations in Sub-Saharan Africa. Despite the performance of commodity prices, the recovery of these commodity driven economies will also require fiscal and monetary policy actions in order to support their foreign exchange markets and foster the recovery of their current account position. Below is a chart showing the performance of select commodity prices.

Currency Performance

Regional currencies registered mixed performance during the quarter driven by different country specific fundamentals that drive the economies. Economies that are reliant on metals and minerals registered the highest gains attributed to a rise of 5.9% in metal prices. Currencies of economies that are heavy net oil importers weakened, due to the global strengthening of the dollar after the US rate hike in December 2016 and March 2017. Below is a table showing the performance of select African currencies.

African Eurobonds

Yields on African Eurobonds have continued to decline, highlighting the improved investor sentiment owing to improving macro-economic conditions and a relatively stable political landscape. During the quarter, 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. Prior to this, Ghana raised USD 750.0 mn, in September 2016, through its 5^th Eurobond at a yield of 9.3%, with a weighted average tenor of 5-years, recording more than 5.0x subscription level. This indicates the high appetite for Frontier markets securities. Below is a graph depicting the Eurobond performance of select African sovereign bonds.

Equities Market Performance:

Sub-Saharan African stock market performance has shown improvement with majority of the markets recording positive returns during the quarter. This can be attributable to (i) higher economic performance brought about by improved commodity prices, and (ii) renewed investor interest following attractive valuations on most stocks in these countries making them attractive to long-term investors. 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 MACRO ECONOMIC REVIEW

The Kenyan economy is still on a firm footing supported by continued investment in infrastructure and real estate, the growth in the financial sector and the recovery of the tourism sector. Despite the positive sentiment, there are a couple of challenges facing the economy, among them being the ongoing drought, political risk as we head into the election and increasing oil prices that may lead to a weakening shilling. The government in a bid to support the economy presented a very expansionary budget last week. The budget was themed ?Creating Jobs, Delivering a Better Life for All Kenyans?. There was a 2.4% increase in the budget to Kshs 2.3 tn from the Kshs 2.2 tn FY 2016/17 budget, as per the Budget announcement speech made by Cabinet Secretary to the National Treasury, Henry Rotich, with the bulk of it being financed by tax collection.

Key highlights as regards to financing the Budget were:

1. The budget will focus on reducing the budget deficit to 6.0% of GDP at Kshs 524.6 bn from 8.9% of GDP in the FY 2016/17 budget; with external and domestic debt estimated at Kshs 256.0 bn and Kshs 268.6 bn, representing 2.6% and 3.1% of GDP, respectively,
2. The Kenya Revenue Authority (KRA) is expected to collect revenue of Kshs 1.7 tn through taxation. In a bid to continue supporting investments into the country a couple of Tax incentives were introduced:
   1. Additional tax incentives for businesses in the Special Economic Zone (SEZ), including allowing a capital deduction of 100% of the cost of buildings and machinery owned by the SEZ enterprise, and exempting goods exported from and imported by an SEZ enterprise from export duty and Import Declaration Fees,
   2. Exemptions from VAT on transactions related to transfer of assets into Real Estate Investment Trusts and Asset Backed Securities,
   3. Increased the taxation on gains from gambling to 50% to discourage the betting culture
   4. Exemptions from VAT on locally assembled tourist vehicles,
   5. Zero rate importation of maize for four months, and
   6. In order to support the low income population in Kenya, and encourage health care initiatives, the budget has introduced an increase in the lowest monthly taxable income to Kshs 13,489 from Kshs 11,135, and a cash transfer allocation for health care for people over 70 years of age, respectively.

   The tax incentives are a commendable effort by the government as it indicates that the operating environment will improve going forward.

   The following table looks at the Kenya National Budget growth in the last 5-years, highlighting the changes from fiscal year 2016/17 to the 2017/18 budget estimates:

   all figures in Kshs bns unless stated otherwise
   Kenya National Budget Change to 2017/18 from 2016/17 and 5-Year Growth
   Items	2011/12	2012/13	2013/14	2014/15	2015/16	2016/17	2017/18 est.	% Change (2016/17 - 2017/18)	5-Year Growth
   Nominal GDP	3,295.2	3,866.5	4,164.6	5,719.1	6,520.5	7,435.2	8,284.3	11.4%	151.4%
   Revenue & grants
   Total revenue & grants	854.5	984.7	1,098.3	1,231.0	1,431.6	1,566.9	1,763.3	12.5%	106.4%
   Expenditure
   Recurrent & county allocation	697.5	781.9	1,041.9	1,171.8	1,280.9	1,502.5	1,646.2	9.6%	136.0%
   Development	385.2	370.2	428.7	634.8	717.6	729.8	640.8	(12.2%)	66.3%
   Total expenditure	1,082.7	1,152.1	1,470.6	1,806.7	1,998.5	2,232.3	2,287.0	2.4%	111.2%
   Budget -deficit/+surplus	(228.2)	(167.4)	(372.3)	(575.6)	(567.0)	(665.4)	(523.7)	(21.3%)	129.5%
   % of GDP	(6.9%)	(4.3%)	(8.9%)	(10.1%)	(8.7%)	(8.9%)	(6.3%)	2.6%	0.6%
   Deficit Financing
   Net external borrowing	166.1	60.7	238.8	261.2	340.5	382.7	206.0	(46.2%)	24.0%
   Domestic borrowing	62.1	106.7	133.5	314.5	226.4	282.7	317.7	12.4%	411.6%
   Total financing	228.2	167.4	372.3	575.6	567.0	665.4	523.7	(21.3%)	129.5%

   Key points to note from the table above are:

   1. The budget is estimated to increase by 2.4% from FY 2016/17 to FY 2017/18, and by 111.2% in the last 5 fiscal years, with recurrent & county allocation expenditure growing faster than development expenditure at 136.0% as compared to 66.3%,
   2. The government has tried to cut down on expenditure by reducing development expenditure by an estimated 12.2%. This coupled with a 12.5% estimated increase in revenues and grants will reduce the budget deficit to GDP ratio to 6.3% in FY 2017/18 from 8.9% the previous fiscal year,
   3. The government continues to borrow heavily to finance the budget, and with tax collections having historically always fallen below target numbers, pressures on borrowing continue to increase during every fiscal year. The budget deficit has been growing at a faster rate than the budget has, with the deficit growing at 129.5%, which translates to an equal growth in budget financing through government borrowing,
   4. Growth in domestic borrowing has outpaced foreign borrowing, at 411.6% over the last 5 fiscal years, with an estimate that it will increase by 12.4% this fiscal year, and,
   5. Foreign borrowing has increased at a slower rate at 24.0% over the last 5-years but is estimated to decrease by 46.2% in 2017/18, leading to increased pressure on the domestic borrowing front.

   The Kenyan budget has always been expansionary, with no single year when the budget has been less than the previous years. However, we foresee the government facing these challenges in budget implementation, as has been in past years: (i) under-absorption of development expenditure, which has averaged 65.0%, and over-absorption of recurrent expenditure which has averaged 103.5% leaving the overall budget absorption rate below 100.0% consistently in the last 5 fiscal years, (ii) failure to meet revenue collection targets by the Kenya Revenue Authority, which is projected to rise to Kshs 1.7 tn in 2017/18, from Kshs 1.5 tn in 2016/17, after having missed its first half of the fiscal year target by 3.2%, and (iii) high budget deficit being plugged in by debt, especially external dollar denominated debt and resulting in a rising debt-to-GDP ratio. We are of the view that the government should put in place structural measures to address these challenges in order to ensure the budget policy items are actually well implemented. In addition, KRA needs to address a number of areas, including (i) streamlining tax collection, and allowing for efficient payment of taxes, and (ii) taxation of the informal sector in order to achieve their tax collection targets, to boost revenue collection and reduce the pressure on borrowings.

   The Kenya Shilling depreciated against the US Dollar by 0.5% during the quarter to close at Kshs 103.0 from Kshs 102.5 at the end of 2016, due to global dollar strengthening as the Fed continues on its monetary tightening cycle. This week, the shilling depreciated against the US dollar by 0.1% w/w to close at Kshs 103.0 from Kshs 102.9 due to increased dollar demand from oil importers. The forex reserve level has increased to 5.1 months import cover from 4.6 months recorded at the end of 2016, on account of the receipt of the Kshs 82.3 bn syndicated loan last week. This is a significant rise given the foreign reserves had stabilized at 4.6 months throughout the quarter. Going forward, we expect the shilling to come under pressure from (i) global strengthening of the dollar due to planned rate hikes during the year, and (ii) recovery of global oil prices. However, with the current forex reserve level, the CBK will be able to support the shilling in the short term.

   The inflation rate for Q1?2017 increased to 10.3% in March from 6.4% in December 2016. This was above our projections of 9.5% - 9.8% for the month of March. The rise in inflation was driven by (i) an increase in food prices, which rose 8.2% during the quarter, on account of the prevailing drought in the country, and (ii) transport prices, which rose 1.6% during the quarter, despite a notable decrease in the cost of diesel in January. We expect upward inflationary pressure to persist in the first half of 2017, and average 8.6% over the course of the year, which is above the upper bound of the government target range of 2.5%-7.5%, and this is despite the expectation that the food situation is expected to improve in the second half of 2017.

   The Monetary Policy Committee (MPC) met twice during the quarter, on 30^th January and on 27^th March, and in both meetings, the MPC decided to maintain the CBR at 10.0% backed by (i) the prevailing stable macroeconomic conditions despite the rise in inflation to 10.3% in March, (ii) the relative stability of the currency supported by foreign exchange reserves of USD 7.7 bn representing 5.1 months of import cover, and (iii) the resilience of the banking sector with average liquidity and capital adequacy ratios at 43.2% and 19.7%, both above statutory requirements of 20.0% and 14.5%, respectively. Going forward, we expect the MPC to take note of the impact of the interest rate cap on private sector credit growth and economic growth. This assessment will be key in informing the next action to be taken by the MPC.

   Private sector credit growth has been declining from highs of 21.0% in August 2015 to lows of 4.0% in March 2017 according to the CBK. This slow growth can be attributed to (i) an increase in investor participation in government securities, thus leading to a crowding out effect in the private sector, and (ii) an increase in commercial bank non-performing loans (NPLs) that has discouraged banks from lending to the private sector and instead preferred to lend to the government that is considered risk free. The new loan pricing framework brought about by the interest rate cap was a new factor that was perceived to worsen the situation, however, the Kenya Bankers Association and the CBK are to jointly carry out an assessment of the impact of the Banking (Amendment) Act, 2015 on private sector credit growth and economic growth. From the results of the assessment, they shall take a view on steps to be taken going forward. This in our view is commendable and a step in the right direction in terms of getting to the root cause and addressing it in order to revamp private sector credit growth which will be good for the economy going forward.

   Macroeconomic Indicators Table

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

   Summary of Macro Economic Indicators
   Indicators	2017 Expectations	YTD 2017 Experience	Going Forward	Outlook -  Beginning of the year	Outlook
   GDP	GDP growth of 5.4%-5.7%	We still expect 2016 GDP to come in at 5.5% ? 6.0%. IMF, WB and Treasury expect GDP to come in at 6.0%	We expect GDP growth for 2017 to come in at 5.4% - 5.7%, a slight decline from the expected 2016 growth of 6.0%	Neutral	Neutral
   Interest Rates	A stable outlook on interest rates in 2017 with the CBR maintained at 10.0%	The CBK has maintained the CBR at 10.0%. KRA missed their first half of FY 2016/17 target by 3.2% and is expected to meet the Kshs 1.5 tn overall target. Government has borrowed Kshs 236.8 bn ahead of its pro-rated target of Kshs 176.6 bn	The interest rate environment is expected to remain relatively stable with the CBK not accepting higher yields on treasury securities and the MPC maintaining the CBR at 10.0%. There however seems to be an upward pressure on interest rates due to government borrowing pressure	Neutral	Neutral
   Inflation	Expected to average 7.2%, within the 2.5%-7.5% government target	Inflation increased to 10.3% in March from 6.4% in December mainly due to effects of the drought causing a 8.2% increase in food prices and increase in petrol and diesel pump prices causing a 1.6% increase in transport costs	We expect upward inflationary pressure to persist in the 1st half of 2017, averaging 8.6% over the course of the year, above the 7.5% upper bound government target. This is despite the expectation that the food situation will improve in the 2nd half of 2017	Neutral	Negative
   Exchange Rate	Shilling to depreciate against major currencies	The shilling has depreciated by 0.5% against the dollar YTD on account of increased dollar demand from oil importers and strengthening of the US dollar after the March Fed rate hike, despite retail goods importers coupled with dollar inflows from foreign investors and horticultural produce exporters	We expect the currency to depreciate against the dollar driven by (i) global strengthening of the dollar as the Fed plans to increase the pace of rate hike in 2017, and (ii) recovery of the global oil prices. However, it is important to note that the CBK has sufficient reserves (equivalent to 5.1 months of import cover) to support the shilling in the short term	Negative	Neutral
   Corporate Earnings	Corporate earnings growth of 8.0% in 2017 due to lower earnings for commercial banks attributed to the cap on interest rates	Several companied so far have released mixed FY?2016 results, mainly banking sector (listed) with weighted average growth in core EPS of 4.4% from 2.3% in FY?2015, below our 2016 expectation of 12.5%	We still expect corporate earnings to be worse than 2016, exhibiting decline in profits owing to slower private sector credit growth at 4.0% and effects of the cap on interest rates. We expect corporate earnings growth of 8.0% in 2017 with cheaper multiples than historical average	Neutral with a bias to positive	Neutral with a bias to positive
   Investor Sentiments	Foreign investors to demand higher premiums due to political  risks posed by elections and economic risk due to the planned rate hikes by the US Fed	Investor sentiment has been high with foreign investors being net buyers throughout the year with inflows of USD 17.3 mn	Political and economic risks on frontier markets still remains a risk, however, we expect long term investors to enter the market seeking to take advantage of the current low valuations	Neutral	Neutral
   Security	Expect the government to put initiatives in place to ensure improved security, however, the 2017 election remains a challenge	In January, the U.S. Department of State issued a travel warning regarding threats by Al-Shabaab on the Somalia border, coastal and north-eastern counties. In March, the U.K government issued a warning due to security concerns in parts of Laikipia County	Security is expected to be tight as we head towards the elections with the government expected to keep this in check. However, uncertainty still exists due to the August elections	Neutral	Neutral

   Of the seven macroeconomic indicators that we follow, 2 have changed: (i) inflation has turned negative from neutral, and (ii) exchange rate has turned neutral from negative. From this, we can conclude that the operating environment will remain stable but economic growth in 2017 will decline from that which was experienced in 2016.

   D. FIXED INCOME

   The first quarter of 2017 was characterized by T-bill oversubscriptions, with the overall subscription rate decreasing to 106.6% from 113.1% in the last quarter of 2016. Overall subscriptions for the 91, 182, and 364-day papers for the quarter came in at 89.2%, 193.2% and 142.2%, respectively. The 182-day paper has not been on offer for the last 4-weeks, though its last recorded yield remained unchanged at 10.5%, from 10.5% at end of 2016. The 182-day paper was withdrawn with the aim of managing maturities by spreading risk concentration evenly across all three papers. This saw investor interest being skewed towards the 364-day paper in the last two months of the quarter as it offered a higher return on a risk-adjusted basis. Yields on T-bills were relatively unchanged in Q1?2017, closing at 8.8% and 10.9%, from 8.6% and 11.0% for the 91 and 364-day papers, respectively, at the end of 2016.

   During the week, T-bills were oversubscribed, with overall subscription coming in at 122.5%, compared to 145.6% recorded the previous week, with the subscription rate on the 91-day paper increasing to 112.2% from 88.1%, and that of the 364-day papers decreasing to 132.8% from 203.1%, the previous week. Yields on the 91 and 364-day T-bills remained relatively unchanged during the week, coming in at 8.8% and 10.9%, respectively.

   In the recent T-Bill auctions, there has been upward pressure on interest rates and this pressure has been more on the 91-day paper, as it currently offers a negative real return of 1.6%. However, the government has remained disciplined throughout the year, rejecting bids that are considered as above market, as indicated by (i) the lower acceptance rate for the 91-day paper at 63.1% as compared to the 364-day paper at 70.0%, and (ii) the high variance between the market average yield and the accepted average yield for the 91-day T-bill at 0.2%, compared to 0.0% for the 364-day papers, respectively.

   Treasury Bills Yields and Variance
   	91-day	364-day
   Market Weighted Average Yield*	8.9%	10.9%
   Weighted Average Accepted Yield* (a)	8.7%	10.9%
   Variance	0.2%	0.0%
   Inflation rate (as at March) (b)	10.3%	10.3%
   Average Real Return (a-b)	(1.6%)	0.6%
   Acceptance Rate	63.1%	70.0%
   *Average Yield for the last 4 auctions

   The 91-day T-bill is therefore currently trading below its 5-year average of 9.9% as can be seen on the graph below:
   
   

   During the quarter, the Kenyan Government offered 3 Treasury bonds, one in each month with details in the table below:

   No.	Date	Bond Auctioned	Effective Tenor to Maturity (years)	Coupon	Amount to be Raised (Kshs bn)	Actual Amount Raised (Kshs bn)	Average Accepted Yield	Acceptance Rate
   1.	30/01/2017	FXD 2/2007/15 (re-open)	5.4	13.5%	30.0	-	Auction Cancelled	-
   2.	27/02/2017	IFB 1/2017/12	8.8	12.5%	30.0	13.6	13.6%	17.1%
   3.	27/03/2017	FXD 2/2014/5 (re-open)	2.2	11.9%	30.0	20.5	12.4%	41.4%
   4.	27/03/2017	FXD 3/2013/5 (re-open)	1.7	12.0%	30.0	19.7	11.8%	36.2%

   During the quarter, investors showed a preference for short to medium term papers. In the month of January, the bond on offer, which was the FXD 2/2007/15 (re-open) was cancelled. This was an indication that either (i) investors bid at yields that the CBK considered unrealistically above market, or (ii) subscription rates for the bond were low as a result of the tight liquidity that had characterized the money market since the beginning of the year. The February infrastructural bond tap sale had a low subscription rate of 33.5% with a tax-adjusted yield of 14.7%, which was higher than the prevailing market rate at the time of 13.6% for a 9-year bond. Furthermore, the March auction was oversubscribed at an overall subscription of 214.2%, with the CBK accepting Kshs 24.9 bn and opening a tap sale to raise the remaining Kshs 5.1 bn. Contrary to the previous tap sale, this one was oversubscribed at 300.3%, keeping in mind that this auction had bonds with an average effective tenor to maturity of 2-years, lower than that of the IFB which had 8.8-years to maturity.

   We are therefore of the view that this was an indication of investors keeping short to medium term due to the uncertainty around the interest rate environment.

   East African Breweries Limited (EABL) offered a second tranche of its Kshs 11.0 bn Domestic Medium Term Note Programme that had been approved in 2015, offering an additional Kshs 6.0 bn worth of notes. The five-year note was priced at a yield of 14.2%, which is a premium of 0.8% above the same tenor treasury paper that is currently trading at 13.4%. In our view, this is a low risk premium as we would normally expect at least a 200 bps premium above government paper. However, the offer was highly oversubscribed at 141.0% subscription rate. The funds will go towards restructuring its balance sheet by retiring short term debt, and capital expenditure aimed at building capacity for the company.

   The Kenya National Treasury launched its mobile-phone bond auction platform, ?M-Akiba??, following its postponement in October 2015, with the Central Depository & Settlement Corporation (CDSC) acting as the agent, and Safaricom and Airtel as the mobile virtual network operators. The M-Akiba platform is expected to raise Kshs 5.0 bn. The pilot issue that sought to raise Kshs 150.0 mn has so far managed to raise Kshs 75.2 mn, representing 50.1% of the target. The money would go towards infrastructure development, through the three-year fixed coupon retail infrastructure bond that will pay investors a tax-free interest income of 10.0% p.a., translating to 11.5% when adjusted for tax. The sale period closes on 11^th April, from where it shall be traded on the Nairobi Securities Exchange (NSE) via mobile phone, with the NSE acting as the market maker. The effort is commendable as we believe that the platform will open the bond market to low income investors. This is also a pioneering initiative to trade on the mobile phone, which could very well be extended to other securities. However, the platform may end up not achieving its intended purpose, given (i) the lower end of the market is largely made up of net borrowers seeking capital rather than net savers seeking to invest, (ii) the low denominations will make it very difficult for bond holders to trade, and (iii) there still exists a large need for investor education targeted towards the retail investors that this bond is targeting.

   During the quarter, the money market was liquid, with a net liquidity injection of Kshs 77.0 bn. Due to this, the average interbank rate declined by 440 bps to close at 3.8%, from 8.2% at the end of 2016. The injection was as a result of (i) government payments of Kshs 314.1 bn, (ii) reverse repo purchases and repo maturities of Kshs 259.2 bn in total as the CBK participated in Open Market Operations (OMO) to boost liquidity earlier in the quarter, and (iii) T-bill redemptions of Kshs 221.3 bn. The interbank rate is often determined by the liquidity distributions within the banking sector as opposed to the net liquidity position in the interbank market.

   Below is a summary of the money market activity during the quarter:

   all values in Kshs bn, unless stated otherwise
   Q1'2017  Liquidity Position ? Kenya
   Liquidity Injection		Liquidity Reduction
   Term Auction Deposit Maturities	103.1	T-bond sales	6.0
   Government Payments	314.1	Transfer from Banks ? Taxes	235.0
   T-bond Redemptions	28.4	T-bill (Primary issues)	197.5
   T-bill Redemption	221.3	Term Auction Deposit	148.8
   T-bond Interest	27.4	Reverse Repo Maturities	146.1
   T-bill Re-discounts	4.9	Repos	121.7
   Reverse Repo Purchases	132.3	OMO Tap Sales	26.3
   Repos Maturities	126.9
   Total Liquidity Injection	958.4	Total Liquidity Withdrawal	881.4
   		Net Liquidity Injection	77.0

   The secondary bonds market recorded reduced activity during the quarter, with turnover decreasing by 34.2% to Kshs 91.1 bn in Q1?2017, from Kshs 138.4 bn recorded in Q1?2016. Turnover however improved q/q by 38.7% from Kshs 65.7 bn recorded in Q4?2016, despite the yields on government securities remaining relatively flat during the quarter. The NSE FTSE Bond index declined by 0.4% in Q1?2017 due to investors concentrating on participation in the primary market given the CBK has had one T-bond auction per month, two of which had subsequent tap sales.
   
   
   According to Bloomberg, the yield on the 5-year Eurobond decreased by 70 bps to 4.0%, from 4.7% at the end of 2016, whereas that on the 10-year Eurobond decreased by 90 bps to 6.9% from 7.8% at the close of 2016. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.8% points and 2.8% points, for the 5-year and 10-year Eurobonds, respectively, due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination. Given the expected Fed rate hikes and the triggering of Article 50 of the Treaty of the European Union by the UK, we expect foreign investor sentiment to deteriorate as investors exit their investments in frontier markets, seeking safe havens like US treasuries and gold.

    
   
   The Government is ahead of its domestic borrowing for the current fiscal year, having borrowed Kshs 236.8 bn against a target of Kshs 176.6 bn (assuming a pro-rated borrowing throughout the financial year of Kshs 229.6 bn budgeted for the full financial year). The government has only borrowed Kshs 205.8 bn, of the budgeted foreign borrowing, representing 44.5% of its foreign borrowing target of Kshs 462.3 bn, and given Kenya Revenue Authority (KRA) has already missed its first half of 2016/17 fiscal year revenue collection target by 3.2%, and it is expected to miss its overall revenue collection target of Kshs 1.5 tn for the current fiscal year. Given that the government only has 3 months to the close of the current fiscal year and the fact that borrowing from the foreign market is a much longer process than borrowing from the domestic market, the government is likely to use the latter to plug in the deficit that is likely to arise. This creates uncertainty in the interest rate environment as this is a move that may exert upward pressure on interest rates, and result in longer term papers not offering investors the best returns on a risk-adjusted basis. It is due to this that we think it is prudent for investors to be biased towards short-term fixed income instruments.

   E. EQUITIES

   During the quarter, the Kenyan equities market was on a downward trend, with NASI, NSE 20 and NSE 25 losing 2.1%, 2.3% and 1.7%, respectively, as a result of decline in prices of large cap stocks. Top gainers for the quarter were KCB Group, Standard Chartered and Equity Group, which gained 20.9%, 13.8% and 10.0%, respectively. The biggest losers among the top stocks by market capitalization were Housing Finance Group, ARM, Kenya Re, BAT and Safaricom, which lost 30.4%, 21.8%, 14.7%, 6.6% and 6.0%, respectively. Since the peak in February 2015, NASI and NSE 20 are down 23.9% and 38.6%, respectively.

   Equity turnover during the quarter grew by 39.6% to USD 348.5 mn compared to USD 249.7 mn in Q4?2016, and declined by 2.8% from USD 358.6 mn in Q1?2016. Foreign investors were net buyers with net inflows rising 90.1% to Kshs 17.3 mn compared to net inflows of Kshs 9.1 mn witnessed in Q4?2016.

   The market is currently trading at a price to earnings ratio of 10.8x from 10.5x at the end of Q4?2016 vs a historical average of 13.5x, with a dividend yield of 6.5% compared to 6.7% at the end of Q4?2016 vs a historical average of 3.7%.

   The charts below indicate the historical PE and dividend yields of the market.
   
   

   During the quarter, banks and insurance companies released FY?2016 results, recording mixed performance. Bank results were weighed down by the enactment of the Banking Act (Amendment) 2015, which placed regulations on banks? loan and deposit pricing framework, while results from insurance companies were boosted by the change in the valuation methodology of long-term insurance business liabilities to the Gross Premium Valuation (GPV) methodology from the previously applied Net Premium Valuation (NPV) methodology. In addition, a number of other companies also reported depressed earnings in 2016, with the number of companies that issued profit warnings at 11 companies following 14 companies in 2015, indicating a continually challenging operating environment. This resulted into a number of job lay-offs as several banks including Equity Group, National Bank of Kenya, Standard Chartered and Sidian Bank announced job-layoffs affecting more than 840 jobs last year, as highlighted in our Cytonn Weekly #3/2017.

   During the week, we had a number of releases, namely;

   • Housing Finance Group released FY'2016 earnings posting a 24.3% decline in core earnings per share to Kshs 2.6 from Kshs 3.4 in FY?2015, attributed to a 2.0% decline in operating revenue coupled with a 7.4% growth in total operating expenses. For more details, See Housing Finance Group FY?2016 Earnings Note
   • National Bank of Kenya (NBK) released FY?2016 earnings posting core earnings per share of Kshs 0.5 from a loss per share of Kshs 3.8 in FY?2015, driven by a 15.5% growth in operating income, coupled with a 3.0% decline in operating expenses. For more details, see National Bank of Kenya FY?2016 Earnings Note
   • I&M Holdings released FY'2016 earnings posting an 8.4% growth in core earnings per share to Kshs 18.6 from Kshs 17.1 in FY?2015, driven by an 18.1% growth in operating income, despite a 37.3% increase in operating expenses. For more details, See I&M Holdings FY?2016 Earnings Note
   • Jubilee Insurance released FY'2016 results, posting a 17.8% growth in core earnings per share to Kshs 55.8 from Kshs 47.4 in FY'2015, driven by an 18.2% growth in net insurance premium revenue that outpaced the 16.2% increase in operating expenses. For more details, See Jubilee Insurance FY?2016 Earnings Note
   • Family Bank Group released FY'2016 earnings posting an 82.4% decline in core earnings per share to Kshs 0.3 from Kshs 1.6 in FY'2015. The decline in earnings was as a result of a 2.7% decline in total operating revenue coupled with a 31.8% increase in total operating expenses.

   Kenyan Listed Banks Results

   Kenyan listed banks have all released their FY?2016 results, recording an average growth in core earnings per share of 4.4% compared to 2.8% in FY?2015. Based on the above growth, we can bucket the listed banks into four main buckets:

   • The strong growth banks, with above 20% growth: Standard Chartered. The strong growth in Standard Chartered was mainly driven by fall in Loan Loss Provisions due to improved risk assessment framework, resulting in high quality loans,
   • The stable growth banks with 10% and above growth: Diamond Trust Bank. The growth in Diamond Trust Bank was mainly driven by growth in Non-funded income, and a one-off deferred tax gain of Kshs 1.0 bn,
   • Anemic growth banks, with below 10% growth: Co-operative Bank and I&M Holdings. The slower growth in Co-operative Bank was due to a Kshs 0.5 bn monetary loss charge in South Sudan as the economy is experiencing hyperinflation, while I&M Holdings slower growth was driven by a 201% increase in Loan Loss Provision,
   • Negative growth banks: This is where a majority of the banks lie, namely KCB Group, NIC Bank, Equity Group, Stanbic, HF Group, Barclays and National Bank of Kenya. This was driven by increase in Loan Loss Provisions for majority of the banks, and net monetary loss charges as a result of hyperinflation in the South Sudan economy and devaluation of the South Sudanese Pound for banks with subsidiaries in South Sudan, such as Equity Group and KCB Group.
   • National Bank of Kenya EPS growth cannot be calculated since it recorded a profit in FY?2016 from a loss in FY?2015

   FY'2016 Listed Banking Sector Metrics
   	Bank	Core EPS Growth	Deposit Growth	Loan Growth	Net Interest Margin	Loan Loss Provision Growth	Cost to Income*	ROaE	ROaA
   1	SCBK	43.9%	7.6%	6.6%	10.1%	55.1%	44.7%	21.3%	3.7%
   2	DTBK	16.6%	22.7%	4.9%	7.4%	96.0%	37.6%	18.3%	2.6%
   3	I&M Holdings	8.4%	10.2%	5.4%	8.3%	201.1%	34.7%	22.7%	3.9%
   4	Cooperative Bank	8.3%	(2.0%)	11.0%	9.0%	28.7%	52.1%	22.7%	3.7%
   5	KCB Group	(0.5%)	5.6%	11.5%	8.8%	18.9%	52.6%	22.2%	3.4%
   6	NIC Bank	(3.3%)	(0.5%)	(1.3%)	8.0%	126.9%	38.7%	15.5%	2.6%
   7	Equity Group	(4.6%)	11.6%	(1.4%)	11.0%	173.1%	50.7%	21.5%	3.7%
   8	Stanbic	(9.9%)	1.4%	3.4%	5.8%	93.1%	57.9%	11.3%	2.1%
   9	Barclays Bank	(12.6%)	7.9%	15.9%	10.5%	122.4%	53.4%	17.9%	3.0%
   10	HF Group	(24.3%)	(8.6%)	2.7%	6.5%	38.8%	56.3%	8.3%	1.3%
   11	National Bank	N/A	(12.3%)	(12.5%)	8.2%	(27.5%)	73.9%	1.5%	0.1%
   	FY'2016 Weighted Average	4.4%	6.4%	6.3%	9.2%	91.3%	49.4%	19.9%	3.3%
   Average is Market cap weighted
   *Without Loan Loss Charge

   Following the release of all listed banks FY?2016 results, we shall be releasing a comprehensive sector report covering Kenya?s banking sector on 10^th April 2017.

   Insurance Regulatory Authority (IRA) FY?2016 Report

   IRA released FY?2016 results for the insurance industry with the market recording growth in core earnings by 10.9% to Kshs 14.6 bn from Kshs 13.1 bn in FY?2015.

   Key takes from the industry performance in FY?2016 from FY?2015 include:

   • Gross premiums increased by 12.3% to Kshs 194.7 bn from Kshs 173.4 bn previously, driven by growth in the life sector, which grew by 19.3% to Kshs 73.1 bn from Kshs 61.2 bn, compared to an 8.5% growth in the non-life segment to Kshs 121.7 bn from Kshs 112.1 bn. This outpaced the industry?s growth in claims and benefits, which increased by 17.1% to Kshs 90.6 bn from Kshs 75.1 bn,
   • Net Premiums increased by 12.4% to Kshs 156.8 bn from Kshs 139.5 bn,
   • Gross claims increased 14.9% to Kshs 99.7 bn from Kshs 86.8 bn in FY?2015, leading to a higher loss ratio of 63.6% from 62.2% in FY?2015. Net claims increased by 17.1% to Kshs 90.6 bn from Kshs 75.1 bn,
   • Total Assets grew by 10.1% to Kshs 525.3 bn from Kshs 477.2 bn in FY?2015, with investment assets growing 8.6% to Kshs 423.3 bn from Kshs 389.8 bn,
   • Total Liabilities grew by 10.3% to Kshs 385.0 bn from Kshs 349.1 bn registered in FY?2015,
   • Shareholders? funds grew by 9.5% to Kshs 140.3 bn from Kshs 128.7 bn in FY?2015, attributed to capital restructuring following the changes in regulatory capital requirements in the Insurance Industry, whereby short-term insurers will be required to increase their capital from Kshs 300 mn to Kshs 600 mn, while long-term insurers must increase capital from Kshs 150 mn to Kshs 400 mn, in order to match the risk they insure,

   With both increased competition and regulation in the industry, there is need for insurance companies to come up with innovative products so as to increase insurance uptake. In addition, as highlighted in our H1?2016 Insurance Sector Report, there is need for companies to increase market awareness to grow Kenya?s low market penetration of 3.0% compared to countries such as South Africa, which is at 14.0%.

   Kenya Listed Insurance Company Results

   Kenyan listed insurance companies released their FY?2016 results recording an average core EPS growth of 3.4%. Sanlam and Jubilee Insurance registered growth in core EPS of 157.6% and 17.7%, respectively, while Kenya Re, Liberty and CIC recorded core EPS declines of 7.5%, 12.4% and 83.3%, respectively. Britam's EPS growth cannot be calculated since it registered a profit in FY?2016 from a loss in 2015.

   FY?2016 Insurance Sector Metrics
   	Insurance	Core EPS Growth	Net Premium growth	Claims growth	Loss Ratio	ROaE	ROaA
   1	Sanlam	157.9%	0.7%	5.2%	86.8%	1.8%	4.0%
   2	Jubilee	17.7%	18.9%	20.8%	79.4%	17.6%	0.2%
   3	Kenya Re	(7.5%)	(0.7%)	(6.0%)	54.1%	14.4%	9.0%
   4	Liberty	(12.4%)	0.9%	26.4%	70.9%	11.3%	1.3%
   5	CIC	(83.3%)	(6.5%)	(11.2%)	63.5%	13.5%	10.5%
   6	Britam	N/A	6.2%	(52.9%)	28.8%	14.0%	3.1%
   	Weighted Average	3.4%	6.4%	(5.5%)	61.6%	13.8%	3.9%
   	Average is market cap weighted

   Based on the above growth, we can bucket the listed insurance companies into 3 main buckets:

   • Fast growth insurance companies: Sanlam
   • Stable growth insurance companies: Jubilee and Britam
   • Negative growth insurance companies: Kenya Re, Liberty and CIC

   Following the release of all listed insurance companies? FY?2016 results, we shall be releasing a comprehensive sector report covering Kenya?s insurance sector on 24^th April 2017.

   Non - Financials

   During the quarter, non-financial large cap companies released their results posting weak performance.

   • Bamburi recorded a marginal 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.

   The relatively poor performance of the equities market for FY?2016 can be attributed to:

   • The enactment of the Banking Act (Amendment) 2015 that placed regulations on banks? loan and deposit pricing framework;
   • IFRS 9, which requires banks to increase Loan Loss Provisions, thus eating into the profits;
   • Weak investor sentiment on the back of (i) potential rate hikes in the US for the second half of 2016, and (ii) poor corporate governance in companies such as Uchumi Supermarkets, Mumias Sugar and Kenya Airways, which has dampened investor confidence and market sentiment for stocks in Kenya.

   Below is our Equities Recommendation Table;

   all prices in Kshs unless stated
   EQUITY RECOMMENDATION
   No.	Company	Price as at 30/12/16	Price as at 31/03/17	q/q Change	Target Price*	Dividend Yield	Upside/ (Downside)**	Recommendation
   1.	ARM	25.5	20.0	(21.8%)	31.2	0.0%	56.4%	Buy
   2.	HF Group	14.0	9.8	(30.4%)	13.8	9.2%	50.7%	Buy
   3.	Bamburi	160.0	165.0	3.1%	231.7	7.8%	48.2%	Buy
   4.	Kenya Re	22.5	19.2	(14.7%)	26.9	3.6%	43.7%	Buy
   5.	Stanbic Holdings	70.5	63.0	(10.6%)	84.7	7.9%	42.3%	Buy
   6.	Britam	10.0	10.3	3.0%	13.5	2.9%	34.0%	Buy
   7.	KCB Group***	28.8	34.8	20.9%	39.6	10.2%	24.2%	Buy
   8.	Sanlam Kenya	27.5	24.8	(10.0%)	30.5	0.0%	23.2%	Buy
   9.	Liberty	13.2	11.4	(13.6%)	13.9	0.0%	21.9%	Buy
   10.	NIC	26.0	26.5	1.9%	30.8	5.1%	21.3%	Buy
   11.	BAT (K)	909.0	849.0	(6.6%)	970.8	6.2%	20.5%	Buy
   12.	Safaricom	19.2	18.0	(6.0%)	19.8	4.7%	14.5%	Accumulate
   13.	I&M Holdings	90.0	87.0	(3.3%)	90.7	3.9%	8.2%	Hold
   14.	Barclays	8.5	8.0	(6.3%)	7.6	9.7%	5.3%	Hold
   15.	Co-op Bank	13.2	14.0	5.7%	13.6	5.7%	3.2%	Lighten
   16.	Equity Group	30.0	33.0	10.0%	31.3	7.7%	2.5%	Lighten
   17.	DTBK	118.0	116.0	(1.7%)	116.8	1.8%	2.5%	Lighten
   18.	Jubilee Insurance	490.0	489.0	(0.2%)	482.2	1.8%	0.4%	Lighten
   19.	SCBK	189.0	215.0	13.8%	157.7	9.2%	(17.5%)	Sell
   20.	NBK	7.2	6.5	(10.4%)	3.8	0.0%	(41.1%)	Sell
   *Target Price as per Cytonn Analyst estimates
   **Upside / (Downside) is adjusted for Dividend Yield
   ***For full disclosure, Cytonn and/or affiliates hold a significant stake in KCB Group, ranking as the 14th largest shareholder in the Group
   Accumulate ? Buying should be restrained and timed to happen when there are momentary dips in stock prices.
   Lighten ? Investor to consider selling, timed to happen when there are price rallies

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

   F. PRIVATE EQUITY

   During the first quarter, there was heightened private equity activity, with transactions being witnessed across all major investment sectors, combined with active fundraising being undertaken by major players in the African private markets space.

   On the fundraising front:

   1. Kenyan digital currency payments platform BitPesa closed a USD 2.5 mn (Kshs 256.5 mn) funding round. The round was led by US-based Draper Associates, an early stage venture-capital firm that encourages entrepreneurs to transform industries with new technology, and Greycroft Partners, alongside existing investors. This brings BitPesa?s total amount of funding raised to date to nearly USD 6.0 mn (Kshs 615.6 mn). For more information, see our Cytonn Weekly #6/2017.
   2. Mobile credit firm Tala, formerly known as Mkopo Rahisi, raised more than USD 30.0 mn (Kshs 3.1 bn) in series B financing from IVP, Rabbit Capital and existing investors including Lowercase Capital, Data Collective, Collaborative Fund, and Female Founders Fund (F3). For more information, see our Cytonn Weekly #8/2017.
   3. Actis, a leading growth markets investor, raised USD 2.8 bn (Kshs 289.0 bn) in capital commitments for its fourth energy-related fund surpassing the USD 2.0 bn target. See our Cytonn Weekly #10/2017.
   4. Dutch PE firm DOB Equity targets to double its Kenyan investment portfolio this year. The fund is scouting for investment opportunities in Kenya where it already has stakes in eight ventures across sectors such as retail, agribusiness, education, and energy. See our Cytonn Weekly #11/2017.
   5. Nairobi-based private equity firm Catalyst Principal Partners has raised USD 103 mn (Kshs 10.6 bn) from investors as it eyes more acquisitions of medium-sized companies in the region. Catalyst plans to raise a total of USD 175 mn (Kshs 18.1 bn), which is an additional USD 72 mn, by the end of the year in their continued fundraising activities, which will be deployed over time to its various target 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 services.
   6. Spain-based Mediterrania Capital Partners revealed its plans to raise up to USD 270 mn (Kshs 27.9 bn) capital for its third vehicle. The fund, Mediterrania Capital III, will focus on North African companies but is also expected to expand to select Sub-Saharan countries like Ivory Coast, Senegal and Cameroon. Its first close is scheduled for the end of the year.
   7. Home Afrika Limited, a Kenyan property developer, has announced plans to raise as much as USD 48.6 mn (Kshs 5 bn). The Nairobi-based company has picked Genghis Capital Ltd to offer between Kshs 2 bn and Kshs 5 bn to international investors in the first phase of the funds drive that?s set to begin in April. The developer is targeting 40% equity and 60% structured debt from the capital raising, which will be used to complete infrastructure works over the next three-years for its Nairobi, Kisumu and coastal mixed-use projects.

    

   Deals focused on the financial services, hospitality, energy and technology sectors, as expounded below:

   Financial Services

   The financial services sector continued to attract capital in Q1?2017, supported by the demand for financial services in the region. Some of the deals include:

   1. Dubai based Abraaj Group expressed renewed interest to buy into the remaining 50.1% Barclays? International stake in Barclays Africa Group. Abraaj may bid for up to 35.0% of Barclays Africa, which is valued at about USD 2.6 bn (Kshs268.3 bn) at market price. For additional details, see our Cytonn Weekly #2/2017
   2. CapitalWorks, a South African private equity firm, acquired 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. For more information, see our Cytonn Weekly #8/2017.
   3. TA Associates, a US-based global growth private equity firm, acquired undisclosed minority equity interest in Interswitch, an Africa-focused integrated digital payments and commerce company that facilitates the electronic circulation of money as well as the exchange of value between individuals and organizations. For more information, see our Cytonn Weekly #10/2017.
   4. 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.

   Hospitality

   Deals in the hospitality sector over the first quarter of the year include:

   1. Washington-based Carlyle Group and San Francisco-based TPG, are among a group of institutional investors set to acquire Kenyan coffee chain Java House in a transaction estimated to be worth USD 100 mn (Kshs 10.3 bn). Java is currently owned 90% by Washington-based Emerging Capital Partners (ECP). For more information, see our Cytonn Weekly #6/2017

   Technology & Telecommunication

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

   1. The Carlyle Group acquired, through its Sub-Saharan Africa Fund, a 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.

   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 quarter of the year include:

   1. The Carlyle Group is investing USD 587 mn to acquire international oil major Royal Dutch Shell Gabon.  The capital for the investment will be deployed from two of Carlyle?s funds - the USD 2.5 bn Carlyle International Energy Partners fund, which focuses on oil and gas businesses and Carlyle?s Sub-Saharan Africa Fund, a USD 698 mn vehicle that targets buyout and growth opportunities across the continent.
   2. French-owned oil and gas company Total has 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).
   3. A South African pension fund, Public Investment Corporation (PIC) has raised its stake in KenGen, Kenya?s largest power producing company, to 6.6% by acquiring an additional 85.1 mn shares in the open market whose current share price is at Kshs 6.6, which is equivalent to a 1.2% stake. The additional shares will place PIC as the second largest shareholder of KenGen after the Kenya National Treasury that holds a 70.0% equity stake. For more information, see our Cytonn Weekly #12/2017.

    FMCG Sector

   1. Nakumatt Holdings Ltd, Kenya?s biggest retail chain by sales and network presence, landed a strategic investor to inject Kshs 7.7 bn for a 25.0% stake, valuing the business at Kshs 30.8 bn, at a 0.9x EV-to-sales valuation, which is a 50% premium to the average Emerging Markets retail stores multiple of 0.6x. For more information on this deal, see our Cytonn Weekly #3/2017,
   2. Amethis Finance, a French based Private Equity (PE) fund focused on long term investment in Africa, and Metier, a South African PE fund, have jointly acquired a 40.0% stake in Kenafric Industries for an undisclosed amount. For more information, see our Cytonn Weekly #8/2017.
   3. Kenyan businessman Chris Kirubi, has 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 a premium to take total control of the Kenyan FMCG company from the exiting Tiger Brands. For more information, see our Cytonn Weekly #8/2017.

   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.

   Real Estate

   1. Cytonn Investments (?Cytonn?) purchased a 25% stake in Superior Homes (Kenya) Limited (?SHK?), a real estate developer valued at Kshs 4 bn. The purchase of 25% of the shares was from the current owners, the Henderson Family, making Cytonn?s stake, over a series of option transactions, worth Kshs 1 bn.

   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 mn (Kshs 5.4bn) 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,

   Exits:

   1. 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. 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. Some of the global firms that have been on the spotlight include TA Associates, Amethis Finance, Total, Abraaj Group, Caryle Group and Actis. The Carlyle Group has notably been actively involved in Sub-Saharan Africa, announcing acquisitions in three different sectors during the quarter. 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, we remain bullish on PE as an asset class in Sub-Sahara Africa. Going forward, the increasing investor interest and stable macro-economic environment will continue to boost deal flow into African markets.

   G. REAL ESTATE

   The real estate sector continues to enjoy lots of positive news and according to the 2017 Wealth Report - Kenyan Chapter by Knight Frank, high-net-worth investors are investing a bulk of their money in real estate, whose share is 28%, compared to 20% invested in personal businesses and 18% invested in equities and precious metals.

   However, the sector has its share of challenges, including:

   • Investors adopting a wait and see approach owing to the upcoming general elections in Kenya,
   • Low access to financing for majority of real estate developers in the region,
   • Land fragmentation and weak property rights, which render it costly to lay down support services and infrastructure. This results in limited scale of developments within the cities, which according to a report released by World Bank, Nairobi, which is the regional hub is trailing behind Dar-es Salaam, with a real estate value at Kshs 927.0 bn, against Dar-es Salaam?s Kshs 1.2 tn

   Regardless of this, there are efforts to bring understanding and high quality to the construction sector and the real estate sector at large. For instance, The Board of Registration of Architects and Quality Surveyors of Kenya (BORAQS) aims at improving on the quality of buildings in Kenya and easing the approval processes for developers through a five-year strategic plan.

   There were a number of other notable events in the Q1?2017, which include:

   • China State Construction Engineering Corporation (CSCEC) won the tender to construct Hass Towers by Hass Petroleum Group which is a mixed-use development to be developed in Upperhill, Nairobi. This is set be the tallest building in Africa,
   • The opening of the Two Rivers Mall in Ruaka in February, which is officially the largest shopping complex in the East and Central African region, with over 700,000 square feet of lettable office and retail space,
   • Stanlib Fahari I-REIT released earnings, posting earnings per unit of Kshs 0.6 for the 13-month period ending December 2016, having started operations in November 2015. The I-REIT delivered at total return of (38.9%), made up of 2.6% dividend yield and (41.5%) capital appreciation to investors in 2016. For more information, please see our Cytonn Weekly #12/2017

   We have hence witnessed increased activity in the sector in January 2017 across most themes with the exemption of the commercial sector as covered below:

   Residential Theme

   The residential theme continues to attract investments, owing to demand for housing especially in the Nairobi Metropolis. This is driven by an estimated housing deficit of over 206,000 houses per annum, in addition to the backlog of over 2 million units. Developers continue to provide housing for the mid and high end market segments even though demand is highest in the low-end market, in order to service this huge housing deficit through institutional grade real estate developments.

   Asking prices for detached housing units in Nairobi Metropolis increased by 4.7% compared to apartments at 2.5%. This can be attributed to preference for privacy and own compound as opposed to apartments, which are more attractive to investors. As we near the election period, we are likely to witness lower demand and transaction volumes as investors take a wait-and-see approach.

   i) Detached Houses- Top 3 High End Areas in Performance in Nairobi Metropolis
   Location	Average Price per SM	Average Rent per SM	Average y/y Price Change	Average Rental Yield	Total Return
   Karen	233,985	960	14%	3%	17%
   Kitisuru	301,218	1,140	-11%	6%	-5%
   Rosslyn	168,463	931	-2%	7%	5%
   Average	234,555	1,010	1%	5%	6%
   Karen had the highest change in asking prices in Q1/2017 driven by demand due to its up-market state, proximity to shopping centres and serene environment away from the Central Business District. Kitisuru has the highest asking rents at Ksh 1,140 per Square Metre on average due to its proximity to diplomatic offices in Gigiri

    

   ii) Detached Houses- Top 3 Lower Middle Income Suburbs in Performance in Nairobi Metropolis
   Location	Average Price per SM	Average Rent per SM	Average y/y Price Change	Average Rental Yield	Total Return
   South C	148,475	577	15.8%	2.0%	17.8%
   Langata	72,500	411	9.2%	2.4%	11.6%
   Buruburu	61,141	259	7.0%	5.1%	12.1%
   Average	94,039	415	10.7%	3.2%	13.8%
   Asking prices in South C and Lang?ata increased by 15.8% and 9.2%, respectively. This can be attributed to demand for housing by the employed middle income earners, due to proximity to Nairobi CBD and other business districts such as Upperhill.

    

   iii) Detached Houses- Top 3 Lower Middle Income Satellite Towns in Performance in the Nairobi Metropolis
   Location	Average Price per SM	Average Rent per SM	Average y/y Price Change	Average Rental Yield	Total Return
   Kitengela	74,027	311	4.9%	5.4%	10.3%
   Athi River	75,755	264	3.9%	4.2%	8.1%
   Ruai	51,148	421	1.3%	4.1%	5.4%
   Average	66,838	304	-0.7%	4.2%	3.4%
   Asking prices in Kitengela and Athi River increased by 4.9% and 3.9%, respectively. This can be attributed to affordability of housing in these areas with the price of a 4-bedroom townhouse ranging from Ksh 8- Ksh 15 Mn

    

   iv) Apartments- Top 3 Areas in Performance in Upper Middle Income Areas in the Nairobi Metropolis
   Location	Average Price per SM	Average Rent per SM	Average y/y Price Change	Average Rental Yield	Total Return
   Kilimani	112,604	799	10.7%	7.0%	17.7%
   Westlands	93,306	415	2.6%	2.3%	4.9%
   Riverside	106,313	474	-1.8%	5.7%	3.9%
   Average	102,202	574	-1.1%	4.8%	3.7%
   Asking prices in the Upper-Middle Income market declined by 1.1% in Q1/2017. Kilimani area had the highest price increase at 10.7% driven by its proximity to business districts such as Upperhill, Kilimani and Nairobi CBD

    

   v) Apartments- Top 3 Areas in Performance in Lower Middle Income Areas in Nairobi Metropolis
   Location	Average Price per SM	Average Rent per SM	Average y/y Price Change	Average Rental Yield	Total Return
   Dagoretti	115,076	685	8.6%	6.9%	15.5%
   South B & C	107,581	504	10.0%	4.3%	14.4%
   Komarock	75,508	420	10.4%	3.7%	14.1%
   Average	92,398	461	5.2%	5.0%	10.2%
   Asking prices in the Lower Income market in Nairobi Metropolis increased by 5.2% in Q1/2017. Komarock and South B&C recorded the highest price change at 10.4% and 10.0%, respectively. South B &C are attractive to middle income earners due to proximity to Nairobi CBD and good roads, while Komarock is more affordable with the average price per square metre at Ksh 75000

    

   vi) Apartments- Top 3 Areas in Performance in Lower Middle Income Areas in Nairobi Satellite Towns
   Location	Average Price per SM	Average Rent per SM	Average y/y Price Change	Average Rental Yield	Total Return
   Athi River	59,922	340	12.5%	5.2%	17.7%
   Kitengela	60,977	293	11.4%	4.4%	15.8%
   Mlolongo	64,685	337	-3.9%	4.1%	0.2%
   Average	64,526	342	1.6%	4.5%	6.1%
   Asking prices in the Lower Income market in Nairobi's Satellite Towns increased by 1.6% in Q1/2017. Athi River and Kitengela recorded the highest price change at 12.5% and 11.4%, respectively due to affordability of housing in these areas

   We foresee the opportunity in this subsector being the lower income segment of the market. The gap is brought about by the fact that most investors in the sector provide housing for the mid and high-end market leaving the lower income segment to be catered for by the government. The biggest challenge has been high land prices and cost of construction, which is passed to the end user and financing with a mortgage to GDP rate of just 2.4% in Kenya, and only 22,000 mortgages issued in Kenya despite the capping of interest rates last year. Most home buyers are opting for other cheaper, flexible payment plans such as off-plan sales and instalment buying, and also financing solutions such purchase  of real estate through SACCO?s.

   Commercial Sector

   The commercial office sector?s performance declined evidenced by a decline in office rents and occupancies by 1.0% and 2.0%, respectively. This is despite an increase in the number of corporations announcing plans to set up offices in Nairobi, namely Johnson and Johnson, Power China and Boeing. A summary of performance of the various commercial real estate themes is given below:

   A: Offices

   The commercial office market softened slightly in the first quarter of 2017 with average asking rents and occupancy rates declining by 2.0% from their levels in the last quarter of 2016. The prices remained largely flat increasing slightly by 2.0%, which led to a decline in rental yields by 3.0% from 9.4% in the last quarter of 2016 to 9.1%. This is mainly attributable to increased supply with the businesses moving to the newly completed office buildings such as the UAP ? Old Mutual Towers and their own office buildings.

   Summary of Commercial Office Returns in Nairobi Over Time
   Year	2011	2013	2015	2016	Q1 2017	? (2013)	? (2015)	? (2016)	? Q1 (2017)
   Occupancy (%)	91%	90%	89%	88%	86%	(1%)	(1%)	(1%)	(2%)
   Asking Rents (Kshs/Sq. ft)	78	95	97	103	102	22%	2%	6%	(1%)
   Average Prices (Kshs/Sq. ft)	10,557	12,433	12,776	13,003	13,211	18%	3%	2%	2%
   Average Rental Yields (%)	10%	10.%	9%	9%	9%	2%	(7%)	1%	(3%)
   There was slight softening in the market in the first quarter of 2017 with occupancy and rents declining by 2.0% each from the last quarter of 2016. This is attributable to increased supply in the market with several businesses moving to the newly completed office spaces.

   In terms of submarket analysis in Nairobi, Gigiri, Karen and Westlands were the best performers in the quarter due to superior locations allowing them to charge premium rents. These locations recorded on average rental yields of 12.9%, 10.4% and 9.9%, respectively. Nairobi CBD was the worst performing submarket with rental yields of on average 8.4%. This was mainly due to poor location because of inadequate space, traffic and the general feel of the area. This resulted in several companies relocating from the CBD, such as Ecobank and Keninvest, and moving to more attractive business districts such as Westlands and Upperhill, respectively. If no action is taken to revamp the zone as a commercial office zone, it is likely to be relegated to performing largely a retail function.

   Summary of Commercial Office Performance in Nairobi by Nodes
   Area	Price / SQFT ?Kshs?	Rent / SQFT ?Kshs"	Occupancy (%)	Rental Yields (%)
   Gigiri	14,000	130	70.0%	12.9%
   Karen	14,500	124	96.7%	10.4%
   Westlands	13,000	103	83.0%	9.9%
   Parklands	13,167	104	85.0%	9.8%
   Kilimani	13,800	105	87.6%	9.3%
   UpperHill	13,864	108	83.3%	9.1%
   Msa Road	11,643	86	76.7%	8.6%
   Nairobi CBD	11,750	87	92.7%	8.4%
   Average	13,194	101	86.4%	9.1%
   Nairobi CBD was the worst performing region with average rental yields of 8.4%. This is attributable to inadequate space in the area and increased retail activity hence making it lose the exclusive high-end feel sought after in prime commercial office locations.

   B: Retail

   In the first quarter of 2017, retail market performance remained unchanged from the last quarter of 2016. The sector recorded average rental yields of 10.2% and an average annual occupancy of 83.1%. The rents charged averaged at Kshs 190 per square foot in Nairobi. In terms of submarkets, Karen, Ngong Road and Westlands were the best performing markets due to prime locations near high-end population and companies and ease of access to these areas. These areas recorded average rental yields of 13.4%, 12.3% and 11.9%, respectively. The worst performing submarkets were Eastlands and Satellite Towns, which recorded average rental yields of 7.5% and 7.3%, respectively.

   Summary of Retail Sector Performance by Nodes in Nairobi
   Location	Rent / SQFT ?Kshs?	Occupancy (%)	Yield (%)
   Karen	230	90.0%	13.5%
   Ngong Rd	215	87.5%	12.3%
   Westlands	223	88.2%	11.9%
   Kiambu Rd	222	75.0%	10.9%
   Kilimani	188	86.7%	10.7%
   Thika Road	188	82.5%	10.0%
   Mombasa Rd	148	83.7%	8.1%
   Eastlands	148	77.0%	7.5%
   Satellite Towns**	143	77.5%	7.3%
   Average	190	83.1%	10.2%
   Karen is the best performing submarket, with a yield of 13.5% and an occupancy of 90.0%. This is attributable to the premium for class charged on their rents and lower competition from small scale retailers present in low end areas **The Satellite towns include but not limited to Ngong, Rongai, Kitengela

   C: Industrial

   In the first quarter of 2017, the industrial theme remained largely flat recording average yields of 5.8% on average, similar to the last quarter of 2016. Rental rates averaged at Kshs 33 per square foot with selling prices of Kshs 5,904 per square foot and a high uptake of 82.6%. In submarket analysis, Baba Dogo was the best performing market with average rental yields of 7.1% and a high occupancy of 93.8%. This can be attributed to the high demand for warehousing space in the area due to presence of many manufacturing companies in the area as well as proximity to Thika Road making it easily to accessible both from the CBD and Central Kenya. Mombasa Road is the worst performing submarket with rental yields of 4.3% attributable to traffic congestions along Mombasa Road.

   Summary of Industrial Market Performance in Nairobi by Nodes
   Location	Price / SQFT "Kshs"	Rent / SQFT "Kshs"	Occupancy %	Rental Yields %
   Baba Dogo	6,125	39	93.8%	7.1%
   Industrial Area	7,600	43	83.3%	6.4%
   Syokimau	5,925	38	84.0%	6.4%
   Athi River	3,977	24	75.6%	5.0%
   Mombasa Road	7,824	32	86.1%	4.3%
   Grand Total	5,904	33	82.6%	5.8%
   Baba Dogo was the best performing market with average rental yields of 7.1% and a high occupancy of 94%. This can be attribute to the high demand for warehousing space in the area due to presence many manufacturing companies in the area as well as proximity to Thika Road making it easily to accessible both from the CBD and Central Kenya

   Land

   In the first quarter of 2017, land has continued to attract developers and investors. The performance of the theme in the first quarter of 2017 is as outlined below:

   All Values in Kshs Millions (mn) unless stated otherwise
   Land Appreciation Rates in the Nairobi Metropolitan Area
   Location	2011 Price	2015 Price	2016 Price	25 percentile			75 percentile	5-yr CAGR
   Nairobi Suburbs
   Commercial Areas	191	389	516	376			579	22.4%
   High Rise residential areas	46	80	97	68			118	17.7%
   Low Rise Residential areas	65	114	133	85			172	16.5%
   Satellite Towns
   Serviced Land	6	13	15	10			19	24.5%
   Unserviced Land	9	14	17	12			22	17.6%
   Market Average	63	122	156	110			182	19.7%
   Serviced land in Satellite towns have the highest appreciation rates as they rose from a low base and the servicing increases their attractiveness to the buyers. Land in commercial areas have also witnessed rapid appreciation as a result of limited supply and increased demand

   A number of activities on the transactions and legal fronts affected the land sector as outlined below:

   Land Transactions

   • Rendeavour, the group behind Tatu City, expanded the master plan by buying an additional 2,500-acres of land adjacent to the master plan. Initially on 2,500-acres, the new master plan will now be 5,000-acres, and,
   • E-Farm Housing Co-operative Society deepened its investment portfolio with the acquisition of 300-acres of land in Embu as part of its growth and diversification plan targeting investors who want to invest in agribusiness. The society also endeavours to provide 5,000 low-cost houses in Konza, Juja, Nanyuki, with a target price of Kshs 1.0 mn for a one-bedroom unit.

   Legal Environment

   • In January, there was opacity surrounding the issuance of title deeds at the coast, where all title deeds issued after 2013, against Land Act, 2012 were to be declared invalid, however the ruling was made in favour of land owners, where the judgement issued stated that the transactions that had been completed would not be affected by the judgement,
   • There were also legal battles on land ownership, case in point being the 20-acre land parcel in Kasarani believed to belong to Uchumi Supermarkets. These cases limit the land?s development capabilities and thus the government needs to lay down proper structures in the lands ministry to ensure seamless transactions in land,
   • Actis Limited filed a suit seeking a refund of Kshs 1.95 bn and accrued interests from East Africa Breweries Limited (EABL) after a deal gone sour. The former had offered to purchase 15-acres of land owned by the latter through a subsidiary, Kasarani Investment Holdings Limited (KIHL). The dispute arose after Actis issued a rescission notice, following a request by EABL, which was yet to deliver on its end of the deal, for an extension of time, having not secured corporate approvals to build its headquarters on the property. For a legal summary of the matter, see a note from our legal team: See EABL-Actis Legal note
   • The High Court stopped the Kenya Revenue Authority (KRA, or its agents, servants, or employees from implementing laws demanding that Capital Gains Tax to be paid before property is transferred simultaneously with the payment of Stamp Duty following a lawsuit by the Law Society of Kenya (LSK).

   Hospitality

   The Kenyan hospitality sector continues to witness increased investment by both local and global players. Tourism in the country is recovering from a five-year dip evidenced by a (5%) growth of Total RevPAR between 2011 & 2016. These findings are documented in the Cytonn Hospitality Report 2016 released in October 2016. This has attracted investors specifically in Q1?2017, including the following:

   • Meridian Hotel and Mombasa?s Creekside Hotel adopting the Best Western International brand bringing the total number of its local franchise to 4,
   • Sarova Group of Hotels signing a contract to manage the 146-key Sarova Woodlands in Nakuru, which is set to open to the public in May 2017,
   • Urithi Housing Cooperative announced its plans to enter the tourism market through provision of 200 one and two-bedroom furnished units in Mombasa, and,
   • Radisson Blu announced that it will open four more hotels in Kenya, including Park Inn, which was scheduled to be opened in March 2017.

   We expect that there will be continued spending in hotels this year due to:

   • Increase international conferences indicated by the steadily increasing number of local and international delegates over the past five-years at 3.3% and 20.9%, respectively, as per the KNBS 2016 Economic Survey,
   • Increased demand for hotel facilities prior to the election period, and,
   • Growth of the number of tourist in Africa which a report by the United Nations World Tourism Organization (UNWTO estimates it to be at 8% in 2017 up from 58mn in 2016.

   Listed Real Estate ? REITS

   During the quarter, Fahari I REIT?s share price declined 5.6% to close at Kshs 11.0 per unit, which is a 45% decline from Kshs 20 at the time of the listing. The prices for the instrument have remained low 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 currently engulfing the sector given the poor performance of Fahari and that the Fusion REIT, dubbed Fusion Real Estate Development (FRED).

   Also in the month, Stanlib Fahari i-REIT released its earnings. The entity recorded a net profit of Kshs 109 mn and announced a dividend pay-out of 92.6% translating to Kshs 0.5 per unit and hence 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 as direct investment in real estate delivered higher returns, with retail buildings like the underlying assets for the REIT offering yields of 10.1% p.a. We hence expect the REIT to continue trading at low prices and in low volumes. See Cytonn Weekly #12/2017

   
   
   We expect the real estate sector?s performance to remain stable in the year with prices remaining at the current levels as investors adopt a wait-and-see approach.
   
   Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only, and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.