Tuesday, February 05, 2013

What matters in 2013

What matters in 2013

It feels strange making 2013 predictions in the middle of February 2013.However, I need to stick my neck out and see how they pan out.

1. Constitution will be amended
They are many reasons and excuses why we will do this:

-Cost: we haven’t doubled our tax revenues or tax bases but our fiscal expenditure has increased tremendously.

-Federal vs State issues: In all Federal Governance systems there’s always a push and pull between the centre and the federal regions. If we get significant oil or gold deposits I see the centre re-asserting itself.

-Fine tuning the constitution. Just like a car engine needs regular servicing so do constitutions.

The issues between the Inspector General of Police and the National Police Service commission point to the probable need for an amendment. As the new constitutional offices come on stream more areas  for amendment will appear.

2. Real estate

2013 will be the year real estate will stop looking like a one sided bet-any real estate you buy doubles in 12 months. I think taxes on idle land and probably Capital Gains tax is on the way within 3-5 years whether Jubilee or Cord wins. I’ll do a post on real estate soon.

3. Geopolitics and Terrorism

Kenya is a frontline state in the global war on terror. The recent French action in Mali mirrors Kenya’s entry into Somalia. Given our victory in the Somalia offensive, Al-shabab and their sympathizers will be looking for a comeback. Hence, terrorism threats will remain a clear and present matter.

4. Stock Market

NSE has rallied by over 30% in 2012 but it is still cheaper than it was at its last peak. Foreigners are busy picking counters. Local retailers will come to buy at the top. The big news isn’t the rally. It is the GEMS segment of the market. It allows firms to list with less strict requirements than the main NSE.It will likely attract many mineral exploration firms who are fundraising and aim to meet the 35% local ownership requirement.

If we do strike Oil, Gas or Gold this segment will explode.

5. Apple no longer cool

Apple is going down the BlackBerry road that is when everyone holds up a half bitten fruit, that gadget is no longer special. Buyers start interrogating the premium. The Sony Xperia Z may start a trend of shockproof, waterproof Smartphones. Apple is now playing catch-up. Take a look at the ipad mini to fight 7 inch android tabs and the increase in Iphone 5 screen size over the Iphone 4S.

Apple Commoditization: the bi-annual release cycle for Ipads makes them less special. Consumers will wonder why they have to pay a premium for a product that is obsolete in 6 months. It will be a replay of the PC industry when Pentium I was superseded by Pentium II then Pentium III before consumers realized they didn’t need all that horsepower for email and word processing.

Sunday, November 04, 2012

Hiatus: 2 years and 6 months

Hello blogger world back after 2.5 years.A lot has changed, i have changed and all of you too(you are all a lil older).
Pesa's going to focus on the markets  and the trends, ideas and events that drive our markets and money in the present and future.

Monday, April 05, 2010

Nairobi Real Estate bubble bursts

It happened sometime towards the end of 2009.The bubble was concentrated in the upper to high end property market.i.e. houses above Ksh 10 million.Unlike, other markets Kenyans have never experienced a large scale property price decline or slump.
Signs of the high end property slowdown are:

-Property sellers not providing indicative prices

Take a look at the property supplements in the thursday newspapers in early 2009 and 2008.Sellers provided indicative prices for every property offered.Currently, property listings beyond Ksh 10 million have Price on Application(POA) instead of an actual price.POA indicates that the sellers are unaware of the ruling prices for the relevant property prices.Hence, they wont quote an indicative price for fear of over bidding the market and failing to sale or underbid the market and sell for less than the market rates.

-Compression of rental yields
Looking at the indicative rents around Kilimani,certain areas in Lavington such as Valley Arcade you can see that indicative rents have stagnated around the Ksh 60,000-65,000 range or lower for the desperate landlords.Areas, such as South B/C,Langata and West are seeing a stagnation of rents i.e. rents rising at less than 10% per annum.

-Rise in furnished apartments
To counter falling/stagnant rents savvy landlords are offering furnished apartments and houses.Ideally a furnished apartment rents at least 30%-50% higher than a similarly unfurnished unit.To furnish an apartment that you can go for Ksh 70,000-Ksh 90,000 a month wont cost you more than Ksh 200,000.The extra Ksh 20,000-Ksh 30,000 from furnishing can be recouped in less than 12 months.Furnished apartments have also seen a decline in rents a furnished 3br unit in Upper Hill used to be Ksh 120,000 now its around Ksh 90,000.

The factors that led to the real estate slump were:
-Oversupply to a narrow market segment
Most developers were focusing on the Ksh 10 million and above units because thats where the high margins were.In the end they oversupplied it.The slump has led developers back to the Ksh 5million-Ksh 8million segment.VillaCare and all those high rollers have projects for that price range on going.

-Consumer sophistication
Property buyers in the late nineties and early 00s were thrilled by the property location they didnt care about the finish or quality of the property.i.e. people were happy to buy property in Kilelelshwa it didnt matter if the finish was poor.Thats how the area around Kileleshwa Police station and Kenton College ended up looking like Umoja with a lot of flats/apartments.

Over the past three years people buying/renting high end apartments have developed minimum requirements.i.e. if someone is going to buy a Ksh 10 million apartment or rent it he requires: at least two allocated parking spaces,back up water supply e.g. borehole or large reserve tanks, large living space, good security lay out and recently a servants quarter is a must.If your apartment doesnt have these facilities, renting/selling it at the higher end of the market ruling price is tough.

-Alternative choices
Real estate buyers in Nairobi started questioning the wisdom of buying an apartment at Ksh 9,10 or 15 million when that amount could buy an acre or more of land around the city.The odds of land values rising are higher than a Ksh 10 million apartment doubling in price to Ksh 20 million or even rising to Ksh 15 million.

-Bank lending
The risk aversion among local banks led to a slow down of lending for mortgages and development towards the high end units.Leading to fewer clientele for the finished property.By the way i see banks fronting for several property sales through newspaper ads.does that indicate their exposure to the sector?

-Normal supply of units for sale
Regardless of existing market conditions(whether boom or slump) property is always on sale.People who need to sell property are ready to take lower prices because they need the cash.On the other hand existing property owners who have a large capital gain will sell to cash their gains.e.g. if you bought the first Apartments in Lavington/Kileleshwa in the late nineties you got in at between Ksh 4million-Ksh 6 million.Even if the current market is tough, Ksh 8 million to Ksh 10 million can be raised.

Tuesday, November 03, 2009


You are tired of earning 0.5% interest on your Savings Account,uninterested in all those mutual funds/unit trusts but need a place to keep your money."Treasury Bills !" (Short term paperless Government Borrowing issued through Central Bank for periods up to 1 year)pops into your head.Central Bank of Kenya (CBK) announced that you can buy Treasury Bills from Ksh 100,000 and multiples of Ksh 50,000 thereafter.

How do you start?
The first thing is to open a CDS account with at the CBK.Download the application forms off the CBK site then fill them in and return them to any of the CBK branches- Nairobi,Mombasa,Kisumu and Eldoret.

Before you invest there is the investing jargon that you need to understand such as:
TENOR- Length of time before a bill pays back the principal amount.For instance a Trasury Bill that pays back its principal in 91 days has a 91day tenor.

MATURITY DATE- Date on which the bill pays back the investor the principal invested and interest.

FACE VALUE- Full value of a treasury bill that is issued eg. if a Ksh 1 billion treasury bill is issued.Its face value is Ksh 1 billion.Face value may differ from what you pay in.If a bill is at discount you pay less than face value i.e. less than Ksh 1 million.a bill issued at PAR is paid for at full face value i.e. Ksh 1 million for Ksh 1 million.

Applying for your Treasuries
With your CDS account ready,you can apply for the treasury bills auctions on a weekly basis.
91 day and 182 day treasuries are issued alternately i.e if 91 day is auctioned this week , 182 day is done the following week.

Treasury Bills are sold at a discount- you pay for less than face value and on maturity you get what you put in plus interest .The two are equal to face value.
For example,CBK offers a Ksh 100,000, 364 day Treasury bill at 8% interest per annum at a discount.An investor would pay Ksh 92,593 and receive Ksh 7,408 interst on maturity after 1 year.His total return would be Ksh 100,000= Ksh 92,593+Ksh 7,408. (i have ignored taxes)

The FACE VALUE of the bill is Ksh 100,000, the discount is the interest of Ksh 7,408. All Government of Kenya treasury bills follow a simialr pricing format.

CBK has a bond price calculator on their website. Key in your required return,initial investment and get the expected returns and tax amount.Click on the hyperlink for the CBK treasury pricing Calculator.

Competitive or Non Competitive?
When applying you have an option of bidding competitive or non competitive.Competitive bidding means that you quote a rate to CBK.Unless,you are a financial proffessional-know a lot about interest rates and Yield curves - bid Non competitive(limit for non-competitive is Ksh 10 million).Because you may ask too high a rate an your bid may be rejected.Non-Competitive means that you will accept the average interest rate at that auction.

How it goes

Every week CBK will offer treasuries for auction via notices placed in the media and on their site.You must apply by Thursday 2pm weekly.The auction results come out on the next day -Friday on their site and the Daily Nation.Allocations are to be paid on the following Monday(known as the value date) to CBK by 2p.m.

On Maturity

CBK wires the principal and interest(Face Value) to your bank account unless you have used your CDS account as security for a loan.Then it's wired to the lender.Rollovers are allowed i.e. your proceeds are applied to the next treasury auction.

Small Investors

Small investors may find it easier to go through a money market or bond fund.The process for small amounts of money may be tedious and the interest rates not exciting.e.g. if you invested Ksh 100,000 in in the 182 day Treasury bill auction-1849 of 02/11/2009,payment would be Ksh 96,712.20 and interest Ksh 3,287.80 after tax for the period.

For amounts above Ksh 1 million (US$ 12,987) it makes sense.Because to get an attractive fixed rate at a locally based bank you must have at least Ksh 10 million (US$ 129,870).

I came across some more blog posts on bonds:

hatua.blogspot.com- Good post on bond pricing

Kenyankytoon-A beginner's introduction to bonds but with a US/Canadian flavour

Wednesday, June 17, 2009


Finance Minister has impressive speech delivery. He kept the budget speech short, interesting and communicated with his audience within and outside the Parliament during the speech.
2009/2010 budget anticipates Government borrowing of Ksh 109 billion. Armchair economists have crowed about how the new borrowing will crowd out the private sector and raise interest rates.

I think NOT.Uhuru provided an expansionary budget and an expanded source of funds at the same time. How?

Firstly, he has provided AMMENDMENTS to the
Retirement Benefits Authority (RBA) regulations to allow schemes below Ksh 100 million in size to invest entirely in Government Bonds and bills. New money into statutory schemes such as the new Civil Service Pension scheme, Local Authorities provident schemes and National Social Security Fund (NSSF) will be channeled into Government securities and infrastructure bonds.

Secondly, he maintained the current TAX RATES. In an environment of rising inflation constant tax rates allow Governments to increase their tax revenues without raising tax rates. For instance, if the price of a widget increases from Ksh 116 to Ksh 150.Value Added Tax payable to the Government would rise from Ksh 16 to Ksh 20.69 (assuming a VAT rate of 16% and a VAT inclusive sale price of Ksh 116).
Salaries are likely to be increased to mitigate the effects of higher living expenses. If your Gross pay rises from Ksh 20,000 to Ksh 25,000 your tax payments rise. The effect is more pronounced if your gross is above Ksh 40,000 because your marginal tax rate is 30%.

Thirdly, Kenya has a low CAPACITY to spend. It is unlikely that all the money set aside for the CDF and other Development projects will get spent. Hence, our deficit may be smaller than expected.

Links: 2009 Budget speech and Finance Bill 2009.