Investors looking for high returns could start moving back funds into real estate and high-yielding stocks in the next few months as fixed-income returns shrink, analysts at British American Asset Managers (BAAM) have said.
Simon Ikua, a portfolio manager with the asset management company, which has assets valued in excess of Sh21 billion under management, Tuesday said that the shift of funds to other asset classes would come as inflation and interest rates fall over the next three months.
Mid last month, the Central Bank of Kenya (CBK) started pushing yields on the 91-day, 182-day and 364-day Treasury bills down after they peaked at 20.799, 20.914 and 21.961 per cent respectively, as inflation dropped.
Mr Ikua told a BAAMs investor briefing that the shift of funds would accelerate if the yields on the risk-free paper dropped below the inflation rate, which last month fell for the second consecutive month after rising to double digits throughout last year. “Investors will be chasing yields as they trend downwards. We expect a lot of continued interest in fixed income as long as real returns are higher than inflation and a gradual shift to real estate and probably high yielding dividend stocks in the stock market is expected,” he said.
Real estate business has had a dim outlook recently. At the beginning of this year Stanbic Investment Management Services in a research note said that they expected developers to suspend planned projects in the first quarter of this year, those with developments on sale to adopt aggressive marketing strategies and demand and supply to be affected by the high cost of credit.
Property firm HassConsult revealed that rental incomes for housing developers dropped by two per cent between July and September last year with rental returns on high-end homes most affected mainly due to the high cost of living.
Ben Woodhams, the managing director at Knight Frank also told Business Daily in an earlier interview that in the fourth quarter of last year there were “significantly fewer transactions” with most potential buyers postponing their decisions owing to higher interest rates.
Edwin Dande chief executive officer BAAM said that with high interest rates people are currently less likely to service loans and less likely to borrow.
“Real estate prices are already softening,” said Mr Dande who added that commercial banks had turned to restructuring loans to avoid defaults.
The cost of living dropped in January to 18.31 per cent compared to 18.93 and 19.72 per cent in December and November last year while yields of the 91-day, 182-day and 364 day Treasury bills dropped to 19.807, 20.02 and 20.723 per cent respectively during the last auctions over the past two weeks.
Cost of living drops
The monetary policy committee — the policy making organ of the banking regulator — decided to hold the Central Bank Rate, its benchmark rate steady at 18 per cent, for the first time in almost a year after increasing it from 5.75 per cent in March last year and four consecutive times in the last quarter of 2011.
Analysts are now expecting the benchmark rate which the CBK pegs all open market operations on to start declining as the cost of living drops making it possible for commercial banks to drop lending rates which are at record highs, bringing relief to borrowers.
The lower cost of borrowing will allow commercial banks to lend and as loans become more affordable investors could shift to the real estate sector helping lift its returns.
Mr Ikua said that going forward he expected the yield on the three-month old paper to settle at between 17 and 18 per cent over the next two months as investors assess any changes in monetary policy by the banking regulator in relation to the direction of the inflation rate.
CBK is also currently offering a third one-year bond whose interest rate will be determined by how investors bid. This will be the fourth such bond since the banking regulator shifted to borrowing using short-term facilities.