Beyond Real Estate: Where investors can put their money

Real Estate

Land and rental properties have been the most popular investment options for many Kenyans.

Photo credit: Shutterstock

What you need to know:

  • Kenyans are slowly mastering the art of diversifying their portfolios as competition for real estate gets stiffer.
  • A United Nations Conference on Trade and Development report released in June last year ranked Kenya fifth worldwide in terms of crypto adoption, with 8.5 per cent of the population owning crypto currencies, translating to at least four million individuals.

Traditional assets, mostly land and rental properties, have been the most popular investment options for many Kenyans. But as with any sector, the investment market is constantly evolving.

Different players have introduced varied products. Kenyans are slowly mastering the art of diversifying their portfolios as competition for real estate gets stiffer.

Money Market Funds (MSFs), for instance, have become a popular discussion. These low-risk assets are offered by Collective Investment Schemes (CISs), which put the cash in a combination of assets such as government securities and bank deposits.

According to Capital Markets Authority’s Quarterly Statistical Bulletin, 2023 (quarter 3) the total assets under management by CISs totalled Sh175.79 billion as of June.

The figure signified a 1.7 per cent increase from Sh164.2 billion in March. Government securities and fixed deposits, the two common assets that make up MMFs, accounted for more than 80 per cent of the assets.

Based on comparative data from the bulletin, the money Kenyans are investing in such programmes has been on an upward trajectory since 2017.

In that year, for instance, only Sh55.5 billion worth of assets were under management, with money markets taking a 78.8 per cent lead. In the 2020 quarter, the figure had risen to Sh76.1 billion.

real estate

Over the past decade, Kenya’s retail real estate industry has experienced significant transformation, with a number of factors, ranging from advances in technology, crises such as the Covid-19 pandemic and a shift in buyer preferences, driving this change.

Photo credit: Shutterstock

Digital Assets

Meanwhile, the digital assets sector is also growing at breakneck speed.

A report by the UN Conference on Trade and Development (UNCTAD) released in June 2022 ranked Kenya fifth globally in terms of crypto adoption, with 8.5 per cent of the population owning crypto-currencies. This figure translates to more than four million people.

However, Chainanalysis puts Kenya at number 21 globally as of 2023, while Nigeria is second. Chainanalysis data reveals that between July 2022 and June 2023, Kenya had a transaction volume of more than $15 billion while Nigeria took a staggering lead with close to $60 billion.

When the Finance Bill was introduced early this year, the government showed interest in taxing digital asset transactions, a sign that it acknowledged the sector’s significance. In what is now considered a historical move, the National Assembly Committee on Finance and National Planning on October 31 directed the Blockchain Association of Kenya to draft a regulatory framework for what might turn into the virtual Assets Service Provider’s Bill.

Proper regulation and legislation will undoubtedly increase the uptake of digital assets and unlock new opportunities in Kenya.

But what does this diversification in how Kenyans invest mean for real estate? With such stiff competition for investors’ money, can real estate keep up? What is driving this shift in how Kenyans invest and what can real estate learn from the trends?

“Government securities, bank deposits, CISs (especially the MMFs) and savings and credit (sacco) deposits are some of the most popular investments but MMFs have become an option as they offer lucrative benefits such as stable returns, liquidity and competitive risk-adjusted returns,” John Kihara, the Senior Portfolio Manager at Old Mutual Investment Group, says. 

“Rising interest rates from government securities have catapulted the funds’ returns since they invest a portion of their assets in these securities, in addition to bank deposits whose rates also take an upward trajectory in tandem with government securities.”

He adds that short-term government securities yields have risen from below 10 per cent at the beginning of the year to above 15 per cent. These returns are competitive, especially when compared to those from real estate assets. Annual net rental yields from properties in prime locations on average are in the range of eight to 10 per cent.

Real estate

The latest Economic Survey 2023, released in early May by the Kenya National Bureau of Statistics, shows that Kenya’s construction sector grew by 4.1 per cent in the year 2022 alone.

Photo credit: Shutterstock

Technology and convenience

Technology has introduced a certain level of convenience for those interested in investment schemes.

Complicated processes have been a major barrier for a lot of people but market players are more organised now. They are simplifying and digitising products, thus increasing uptake.

In July, for instance, the Central Bank of Kenya launched DhowCSD, a platform for trading in government securities. The digital platform slashed the time it takes to create an account from 14 days to minutes. MMFs have introduced similar convenience for investors with easy to access USSD codes and apps used to create accounts.

Additionally, one gets a money manager to advise and monitor the investments.

Compare this to the process of buying land that involves a lot of legwork as one conducts due diligence. Even with all that, the risk of getting conned or stuck with a piece of land you will never use remains high.

Other factors that make MMFs more lucrative are the low amounts required to start investing, compared to real estate which demands huge sums of money. Liquidity is also a major consideration for many investors.

People want to be able to access their money when they need it. Exiting is also a lot easier compared to reselling real estate assets.

Lastly, MMFs and capital markets in general are well regulated, a factor that connotes safety and controlled risk. Real estate has grappled with regulation issues for decades, despite the high returns.

As MMFs continue to rival traditional real estate, other opportunities have come up in the last 10 years, further giving investors diversified options. In property, there is an alternative to invest through unitised products such as Real Estate Investment Trusts (REITs), which are listed at the Nairobi Securities Exchange (NSE).

REITs are structured in a manner that allows lower investment amounts, better diversification across various property sectors and potentially better liquidity compared to the lumpy direct property investments.

Businesses looking for hard currency investments are putting money in options such as dollar-denominated MMFs and other funds that give them access to international markets opportunities, especially as the shilling continues to depreciate.

Kihara emphasises the need for investors to diversify their portfolios so as to reduce risks. It also  enhances returns – just like the vintage proverb:   “Do not put all your eggs in one basket”.

Moving on to digital assets, Robert Muoka – a lawyer, chairperson of Blockchain Tech Sub-Committee (Law Society of Kenya, Nairobi Branch), co-Founder Sheria Online, Chief Executive My Shamba Digital, Founding Partner at TMM and Partners Advocates and the Country Lead for the Government Blockchain Association – has witnessed the digital assets sector grow from a small, private industry to a significant international movement.

For years, Muoka and his partners have been providing literacy around blockchain and digital assets through Sheria Online, a platform built to help Kenyans access justice, legal information and education on the intersection between the law, technology and blockchain.

There is certainly increasing interest in digital assets and more Kenyans are investing here, as captured in the Chainanalysis data.

But why are Kenyans putting their money in digital assets?

First, there is the shilling problem. The falling value of the local currency has encouraged more people to seek alternative ways of protecting their money.

While the shilling is depreciating, crypto assets like Bitcoin – now considered a form of digital gold – have increased in value, especially this year.

Transaction cost is also much lower with digital assets compared to banks and mobile money fees incurred when doing business in the local currency. These benefits, coupled with Kenya’s fast internet penetration, are some of the factors driving interest in digital assets.

Muoka has sat on both sides of the investment worlds as a property lawyer and blockchain enthusiast. He says digital assets have many other advantages over traditional ones. They are, for instance, inclusive.

“There is financial inclusion for the unbanked- with digital assets. All you need is a wallet. You don’t need a lot of onboarding and paperwork to buy assets. People can invest in crypto from anywhere and the assets are portable, unlike other property which you leave behind when you move. Like land, digital assets can be a stable store of value and net worth,” the lawyer says.

“Blockchain technology ensures transparency because data is permanent and public. The technology includes smart contracts, which eliminate intermediaries – further reducing transaction costs.”

Emerging opportunities

Though digital assets are taking a significant chunk of investors’ money, they do not have to be perceived as a competitor.

“In fact, they present interesting opportunities for traditional companies, including real estate,” Muoka says.

“Proper regulation is bound to impact the sector positively. Transactions will be easier and more transparent as many people have been operating in a legal grey area. This will increase the tax base for the government and information will flow easily. Innovators and investors will also be protected legally, obviously creating opportunities and employment for many.”

During the presentation to the National Assembly Finance Committee, Muoka said: “As we embark on the path to regulate blockchain and crypto assets, may we draw inspiration from the Swiss success story. Switzerland’s progressive approach to regulation has made Crypto Valley a global hub for blockchain innovation boasting a valuation of more than $611.8 billion.”

Switzerland is home to one of the largest blockchain real estate firms, Brickmark. In 2020, the company announced one of its biggest acquisitions yet, a commercial property. A significant part of the payment for the property was to be made in Brickmark’s tokens, making the deal the biggest blockchain real estate transaction at the time.

Clearly, there are opportunities for local real estate players once the legal framework is sharpened.

Tokenisation, for instance, can unlock liquidity and expose developers to the global market.

However, before rushing to invest or innovate, Muoka advises everyone to learn how different digital assets work.

“Research the coin and the asset you want to buy and its potential. Work with companies that have been in the market for long and talk to experts. When you decide on a peer-to-peer exchange, get a lawyer to draft an agreement and take it as seriously as any other transaction,” he says.

Looking ahead and seeing that the investment industry evolving, real estate companies ought to see emerging opportunities and re-invent their business models.

James Hillary Obonyo, a financial analyst and founder of James Hillary Consult, says the economic outlook – based Kenyan Bureau of Statistics data – looks good.

“The data shows a robust 5.4 per cent expansion in the second quarter of 2023, outperforming the 5.2 per cent growth seen in the same period last year,” Obonyo says.

“This can only mean that 2024 might be a wonderful year for investment. There will be more room to come up with innovative products.”

He says real estate can glean valuable insights from the shifts in investment, especially in the context of tokenisation.

“To maintain competitiveness, sellers should consider several strategies. They can learn from tokenisation of blockchain to enable fractional ownership of assets and enhance access. Recognising the significance of reducing financial barriers, sellers can explore solutions like tokenisation that lower minimum purchase requirements compared to traditional Real Estate Investment Trusts (REITs), which require a minimum of Sh5 million to invest,” Obonyo adds.

“Property sellers need to acknowledge the appeal of liquidity. They should consider implementing solutions that facilitate quick exits, akin to token trading on secondary markets. The industry also needs to prioritise transparency. Sellers can adopt technology that enhances open transactions to rebuild trust with investors. Through these measures, real estate sellers can effectively position themselves in the evolving investment landscape shaped by tokenisation.”