It’s now emerging that Cytonn Investments is embroiled in a fight with CMA and their license is at stake. Sensing danger, the firm quickly appointed Co-op Bank to be their trustee but the bank politely declined and did not disclose their reservations.
The Four other banks that they approached also failed to take up the opportunity. This brings us to some of the observations we made a few months ago giving details why Cytonn is a risky investment as follows; Cytonn Investment Management PLC pauses as one of the independent investment management firm in Kenya which is doing well locally and in the region but beyond the what the eyes could see lies a company in deep problems.
The recent regulations in real estate industry did not leave Cytonn’s regulated clients in its Money Markets Fund and Pensions products. Cytonn’s Investor Relations page also opted to conceal the 2017 and 2016 financial years’ statements. And to make matters worse, they are yet to publish financial statements for FY 2018.
While there are risks associated with every company but it’s a lot more for Cytonn’s clients. Most of the risk in Cytonn is centered in its real estate development arm. Cytonn’s regulated clients in the Cytonn Money Market Fund and Cytonn Pensions products are equally exposed to loss as Cytonn’s High Yield Solutions LLP clients.
On the other hand, it’s evident that StateBank of Mauritius (SBM) Kenya Limited and Taaleri Oyj also face losses to varying extents. Cytonn recently concealed its historical financial statements signifying there is more than meets the eye in the company. They are not releasing the new ones either. Months back, Cytonn was found deep into one of the dangerous PR gimmicks simply because they have failed to sell in this hard market, but in order to create an impression that things are going well, they had to resort to such cheap PR where one person would win nearly in every giveaways.
Experts warn that the markets have not adequately understood the risk inherent in investing with Cytonn and urge caution. “While the Cytonn brand represents a youthful freshness not seen in the staid financial services industry to date; we recommend that market participants remain cautious.” A source told KMI.
For the companies in real estate, it’s no longer rosy for them. CIC is already selling 712 acres of land and exiting the property development business. Britam PLC on the other hand is exiting the real estate development business with plans to auction properties in Upper Hill and beyond to avoid losses across its portfolio. Also, a second developer in Athi River’s Sunset Boulevard estate is in the red as I&M Bank plans to auction 204 units to recover a KSh 2 Billion debt. The banking industry reports that Non Performing Loans (NPLs) to real estate developers amount to KSh 43 Billion.
Cytonn has bet boldly on real estate. Since the firm offers clients, through Cytonn High Yield Solutions LLP, rates of up to 18% p.a based on loans made to its own projects. After admitting that CHYS rates are based on loan pricing, Cytonn cannot pose as a better real estate risk manager than banking and insurance firms which have more established track records. The falling Cytonn PLC is now acting as a bank thus offering loans to its own real estate projects at 18% p.a. This in real sense is not logical at all. CIC Britam PLC and I&M Bank PLC are selling properties where Cytonn also has property- the Nairobi satellite towns in Kiambu and Kajiado counties.
According to the notes in Cytonn’s 2017 financial statements- Cytonn has properties in Kiambu County – The Alma, Taraji Heights, RiverRun Estates- where the greatest possibility for loss is. Banks have already moved to auction properties in these areas, fearing that lowering prices would lead to write offs and losses. Since Cytonn’s residential properties are also located in these areas and have the same fundamentals; then its properties are also going to lose value.
Don’t forget that through the corporate guarantee given by Cytonn PLC, these properties underwrite the KSh 10.5 Billion in loans owed to Cytonn High Yield Solutions LLP clients Since Cytonn owes KSh 40 for every KSh 1 invested, even a small decline in property values (such as the 2.6% decline reported by Hass Consult in Q1 2019); would mean that Cytonn High Yield Solutions LLP clients are already losing money. Because properties sold at auction often sell for lower than their market value, Cytonn High Yield Solutions LLP clients are further exposed to loss.
We find that in the present situation, selling Cytonn PLC’s properties would not yield enough money to compensate all CHYS clients. The properties are not as valuable. Through Cytonn Asset Managers Limited (CAML), Cytonn’s regulated clients- in the Cytonn Money Markets Fund (CMMF) and Cytonn Pensions space- are equally at risk of loss for the following reasons: One, CAML clients are still invested in the same manager (Cytonn PLC) that’s already extremely indebted to CHYS clients. Two, the strategy and manager are still the same meaning regulation has not changed how risky the funds are.
Lastly, Cytonn’s Money Market Fund claims an annual return of 10.7% p.a. Since a portion of its fund is likely invested in treasury bonds and bills earning a maximum rate of 10% p.a; the increase in performance is because a portion of CMMF funds is invested in CHYS at 18% and consequently, Cytonn’s declining property portfolio.
According to the Global Credit Ratings company rating of Cytonn for FY 2018, Investment Managers at Cytonn’s B/BB ratings are judged to have a poor management and control environment Ratings Downgrade just like Chase Bank Kenya Limited went under receivership shortly after GCR issued a corporate downgrade.
Cytonn PLC’s current GCR rating implies an 83% chance of bankruptcy in 3-5 years. This is a sign that all pensions clients should avoid the company due to its riskiness. Cytonn PLC’s stakeholders in Cytonn High Yield Solutions LLP clients bear the greatest risk of loss. First, they are owed sh5.8 Billion as interest.
Secondly, the amounts reported on Cytonn’s books don’t tally with the amounts reported in Cytonn PLC’s financials as debts owed to them. Lastly, while CHYS clients have a separate board of directors, they do not have representation in Cytonn PLC’s main board of directors where the decisions to invest their money are made. SBM Kenya Limited, which has loaned Cytonn Sh650 million against The Alma is equally at risk.
The property owned by The Alma is under covenants protecting the interests of TT-Africa, the project’s first lender. SBM is not protected either as some of its units have been pledged as collateral to high value CHYS clients. In terms of ranking Taaleri takes lead followed by SBM then CHYS clients comes last. Taaleri Oyj has the least to lose.
While their investment in Cytonn has come in the form of property loans at 21% p.a (Cytonn’s 2017 financial statements); their status as the first lender with board representation protects them from loss. It is common for international private equity firms such as Taaleri to insist on restrictive covenants that protect their investment from loss. Such covenants would give them priority in the sale of assets such as Cytonn’s land.
Taaleri also owns the option to purchase 20% of Cytonn which is more ofPR stunt than bonafide transaction as Cytonn’s reports of the transaction provided no consideration. It is uncommon for private equity transactions to close without reporting transaction values. Reporting the transaction value would also value Cytonn PLC, Cytonn Asset Managers Limited (CAML) clients are also at risk of loss.
Given last year’s GCR downgrade and the delayed release and concealment of the 2018 and 2017 financial statements respectively; the management culture and risk management processes are still the same.
You all remember that Chase Bank Kenya Ltd’s receivership was preceded by a GCR ratings downgrade, withdrawal. While there is certainly more hope for Cytonn at this point, it is unwise to recommend CAML’s services as a pensions manager due to the riskiness of Cytonn PLC, the parent company.
Pensions trustees and consultants should evaluate Cytonn PLC’s financial statements which are currently concealed before deciding whether to engage the services of CAML. We went on to disclose that Cytonn has a questionable reputation financially. Cytonn PLC’s current GCR rating alone implies an 83% chance of bankruptcy in 3-5 years.
Experts have been questioning how in a country where many developers have run at huge losses, some facing auctioneers and others sell their properties at a throw-away prices, it is still possible for Cytonn to genuinely promise a 55% capital appreciation in some of the 10 multibillion projects.
Cytonn PLC should not lie to local and foreign institutional investors, high-net-worth-individuals and struggling Kenyans that they are doing well. It’s only through cheap PR stunts that Cytonn PLC have paused as a company which takes calculated risks after extensive research. Not even the use of latest financial model will save them from crumbling.
It’s worth recalling that Cytonn’s housing projects have been accused of flouting the urban planning and environment regulations among other impunities. The Situ Village which sits in a very serene environment in Karen is subject of an appeal to the National Environment Tribunal – by Karen & Langata District Association- and it is said Cytonn can construct anything except a boundary wall. In February 2019, they stripped a section of the riparian area of the sensitive Mbagathi River.
Cytonn fraudulently acquired an area of around 7,500 square metres. The Water Resources Authority has visited and 254News trust that Cytonn will be brought to book soon over this. In fact it’s a matter of time. KMI also learnt that Karen area has the highest concentration of private schools where most of prospective investors want to settle. It’s on this reason that Cytonn PLC employed impunity to acquire pieces of land in riparian areas since acquiring such appears cheaper in the long run compared to other high-end areas without such riparians.
Also the crazy monies from Finnish equity funds and financial services firm Taaleri that manages a Sh658.5 billion kitty and provides funding to Cytonn and other Africa’s real estate makes them operate with impunity. If only the markets in Kenya and the region adequately understood the risk inherent in investing with Cytonn, nobody would stand at a loss. There has been slow growth in Kenya’s real estate over the past few years. This situation has worsen following the current tough economic situation in the country, many layoffs, constrained credit access to both buyers and developers, uncertainties in building approval laws, and a weakening purchasing power among potential buyers.
A recent data by Kenya Bankers Association (KBA) seen by KMI indicates that there has been very minimal growth of 2.78% in the sector. While releasing the banking lobby’s house price index at the middle of this year, Jared Osoro, KBA’s head of research and policy observed that there was a price decline during the first quarter of 2019 while indicating that “The sustenance of a general trend observed since the second quarter of 2018 is seen as tentative, and could be a pointer to a depressed market if sustained,’’ Real estate has been one of the country’s fastest growing sectors in the last 15 years, with returns from property outpacing equities and securities.
The sector has, however, suffered slow growth in sales and rental prices recently due to a huge stock of unsold units and oversupply of properties thus surpassing the demand.
KMI has learnt that it’s this depressed Kenyan housing market that has forced Cytonn PLC to offer huge promotions in blogs, mainstream media and social media to entice unsuspecting buyers with freebies and lower down payments. Some of these PR stunts involves cutting down the prices by a percentage thus angering earlier buyers who paid higher prices; an image of a well-managed company and photos that hoodwinks potential buyers.
According to data by central bank of Kenya (CBK), real estate recorded the highest growth in non-performing loans in the first quarter of the year, this has resulted to the rise of the asset seizures by many lenders. A loan is considered non-performing if it remains unserviced for more than three months so they say.
CBK reported that non-performing loans (NPLs) in the sector rose by Sh6.1 billion (15.8%) in April-June to Sh44.4 billion compared to the previous quarter as property developers outpaced manufacturers (11.7%) and traders (7.3%) in growth of default on loans.
Cytonn continues to get funds directly from individuals and institutional investors as opposed to going through banking sector intermediaries irrespective of the frustrations these group of investors are left to go through in this tough economy. Cytonn has subjected many of its customers to untold suffering. They do a lot of PR only for their unsuspecting buyers and investors to lose their properties to creditors.
There are so many repossessed homes, properties that are being sold off cheaply across the country. We understand that there is general financial difficulties but a bigger percentage has been fueled by cheap PR stunts, promotions. If your monies are not looted from state coffers but borrowed from banks or earned by the sweat of your brows then if you have to buy property in Kenya, Cytonn is not your ideal seller because sooner or later, your sweat may be watered down as you die slowly through depression.
It is the same PR that forces real estate firms to look for environmentally unfriendly locations in the guise of ’leafy suburbs’ to build your ‘dream home’. Cytonn is deeply in this rat race, flouting environmental and urban laws with impunity and bribing the authorities not to demolish such structures.
The Situ Village, a Cytonn development, which sits in a very serene environment in Karen is subject of an appeal to the National Environment Tribunal– by Karen and Langata District Association- and it is said Cytonn can construct anything except a boundary wall. In February, they stripped a section of the riparian area of the sensitive Mbagathi River.
Cytonn fraudulently acquired an area of around 7,500 square metres. The Water Resources Authority has visited and 254News trust that Cytonn will be brought to book soon over this. In fact it’s a matter of time. Furthermore, 254News can authoritavely confirm that CIC, Britam PLC and I&M Bank PLC are already selling properties in Nairobi’s satellite towns of Kiambu and Kajiado counties.
And according to the reports inside the Cytonn’s already concealed 2017 financial year statements, Cytonn has properties in Kiambu County namely The Alma, Taraji Heights, RiverRun Estates- where the greatest possibility for loss is. Banks have already moved to auction properties in these areas, fearing that lowering prices would lead to write offs and losses.
This auctioning craze can be seen in one of the biggest mortgage lender, Housing Finance Company of Kenya (HF) which has put Ksh2 billion clients’ properties to auction, sending distress in the real estate sector. Majority of the 54 properties that are on sale in Nairobi and its environs are standalone houses and apartments whose reserve prices range from Sh3.4 million to Sh300 million, the Business Daily reports. HF was also recently sued and the clients won, HF is therefore being sked to pay Sh1.2 billion as compensation for the person whose house was auctioned illegally in 2002.
This Kenya real estate market is not lucrative as Cytonn would like you believe. Over the week Cytonn cancelled its public listing plan citing the continued depressed performance of company stocks. “We’ve decided to pull back given the equities market is not that vibrant. From our tests, the market is not willing to pay what we would have liked,” CEO Dande said. However, the truth is that Cytonn PLC’s current GCR rating implies an 83% chance of bankruptcy in 3-5 years.
Most Home owners such as expatriates are sensitive to cost since they have housing budgets, beyond which they must seek approval from their head offices for extra rental expenditure. Cytonn has allegedly been taking advantage of this group since they have been moving away from high-end houses as bungalows, maisonettes, and townhouses to cheaper apartment unfortunately they are fleeing the country en masse.
Their newly finished CySuites Apartment Hotel, the latest offering under its Private Equity arm also looks to attract the same caliber of people in this depressed market and this is a no-brainer that that too will suffer many losses in this depressed economy.
Experts say CySuites, which was launched in early this month can only manage to perform up to around March 2020 and then feel the heat of the lack of clients. At a time CIC is selling 712 acres of land and exiting the property development business; Britam PLC exiting the real estate development business with plans to auction properties in Upper Hill; the Athi River’s Sunset Boulevard estate is in the red as I&M Bank plans to auction 204 units to recover a KSh 2 Billion debt investing in it does not require rocket science to know that Cytonn PLC would be the riskiest business ever. Real estate in Kenya looks rosy but that is further from the truth, the money used might as well come from public coffers; funded by the runaway corruption.
Don’t stress out, just don’t buy Cytonn or any other deals. The message is out there. See how housing Saccos such as Banda Homes (we have data on this and will unleash later) are struggling to sell, they keep on changing names in order to dupe clients. It is a sinful rat race which Kenyans must beware of.