Period: September 21 to 27, 2015

Private Equity Financing.

22/9/2015: www.building.co.ke Blog by Barrack Obaga.

• In a situation where a Developer is looking for financing but is unable to acquire financing from a commercial bank, they have an option of getting into a joint venture with a private equity investor.
• In property development and investments, there are three crucial ingredients that need to be taken into account: Land, finances and expertise that go into successful development.
• Private Equity – Finance that is provided in exchange for a share or equity stake in a private company or business that is regarded to have a high potential for growth.
• Private equity is combined with debt financing (Commercial loans from banks) in order to build and invest in companies. The aim of private equity financing is to drive growth and minimize inefficiencies of mature companies that have demonstrated the high potential for growth.

How does private Equity Finance Work?

• Joint ventures is a vehicle utilized by private equity funds whereby PEF (Private equity firms) fill in the financial gap after a developer has already pooled the land, professional and business expertise and other finances.
• PEF’s in real estate prefer to invest in projects where they feel they will have a better management, understanding and control of risks associated with the development.

Growth of Private Equity

27/9/2015: Cytonn Weekly Report No. 38

• Kenya has seen a high and steady inflow of funds through private equity, being channeled through real estate projects.
• Private equity has outperformed all the asset classes over the last five years and it is expected to continue with its strong performance in the next 5-10 years.

Property Investment Continue To Be a Safe Bet

21/9/2015:Daily Standard, page 31

Pension Scheme operators have been advised to invest more in the property market unlike in Bonds bills and equity, off shore and alternative markets, because in property investments the value never depreciates.

Cement Prices Remain Unchanged Thanks To Increased Competitors

24/9/2015:Daily Nation, DN2 Magazine, page 2

• Stiff competition between cement producers has seen the commodity’s price remain the same, even as the shilling depreciates, offering deprive to developers.
• In Nairobi, Nakuru and Nyeri, a 50kg bag is retailing at Ksh 650/= down from Ksh 680/= at the beginning of the year.

HF Group Set To Build 1,272 Housing Units In Nairobi City

24/9/2015: Daily Nation, DN2 Magazine, page 2

• Integrated Property and finance solution provider HF Group (Formerly Housing Finance Company) through its subsidiary HF Development and Investment Limited (HFDI) is set to construct 1,271 housing units in Nairobi’s Komarock Area. The project christened Komarock 5C is the second largest housing project – after Nyayo Estate Embakasi – to be undertaken in Nairobi in the last 10 years.
• It will consist of two- bedroom units that will sell at ksh5.75 million and three bedroom ones at Ksh 6.75 m million on a 23.5 acre piece of land. Five acres have been set aside for a private school.

New payment model for homes

24/9/2015:Daily Standard,Home & Away Magazine, page 9 and Cytonn Weekly Report no. 38

• A developer has introduced a new payment model that gives home buyers up to three years to pay.
• Superior homes Kenya developers of the Green Park housing project in Athi River, will allow purchasers to pay at least 10% deposit of the selling price, another 10% a month later and the remaining 80% in the next 36 months, with the price remaining fixed over the period.

Rental Income Tax Collection

27/9/2015:Cytonn Weekly Report no. 38

• KRA will in the next few weeks collect data relating to buildings and their owners to establish their rental income tax status.
• Many property owners have failed to comply due to several factors i.e. Low levels of education, Ignorance of tax

Impact on high interest rates on the Kenya Economy and Investments

27/9/2015:Cytonn Weekly Report no. 38

• The government issued a 1- year bond at a yield of 19.1% and the 91 – day T- bill was at 18.6%.
• With the significant increase in yields on government securities and bank deposit rates, the question is how this will impact the economy and the investments environment in the country.
• With the current inflation rate in the country being stable, it’s an indication that the current increase is driven by other factors and mostly the pressure to finance the budget for 2015/2016 fiscal year. In order to meet the Ksh 219.0 bn target to fund the 2015/2016 fiscal year budget, the government is slowing down its appetite for debt, which will keep interest rates high and crowd out the private sector.

Effects of High Interest rates

• Increased in cost of borrowing
• Slowdown in growth of economic growth because of expensive borrowings
• Increase in the non –performing loans.
• Slower Corporate earnings
• Slowdown in the stock market
• Real estate might be negatively affected owing to higher costs of funding projects.
• Positively, the environments present an attractive entry point for foreign investments.

Recommendation to Investors in this environment.

• Increase asset allocation to short-term interest earning securities i.e. Government securities, money market instruments
• Increase asset allocation to real estate as this ensures stability in the portfolio return given the elasticity between inflation and re-pricing of rental incomes.