Treasury removal of Nema, construction levies fails to take off

PERIOD: August 1 – 7, 2016

01/08/2016 : The Business Daily, Pg. 6

• Investors will continue paying the punitive fees for environmental audits and levies to the construction regulator for their projects despite the treasury abolishing the charges in June
• While the bulk of tax measures took effect after the announcement of the budget statement on June 8, the project fees have remained unchanged making the it costly to build homes, power plants and office towers
• The Nema and NCA recall that there’s no legal backing for the removal of levies and their budgets and hinged on the levies and fees
• Nema had previously in September 2013 removed a flat rate charge and introduced a minimum assessment fee of 0.1pc of project cost, without an upper limit. The regulation removed the max limit of sh1m that existed previously, making it punitive for large-scale real estate developers
• Developers whose project exceeded sh5m also pay a levy of 0.5pc of the value of the contract before they can start work to the National Construction Council
• Treasury secretary Henry Rotich reckons the Environment and lands ministries need to change the current laws to scrap the environment audit fees and construction levy that has hit developers of mega projects hard
• Developers had welcomed the removal of the fees last month and will now be forced to shoulder the burden for new projects
• For instance, the developers of Kenya’s first coal-powered plant in Lamu had to part with sh200m as EAI fees based on the project value of sh200b. “Treasury approved our 2016/17 budget to be funded to the tune of sh800m from the license fees,”Nema director-general Geoffrey Wahunga said, defending the fee collection.
• This means the state-backed agency would suffer cash shortfalls should it stop collecting the fees, affecting its operations to ensure environmental safety
• Nema requires projects such as mineral processing, oil drilling, infrastructure development, real estate and waste disposal to be licensed before their implementation. Read more

Oman real estate group comes calling with sh1bn villas for Kenya’s super-rich

02/08/2016 : The Business Daily, Pg. 8

• An Oman-based real estate group is in the country scouting for Kenyan buyers of its villas, which is selling for as much as dh1b each
• The group is targeting wealthy Kenyans in their road shows which start today, reflecting the growing profile of the country’s super-rich
• Executives of the property development, Al Mouj Muscat, say they are mainly keen on selling to Kenyans residential units in the expansive sh300b project
• The CEO said that they have a lead on 200 locals they will be meeting over the next few days. The prospective buyers are politicians and business people
• Residential units in the project include apartments priced from sh25.6m, with villas being the most expensive at sh1b
• This is the first time a major real estate project from Oman is looking for Kenyan buyers, following developers in Dubai who have been the most aggressive in selling properties to locals
• The government of Oman, which owns the project on a 50/50 basis with Dubai-based conglomerate Majid Al Futaim, has offered many incentives to prospective buyers. These include residency for owners and their immediate family , zero personal income tax and freehold ownership of the properties
• For those buying the properties for investment, Al Mouj Muscat estimates they could get a net tax-free rental yield of seven to nine pc pa
• Built as a luxury waterfront lifestyle complex, Al Mouj Muscat features homes, public parks, an 18-hole link golf course, a 400-berth marina and hotels including one managed by global hospitality group Kempinski. It is located about 20 km west of Muscat City close to the airport. The project is 40pc built and is expected to be complete in 2025
• The project sponsors recently booked purchase orders amounting to 1.5b from Tanzania’s rich individuals after a road show in the neighboring country.Read more

Demolition of unsafe houses to resume tomorrow

03/08/2016 : The Daily Nation, Pg. 10

• Nairobi county government will resume demolition of unsafe houses after a break of one  month
• The demolition had stopped following the breakdown of the National Youth Service excavators
• This comes after a five-storeyed building collapsed in Nairobi’s Kariobangi South yesterday morning
• The demolition of unsafe buildings in Nairobi had been hyped after the collapse of a building in Huruma
• The urban planning executive inn City Hall said they are consulting with the KDF
• to give them the machinery as theirs is powerful and can bring down the tall unsafe buildings
• A new audit on 3000 buildings found 184 of them unsafe.

House prices going up slightly in the second quarter of 2016

04/08/2016 : The Standard, Home & Away, Pg. 2

• House prices in Kenya recorded a marginal, but stable increase in the second quarter of 2016, portraying broad market stability in the sector, a new report shows
• According to the Kenya Bankers Association- Housing Price Index, the average cost of pricing increased by 1.74 pc over in quarter two, compared to 1.4 pc recorded in the first quarter of the year
• This price movement is attributed to the market demand and supply that has remained unchanged from the previous quarter
• KBA director of research and policy Jared Osoro said there was a sense of taste consistency among buyers.Read more

Cytonn breaks ground for a sh5.5b housing project

04/08/2016 : The Standard,Home & Away,Pg. 2

• Real estate firm Cytonn on Monday broke ground for the construction of a sh5.5b gated community housing project in Karen, Nairobi.
• Known as Situ Village, the development will comprise of four-bedroom villas each on half an acre piece of land.
• The whole development will sit on 29 acres bordering the expansive Ololua forest
• The construction of the development will be undertaken in 3 phases within two and a half years
• It boosts close proximity to various retail stores, shopping malls, the largest international schools in Nairobi and easy access to outdoor entertainment points.

Construction of two-kilometer Funzi Bridge

04/08/2016 : The Standard,Home & Away,Pg. 2

• Sh70m will be spent on the construction of a two-kilometer bridge that will see Funzi Island connected to the south coast mainland
• The island, known for animal sanctuary, tourism and fishing, has 3000 residents  who live in impoverished conditions as they lack proper access to the mainland
• Besides three tourist hotels the Island does not have key facilities like hospitals markets and proper housing units
• It is inhabited by ethnic Shirazi people
• The construction which is being undertaken by the central government, will take one year and on completion, the bridge will be the second longest in Kenya after the Nyali Bridge in Mombasa. Read more

Superior homes to list on the Nairobi securities exchange

04/08/2016 : The Standard, Home & Away, Pg. 2

• Superior homes Kenya, developers of Green Park estate in Athi River, has announced plans to list on the Growth Enterprise Market Segment(GEMS) of the Nairobi securities exchange
• The company has appointed Burbidge Capital as advisors for the listing, PKF as reporting accountants and A&K as transaction lawyers
• Superior homes managing director Ian Henderson said the money that will be raised from the market will be used to start new real estate projects in new locations following the successful model deployed at the 163-acre project in Athi river
• The company intends to engage county governments and other partners on development of real estate projects in other parts of the country
• Apart from residential homes the company is also constructing a 50-room luxury hotel at Lake Elementaita
• Nairobi securities exchange CEO ,Geoffrey Odundo said the company’s decision to go public showed its long term commitment to the Kenyan market
• He also said that the company’s intention to list is a clear indicator that Kenyan companies are ready to capitalize on the available resources while not shying away from robust governance and reporting practices
• The intention to list is yet another pointer of the great confidence that Kenyan companies continue to have in our capital markets as they seek to raise capital to facilitate their various strategic initiative, said Odundo
• Head of Burbidge capital said Superior Homes is a solid company with a clear focus on growing its business and expanding its footprints in Kenya: “it offers investors a strong opportunity to reap the benefits of the lucrative real estate sector.Read more

More developers seek real estate financing through capital markets and this week, Superior Homes announced plans to list on the NSE, while market statistics point to sustained housing demand through increased mortgage uptake

07/08/2016 : Cytonn Weekly  report no.31

• The capital-intensive nature of real estate development has caused many developers to seek funding from local and international investors through the capital markets in Kenya.
• Superior Homes Limited, the real estate developer behind the Green Park Estate in Athi River, announced plans to list on the Growth Enterprise Market Segment (“GEMS”) of the Nairobi Securities Exchange (“NSE”), subject to regulatory approvals.
• The funds raised will be used for expansion of their real estate deal pipeline, including construction of a 50-room luxury hotel in Elementaita. This will make it the second real estate company to list on the bourse, after Home Afrika, which listed in 2013.

Real estate firms are increasingly using the capital markets to raise capital, giving (i) investors the opportunity to invest in real estate development firms, and (ii) providing avenues for pooling resources to finance development projects. Other firms that have done this recently include:

1. Stanlib, which issued an I-REIT in October 2015 – Funds were used to acquire the Greenspan Mall in Donholm for Kshs 2 bn, and;
2. Fusion Capital’s ongoing issuance of a Kshs 2.3 bn D-REIT where Funds will be directed towards development of the Greenwood Park in Meru.

• Superior Homes looking to list on the NSE, combined with the fundraising activities of Stanlib and Fusion, all are indicators of the financing opportunities available in the capital markets that real estate developers can take advantage of. However, the track record for real estate issuances have not been good so far, notwithstanding the fact that returns and prospects in real estate remain very attractive:

1. The Stanlib I-REIT achieved only 29% subscription, and is now trading at Kshs 16.35, 18.25% below its issuance price of Kshs 20,
2. Home Afrika went public in 2013 at Kshs 12.0 per share and is now trading at Kshs 1.25, which is 89.6% below its issuance price, and,
3. The currently ongoing D-REIT offering by Fusion has been extended twice indicating failure to raise required amounts. There is little clarity on its closure which was scheduled for 4^th August

• For a successful offering, Superior Homes will need to address the unique challenges that the past offerings have faced.
• Market statistics continue to indicate sustained demand for residential houses, but most of the demand is in the low to mid-income sector. As per a report released by CBK, there has been a marginal increase in mortgage uptake in 2015, reaching 24,458 loans as at December 2015, up from 22,013 in December 2014, recording an 11.0% annual growth compared to a 10.7% increase in 2014.
• The increased uptake was despite the increase in average interest rates from 15.8% in 2014 to 17.1% in 2015. There was an increase in the average mortgage loan size from Kshs 7.5 mn in 2014 to Kshs 8.3 mn in 2015. The trend of increase in mortgage uptake is likely to continue upwards, driven by high demand from the growing middle class and infrastructural development, which has opened up satellite towns for development, encouraging first time home owners to purchase residential units.
• The CBK report’s growth trend is in line with two more reports that were released recently:

1. KBA Housing Price Index indicates that the average cost of houses across the country increased by 1.74% in Q2’2016 compared to a 1.4% rise in Q1’2016. The index attributes the growth to demand and supply dynamics, a stable macroeconomic environment with a growing financial sector and infrastructural development enabling gradual opening of new areas for development, and;
2. Hass Consult’s Q2’2016 Property Report, which indicated a 3.6% q/q increase in property prices over house rents, which increased at 1.5%. The increase is largely in high-end areas such as Karen and satellite towns such as Athi River, and is more so for detached houses compared to apartments.

• However, with the high interest rate environment in Kenya, increasing prices of real estate units means higher monthly payments for a mortgage and may lockout some buyers. A Kshs 8.3 mn mortgage at 17.1% for 20 years, for example, will require the homeowner to pay instalments of Kshs 122,376 per month. Assuming they can only spend a maximum of 40.0% of their income on mortgage repayment, the household income required to sustain this would be Kshs 306,000 per month.
• This indicates that a majority of Kenyans would be locked out of bank-financed housing. Prospective homeowners can however explore various options to lower the cost of home ownership, such as obtaining Sacco loans, fixed-rate mortgages, off-plan purchases or even tenant purchasing. Read more