TICAD Gave Boost to Hospitality Sector- #CytonnReport

Real estate continues to be one of the key drivers of growth in the economy. Despite the sector being lucrative, capital raising into the sector has remained a challenge and that is why we have seen many developers seek alternative sources of capital. In the month of August, we saw two firms seek to fund raise from the capital market markets through the issuance of REITs and Equity listings prospects.

According to a report by Cytonn Investments, Superior Homes announced plans to list on the Growth Enterprise Market Segment (GEMS) of the NSE, subject to regulatory approval. If the bid succeeds, the developer behind the Green Park Estate in Athi River Machakos County will be the 2nd real estate company to list on the bourse after Home Afrika, which listed in 2013. Superior Homes has a good track record in real estate development and we think the company might be able to list if they are to get the timing right.

Fusion Capital failed to list its REIT in the market as it did not meet the threshold for listing of a minimum of 7 investors and 50% subscription rate. The REIT recorded a 37.9% subscription rate raising Kshs 873.8 million out of the targeted Kshs 2.3 billionn from only 4 investors. Fusion Capital will, therefore, have to raise additional capital through private placement and only use debt as a last resort to fund a mixed-use development in Meru. Cytonn weekly Real Estate Listings in Kenya believes that the successful fundraising from the market shall be supported by Institutional support before launching, increase product-knowledge to the wider market, improve corporate governance around issuances, and provide a minimum return guarantee to the buyers and clarity regarding exit strategies to build investor confidence.

Read: Africa Optimistic of Future in Partnership with TICAD

Innovation into the real estate sector continues and the adoption of the use of Alternative Building Technology (ABT) for construction is likely to increase in future. In August, China Wu Yi broke ground on construction of a Kshs 10.0 billion factory along Mombasa Road Kenya. In the past, uptake of ABT in Kenya has been low due to insufficient information of technology and mistrust on its quality and durability. However, in our view, use of the technology will solve the undersupply of the residential housing through enabling faster construction and at lower costs. The use of pre-cast blocks significantly reduces construction periods by up to 50 percent as the pre-cast blocks come ready for assembly, while the use of EPS lowers construction costs as its use results in lighter structures making them ideal for construction of high rise buildings. Through sensitization, uptake for this technology will enable mass housing construction and meet the housing needs of the Kenyan population.

As an incentive to increase development and thus bridge the housing gap in the country, Parliament has tabled a proposal that seeks to lower the number of units required to qualify for a tax rebate from 1,000 to 400 units. Through amendment of The Finance Bill 2016, developers will pay 15.0% in income taxes for constructing at least 400 residential units annually. By doing these, we expect increased investment in the residential sector, as developers seek to benefit from the incentives issued. The number of units is much lower and we have a couple of developers who are set to benefit from this.

On the statutory front, projects will now pay for environmental audits based on their risk level after NEMA disregarded the Treasury’s declaration abolishing these charges in June this year. Investors have since September 2013 been paying a minimum of Kshs 10,000 or 0.1 percent of project cost without an upper limit, making it costlier for large projects. Under new regulations, developers will pay a maximum of 0.1 percent of project costs but within the following price ranges:

High-Risk Projects – These include mega real estate projects, roads, large hotels, mining and energy plants and will attract a maximum of Kshs 40.0 mn and a minimum of Kshs 50,000

Medium-Risk Projects – These include hotels less than 150-bed capacity, petrol stations, shopping centers, office blocks and stores not exceeding 10,000 square meters. The developers will pay a minimum of Kshs 20,000 and a maximum of Kshs 10.0 million, while

Low-Risk Projects – These include churches, bus parks, and stadia, which will attract a fee of between Kshs 10,000 and Kshs 3.0 million.

The reported further noted that the hospitality sector received a boost in August as hotels recorded full bookings when Nairobi hosted the Tokyo International Conference on African Development (TICAD). The growing MICE tourism in Nairobi has been driven by its stature as a regional hub, infrastructural development, and presence of multi-national firms in the country. We expect increased investment in the sector driven by improved security, lifting of travel advisories and improving infrastructure. Construction of a double-decker highway linking JKIA to the Nairobi-Nakuru Highway is likely to create opportunities for hotel development. The elevated dual-carriageway will ease access to Westlands and Rironi areas for internationals travellers and reduce snarl-ups along the Mombasa Highway. In addition, the government has allocated Kshs 1.5 billionn for promotion and marketing of Kenya’s tourism, which if well-utilised will increase the profitability of the sector.

Read: First Phase of Expansion Work on Ngong Road Unveiled

Property transactions resumed following the appointment of Land Control Boards (LCB) in Nairobi, Kajiado, Kiambu, Nakuru and 6 other counties. The Government had disbanded all LCBs on corruption allegations in April 2016. The move will enable property dealers and developers obtain consent for sale, transfer, partitioning and amalgamation of agricultural land, and continuity of projects, which would have otherwise stalled. However, transactions are still frozen in 21 other counties.

Cytonn Investments reported that they expect increased development activity as developers are likely to take advantage of the recent introduction of a cap on interest rates at 4 percent above the base rate as well as the tax incentives for development of housing units. In addition, the rise in property prices is likely to slow down due to reduced cost of borrowing for development.