Kenya Investment Options:
The Nairobi Securities Exchange– the stock market
Treasury Bonds
Property in Kenya
Private Companies
Saccos / Chamas
Why invest in Kenya?
There is the potential to make money.
Kenya will add to the diversification of portfolio of the international investor.
Kenya has the potential of economic growth, to support your own investments.
This is reinforced by:
-Many Kenyans being hard working.
-Education is a priority.
-They are open to innovation.
-They hunger for wealth
-They understand the importance of political stability.
-The economic growth rate has generally varied between 4% and 6%.
Note: The regulatory framework and legal system in Kenya are better than many countries.
They don’t, however, give the same level of protection for the investor as top level investment destinations such as UK and the USA.
This increase in investment risk, is mitigated by the Kenyan investor knowing how the ‘system’ functions in Kenya.
Treasury Bonds (T Bonds)- Kenya shillings
General:-
The government pays the equivalent of an interest rate for the length of time it borrows your money.
The government needs to borrow money to pay for government expenditure.
The returns on Treasury Bills and Bonds have been higher than received from the more stable banks.
Place in a Portfolio:- Useful for the lower risk portion of your Kenya invested portfolio.
Return:-
In April 2023 returns vary between 10% and 14%.
The official inflation rate is just below 10%
Longer term Treasury Bonds pay a higher interest rate than short term Treasury Bills.
A 15% withholding tax is deducted at source.
Reference for rates of return: Central Bank of Kenya
Volatility:-
Longer term bonds are more volatile than short term bonds.
This volatility is associated with interest rate changes and will only affect you if you wish to sell before the maturity date.
Liquidity:-
Your money is tied for the period of the Treasury Bill or Bond.
If there is a secondary market In a Treasury Bond this bond may be sold to another investor.
How easy this is depends upon how liquid the market is i.e. how keen other people are to buy your bond.
Risk to Capital:
The Kenya government, Kenya shilling debt is relatively lower risk than most private Kenya investments.
If the government gets into financial difficulties, the Kenya government can increase taxes, print money in order to repay its debt or not pay the salaries of its employees.
For Euro or US$ denominated debt default the Kenya government cannot print US$s to pay their creditors. In addition if the Kenya shilling devalues against the dollar, repayment of the loan will cost more in shillings.
The ratings agencies such as Standard and Poors, Moodies, and Fitch give a credit rating to countries.
This indicates their estimates of the probability of default.
Charges:
The 15% withholding tax is a final tax and is taken at source. No other charges or taxes are liable.
Special issues:-
In 2023 Kenya is considered as one of the countries with an unusually high probability of default.
This might include T Bond’s interest payments reduced and/or the dates for interest payment delayed into the future.
In a worse case scenario only a portion of the the capital you invested may be repaid.
Property in Kenya
Why Buy Property:-
- Kenya, with an average annual GDP growth rate of about 5%, and a growing population, It is a good bet that the general price level will rise over the long term. (However this increase in price is not a given.)
- Assuming a continual economic growth rate of about 5%, a growing middle class, and a continued interest in Kenya as a regional business hub and safe haven for surrounding countries, there will be good money to be made in specific areas of the property market.
- There are laws regulating the transfers of property.
- You can keep an eye on property near you.
- There is a relatively low correlation with many of the other asset prices you might hold in your diversified portfolio.
Especially if this includes international equities. This will reduce the volatility of your whole portfolio. - Given the perceived lack of other types of investment opportunities within Kenya, property is largely THE investment of choice for Kenyans.
Unless this changes there will be demand for property as an investment.
In addition, living in one of your assets (the asset being your house), not having to pay rent, and not having to move on the whim of your land lord, has its advantages. Property is, then, an important pillar of your wealth.
Things to be wary of:-
- There is legislation surrounding the transfer of property. However you could end up losing a portion of your property without recompense. In addition some of the people within the government body dealing with land are notoriously corrupt.
- You would do well to invest in other assets as well as property. Your portfolio needs to be diversified.
- Property prices do fall as well as rise. These prices can stay low for a considerable time.
- Property is in big bits. You can’t easily access 100,000/- from a 2,000,000/- property. In comparison, you can cash in a portion of your equities portfolio leaving the rest invested.
- There are no reliable, independent statistics on general property prices in Kenya. In contrast the Dow Jones and S&P stock indexes in the USA are a clear, independent and reliable indicator of the general stock price levels in the USA.
- So here in Kenya we are dependent on hearsay, or the statistics of companies with an interest in talking up the price of property.
People will talk a lot about property prices and their great investment in property when prices are rising.
They remain strangely silent when prices are falling.
It is not, then, easy to get a gauge on changing Kenya property price levels over time.
- Property in Kenya lends itself to price bubbles.
- A savvy investor can make use of the price fluctuations. Most of us, however, need to be careful.
- It is easy to over invest when there is the excitement of great wealth to be had from rising property prices.
Lots of money is lost as prices collapse.
Note: This can happen to all assets, whether Flowers (the Dutch Tulip bulb market bubble of the 1600s), crypto currency, equity markets etc.
Place of Property in your Portfolio:-
Property is an important, core component of your wealth. A large, well diversified investment portfolio might have 10% to 30% of the portfolio value in property.
Owning your house enhances your financial stability.
Towards retirement people often downsize, selling their larger house for a smaller house. The difference in prices is put towards retirement spending.
Return:-
An annual yield of 2%+- after costs of maintenance, tax etc is not unusual. (This is not dissimilar to international equities).
Add this to the capital gain (increase or decrease in value of your property) and you will get the total return of your investment.
Annual yield + Capital gain – Costs = Total return.
Volatility:-
Though there has been a long term increase in the price of property, there have been periods of both high and low valuation. As stated previously be cautious of being caught in a price bubble that eventually pops.
Liquidity:-
Low liquidity. It may take months to find a buyer at the price you are looking to sell. You then need to go through the legal requirements for the sale. The markets are more liquid when property prices are rising.
Risk to Capital:-
Some examples:-
- Fraud- Someone appears with another title deed for the same plot of land and demands ownership of the property.
- Loss of value to the property as there is a general fall in property prices.
- Loss in value as new legal restrictions are put in place (An example being that there can be no new commercial development in your area),
- Old restrictions removed, (An example being that low income development is newly allowed to take place on your border). The loss in value then being due to the degeneration of the areas surrounding the property.
- The government may demand a portion of your property.
- Corruption in the Lands Offices.
Charges:-
Charges include Stamp duty of between 2-4%, Lawyers fees etc. An approximate estimate would be between 4-7% in total.
Special Issues:-
- Land is the investment of choice in Kenya.
- Land is a highly political issue.
- Land planning does not exist in most of the country.
- Do your home work before purchasing. Understand the risks.
The Nairobi Securities Exchange– the stock market
General:
There are between 60 and 70 companies on the Nairobi Stock Exchange.
The market is volatile and can go through long periods of low or high valuation.
Given the size of the Stock Market and Kenya’s sometimes fluid political and regulatory environment, investment in the stock market might be limited to the smaller, higher risk section of your portfolio.
International investors focus on a handful of these companies which include Safaricom, East African Breweries, Standard Chartered, Diamond Trust, Barclays/ABSA etc.
To reduce the risk of poor internal governance and theft there are companies that, in addition to being regulated by the Kenya regulatory authorities, have additional oversite.
They may answer to the head office of a large multinational company or have multilateral institutions as share-holders. Note that the risk is reduced but not removed entirely.
Place in Portfolio:-
A handful of the larger, well managed companies may play a useful role in diversifying your portfolio.
An investor may hope that a Kenya stock portfolio reflects to a degree the growth of the Kenya economy.
However, the Kenya Stock Market is volatile. You will than hold only a small portion of your savings in this market if you are comfortable with the risk.
Return and volatility:
The Nairobi stock market has been very volatile over the last 20 years with the NSE index being at the same level in 2021 as it was 2001.
In between times the index has been over 5000. In February 2021 it stands below 2000.
A good portion of equites return is through capital appreciation – the price of your stock increasing. With such a volatile stock your return would have been dependent on when you bought the stock. High losses and high gains can be expected by investing in such a volatile market.
Liquidity:
Liquidity varies (ease of buying and selling). The top tier stocks e.g. Safaricom, East African Breweries etc are liquid. These have been easier to trade than others. For example Safaricom has been easier to trade than Limuru Tea Company.
Risk to Capital:
Companies do go bankrupt and will disappear from the Nairobi Stock Exchange listing. This risk is reduced if you are buying into a subsidiary of a strong parent company. If you wish to obtain a credit rating of a large company use a search engine such as Google. Input into a search engine ‘ credit rating of company A’ and you will find a credit rating from one of the big credit rating agencies such as Moodys, Standard and Poor’s, Fitch etc.
Charges:
Your stock broker will charge you 2.1% for sums up to 100,000/- .
1.76% will go to your broker and 0.34% will go in tax and other fees.
For sums higher than 100,000/- the charge will be 1.85%.
For very large amounts of money the stockbroker fee can be negotiated.
Special Issues:
Investment in Kenya public stock adds diversification to a portfolio. Considered high risk, the companies invested in must be chosen with care.
Private Companies (Not listed on any stock exchange):
General:
A private company, unlike a public company, has not sold any of its shares through a stock exchange.
Example:- Your friend starts a company. His father and two friends are share-holders. He has NOT sold his shares through the Nairobi Stock Exchange.
This is a private company.
Public company: On the otherhand you will go to a stock broker to buy shares in a public company such as East African Breweries.
A Private Company has the potential for high returns.
There is also higher risk.
You, personally however, may have access to a relatively low risk, high return investment opportunity that others do not.
For example you have a very clever brother who lets you invest in his own business.
He gives you private information on the company.
There is the potential of making a lot of money at a relatively low risk.
Investing in a Private companies is, however, often considered higher risk than in Public companies.
- The Private companies are not bound to make their accounts available for scrutiny to the public.
- There is thus no public record of a private company’s source of income, debt etc.
- There is less stringent regulatory oversite than is the case with a public company. There is thus a greater possibility that things go wrong before you get to hear about them.
Given the higher risk associated with a ‘Private’ company, investors will often want a higher expected return and/or some say in the management of the company to mitigate the risk.
For the more experienced investor:
Business Angel
Business Angels– There are people with experience in business (termed Business Angels) who will put money into a new company by buying a share of the company.
They may sit on the Board of Directors of this company.
They add their experience as well as their money to the ‘Start-up’ company in exchange for a share in the company.
At some point they will exit the company, selling their shares for a profit.
They will then relinquish their seat on the board of directors.
Venture Capital Company
A Venture Capital Company (a company) will usually deal with larger sums of money than a Business Angel (an individual), and usually with established companies wishing to expand.
The Venture Capital Company invest into their target company.
They can also help this target company borrow fixed interest debt from a financial institution.
At some point they will sell their shares, hopefully for a large profit.
Private Equity
Private Equity:
Institutional investors as well as Private Investors, become the ‘ Investors’ or Limited Partners of the Private Equity Firm.
They believe the management group ‘Private Equity Firm’ (PEF) or ‘General Partners’ will make lots of money.
They, for example, have proven business skills.
The PEF aims to make enough money to cover their fees and then give the investors a return that is worth the risk they are taking.
The fees are high and will often be as much as a management fee of 2% of the total Capital invested and then, on top of this, they will take 20% of the profit of the investment .
The PEF may, for example, restructure a company and its assets so that on reselling the company and assets this can be done at a large profit for the PEF.
A part of this profit will then be distributed to the investors, and a part retained by the PEF.
Investing in Private companies as a part of your portfolio:-
Investing in a private company is high risk.
A small proportion of your wealth invested in a private company might be a useful addition to you portfolio IF the potential return is worth the risk you are taking.
In addition if there is the benefit of a low correlation with the rest of the portfolio, this investment may reduce the volatility of the portfolio as a whole.
Return
The return may be very high or you may lose all your money.
Volatility:
The value placed on the company will probably be more volatile than the stock market. A single company is usually more volatile than a large number of companies together.
Your money will be tied up for a long period.
The volatility during the period of investment is less relevant than the final value of your investment.
Liquidity:
Usually not liquid.
Risk to Capital:
High.
Charges:
Variable and specific to the particular contract with the company being invested in: usually high.
Special Issues:
This is higher risk. You should know what you are doing. You should be comfortable losing a part or all of your money.
An Aside: Saccos / Chamas:-
Saccos and Chamas are more a vehicle through which you can invest rather than an asset type.
We mention them here as they are so much a part of the Kenya investment scene.
Saccos
Joining a Sacco is contingent on you paying a sum to purchase share capital, and then to regularly (often monthly) contribute to your deposit. This contribution must continue for the life of your membership of the Sacco. You will expect a dividend from your deposited money.
6 months after the start date of your membership you can borrow up to 3 times the value of your deposit. You must, however, find someone within the SACCO to guarantee the loan. He will forfeit his deposit up to the value of the outstanding amount if you can’t pay back the loan.
The cost of borrowing usually amounts to about 12% a year and is defrayed by the annual interest/dividend you get as a share-holder to a ‘hopefully’ profitable SACCO.
Sacco (Savings and Credit Cooperative Organisation) is regulated by the Sacco Societies Regulatory Authority
Chamas (Unregulated)
Chamas are groups of like-minded investors who wish to contribute money to a pot. This money is invested with an expected return on the investment.
The members of the group decide who is to be chairperson, treasurer etc. They decide how much each should contribute, and where to invest.
The benefits of a Chama are the returns from investing in larger projects that would be unavailable to the individual investor.
In addition, there is the experience of the groups shared expertise and investment ideas.
The next section includes international Investing
This will increase the options available to you, and enable you to diversify your assets when construction your portfolio.
Important: This information on this WEB site ALONE should not be used to make investment decisions. Investing is particularly personal and is dependent upon your circumstances. You are strongly advised to take independent expert advice before deciding whether to/ or whether not to invest your money.