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Rental Yields Boosted Real Estate In 2022

BY Cytonn Investments · January 4, 2023 01:01 pm

KEY POINTS

The equities market performance was driven by losses recorded by large-cap stocks such as Safaricom at 36.7%, Bamburi at 17.5%, as well as banking stocks such as KCB Group, Diamond Trust Bank Kenya, Equity Group, and Co-operative Bank Kenya at 16.4%, 16.0%, 15.6%, and 5.4% respectively.

KEY TAKEAWAYS

Real Estate's sector’s activity contribution to GDP grew by 5.6% to Kshs 749.7 bn for the 9 months to September 2022, from Kshs 710.3 bn recorded during the same period in 2021.

Additionally, selling and rental prices also continued to soar, driven by continued inflationary pressures and a weakened shilling against the United States dollar that has seen a rise in the costs of construction materials.

In 2022, the general Real Estate sector witnessed considerable growth in terms of property transactions and development activities as seen by the 0.3% growth in rental yields to 6.8%, from 6.5% recorded in 2021.

Consequently, the sector’s activity contribution to GDP grew by 5.6% to Kshs 749.7 bn for the 9 months to September 2022, from Kshs 710.3 bn recorded during the same period in 2021.

Additionally, selling and rental prices also continued to soar, driven by continued inflationary pressures and a weakened shilling against the United States dollar that has seen a rise in the costs of construction materials.

“We expect the Real Estate sector performance to improve, supported by the expansion drive in the retail sector, the private sector, and the government’s focus to provide affordable housing coupled with efforts by the Kenya Mortgage Refinance Company (KMRC) to provide affordable loans to potential buyers.

We believe that the increased visitor arrivals into the country will continue boosting the performance of the hospitality sector,” said Kennedy Waweru, a Real Estate Research Analyst at Cytonn.

“However, factors such as prevailing inflationary pressure from local and external shocks, oversupply in the commercial office and retail sectors, as well as low investor appetite in Real Estate Investments Trusts (REITs) are expected to continue weighing down on the performance of the sector,” added Kennedy.

At the same time, in 2022, the Kenyan equities market was on a downward trajectory with NASI, NSE 20, and NSE 25 down by 23.7%, 12.4%, and 16.6% respectively.

The equities market performance was driven by losses recorded by large-cap stocks such as Safaricom at 36.7%, Bamburi at 17.5%, as well as banking stocks such as KCB Group, Diamond Trust Bank Kenya, Equity Group, and Co-operative Bank Kenya at 16.4%, 16.0%, 15.6%, and 5.4% respectively.

The losses were however mitigated by gains recorded by other banking stocks such as NCBA Group, Standard Chartered Bank Kenya (SCBK), and ABSA Bank Kenya of 54.6%, 9.8%, and 4.7%, respectively, while BAT Kenya and EABL gained 4.5%, and 1.2%, respectively.

“We are ‘Neutral’ on the Equities market in the short term due to the current adverse economic conditions, which has led to a tumble in the equities market in emerging markets such as Kenya, as foreign investors shift their capital to more developed economies, in search of lower-risk investments. However, with the market currently trading at a discount to its future growth (PEG Ratio at 0.9) and a price to Earnings (P/E) ratio of 6.7x, 47.0% lower than the 12-year historical average of 12.6x, we believe that investors should reposition towards value stocks with strong earnings growth and that are trading at discounts to their intrinsic value,“ said Samuel O. Ochieng, Investment Analyst at Cytonn Investments.

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