MIP WEEKLY INDUSTRY CONSTRUCTION REPORT NO.46
Welders from China, Nigeria hired for pipeline construction
PERIOD: July 4 to 10, 2016
04/07/2016 : The Business Daily,Pg. 5
08/07/2016: The Standard, Pg. 8
- Skills shortage has pushed Kenya to ship in about 50 Chinese, Nigerians and Lebanese workers to construct the new Sh43b Nairobi-Mombasa refined oil pipeline
- Kenya Pipeline Company (KPC) said the country has only three specialized pipeline welders, prompting the Lebanese contractor to outsource “the rest” from the Middle East country.
- Kenya turned to Nigeria for about 44 pipeline coaters, according to KPC
- The short supply of technicians has been blamed on growing shift of focus among learners towards degree courses perceived to lead to white-collar jobs while snubbing technical and vocational training.
- The government has in recent years upgraded several national polytechnics to universities, amid concerns over shrinking pool of certified technicians
- The KPC said the country is spending over Sh3.6m monthly on the imported manpower for the pipeline that is set to be completed in September.
- KPC managing director Mr. Sang says the agency seeks to cut foreign staff costs with the opening of a gas and oil training school at its Morendat facility in Naivasha.
- A consortium led by Lebanon’s Zakhem is building the new 20-inch multiproduct pipeline to replace the aging existing one, which was constructed by the same company in 1978.
- Sections of the existing 14-inch pipeline have suffered major corrosion, leading to partial blockages and inefficiencies. Demand for technical workers is set to further soar with the planned construction of a Sh210b crude oil pipeline from the Turkana oil fields to Lamu Port
- Some 2000 Chinese workers are constructing the Sh327b Mombasa-Nairobi SGR expected to be completed next year
- China Road and Bridge Company (CBRC), the contractor for the railway, opened a school in Voi to train Kenyans on Railway construction, operation and management to teach steel assembling, bricklaying and masonry and scaffolding. Read more
Companies want railway contractor jailed for contempt in payout case
05/07/2016 : The Standard, Pg.32
- SGR contractor risks jail for contempt for proceeding with construction despite court orders stopping them
- Two companies, Africa gas and oil company and Miritini Free Port company had gone to court and obtained orders stopping the work
- The companies will apply to have the China Road and Bridge Company managers jailed for disobeying court orders
- The KRC in its papers filed in court wants the orders issued against the contractor and not them.
- The contractor through the government was to compensate the companies before the start of construction
- The companies had made several follow up with the NLC and the contractor without success
- The contractor is on the ground despite companies not paid.
Taxpayers losing sh37.9m daily after construction of SGR halted
08/07/2016 : The Business Daily, Pg. 5
- Kenya railways is losing sh37.9m daily following the suspension of the construction of the SGR on a piece of land in Mombasa, a court ahead on June 24.
- Through the lawyer Cecil Miller, the corporation said the situation will continue to get worse should the court order stopping the construction remains.
- The loss is attributed to the workers’ pay, expenses for running sites and for contracted supplies.
- African Gas Oil Company Ltd stopped the rail construction on the strength that it is yet to receive Sh519m awarded to it by the National Land Commission as compensation for ceding the land for the Mega project.
- But transfer of funds was stopped after African Gas Oil ownership of land was questioned.
- Miller opposed the application by African Gas Oil Company Ltd to have the construction halted pending hearing and final determination the suit, arguing that the court should balance the rights of the petitioner and public.
- He further argued that 80pc of the construction of the SGR from Mombasa to Nairobi had already been completed hence stopping it is unjustified
Nairobi-Mombasa SGR line set for completion two months ahead of schedule
06/07/2016 : The Business Daily, Pg. 16
- Construction of SGR will be completed 2 months ahead of the official time line, says the Transport PS Irungu Nyakera.
- By May, civil works of the project was already 80pc complete with laying of tracks so far covering a distance of 280km from Voi to Sultan Hamud
- The government has already started the acquisition of locomotives, passenger coaches and wagons for the use of the track.
- Of the 33 railway stations under construction, some have already been completed
- Nyakera said the government was fast tracking the construction of the inland container depot in Nairobi with the ground breaking ceremony expected to take place in September.
- For the Nairobi commuter railway project, the ground breaking ceremony will take place next month. The commuter railway project will cover a distance of 20.5km from Nairobi’s central business district to areas near Jomo Kenyatta International Airport.
- The designing of the Nairobi commuter has already been completed and construction is expected to begin soon
- For Mombasa, the commuter railway project was still at its design stage and plans are underway for the project to start.
- The commuter railway line in Mombasa will start from the old Kenya railway station at Majengo to Miritini which will cover about 13 km. Read more
Sh400m set aside to improve roads, Meru county
08/07/2016 : The Business Daily, Pg.12
08/07/2016 : The Standard, Pg. 23
08/07/2016 : The Daily Nation, Pg. 19
- The county has set aside Sh400m for repair and maintenance of roads. Roads to be given priority are those leading to agriculturally productive areas.
- The Meru government has started tarmacking of three km of Maua town roads at a cost of Sh90m
- Using a low cost Pro-base technology, the upgrade of the roads is expected to boost business, the Maua town administrator Hellen Nkatha said.
- She said the town is the second largest after Meru and raises substantial revenue from Khat (miraa) business.
- Ms. Nkatha said some sections of the town’s road were tarmacked a year ago but the project was stopped due to the encroachment of the area by land grabbers. But encroachers have been evicted.
Kenya looks to IFC for road construction funding
08/07/2016 : The East African, Pg. 32
- Kenya is looking for close to Ksh550b to complete the construction of 10,000km roads, after local banks refused to lend money to the contractors after the botched annuity financing model
- The country is now negotiating for a line of credit of $1.5b from the International Finance Corporation, to finance part of construction of 4,000km of urban roads; some 6000km of rural roads are earmarked for funding by state offers.
- It will spend about Ksh340b on rural roads, and Ksh210b on urban roads
- If the new arrangement with the IFC works out, the government said the contractors would be able to access $1b directly from the institution, and $500m will be channeled through a consortium of six commercial banks
Regulator to blacklist inept road building companies, Kampala, Uganda
06/07/2016 : The Business Daily,Pg. 14
- The Uganda National Roads Authority, the body that is in charge of road construction and maintenance in the country, has started profiling road construction companies
- The goal is to establish companies that carry out quality work and those that have been doing shoddy work and blacklist them
- The companies whose work UNRA will find sub-standard will not be given other contracts.
Investors in single room houses reap the most returns
04/07/2016 : The Business Daily, Pg.5
- Investors in single room houses for the past two years have reaped most returns on rising rent while two-bedroom bungalows fetched the least returns amid concern of a glut in high –end housing segment.
- Official data shows that the average monthly rent of a one-room house jumped 12.2pc to Sh3,980 in June compared to Sh3547 in the same month of 2014
- The single units, have experienced the fastest rise in rent according to data from the Kenya National Bureau of Statistics
- Two-bedroom bungalows are up by only 4.4pc to Sh27,789 over the same period while three-bedroom maisonettes are up by 5.3pc to Sh32,797.
- This make growth of two bedroom houses bungalows the slowest, benefiting tenants and denying landlords higher returns on investment.
- Sector players reckon that lower income houses will grow faster compared to other segments amid flat demand in the high-end segment.Read more
What we need to do to increase home ownership in Kenya
07/07/2016 : The standard, Home and away
- Kenya’s property market is the third most developed in sub-Saharan Africa behind Namibia and South Africa. In Kenya, real estate is seriously overvalued, thanks to high housing demand in the face of an acute shortage. The average price for an apartment in Nairobi is currently Sh11.58 million, up from Sh5.2 million in December 2005. There is no home on the formal market selling below Sh2 million.
- Last year, the Central Bank of Kenya and the World Bank released a report showing that over 90 per cent of Kenyans cannot afford to buy a house even with the aid of mortgage loans. The report also revealed that only eight per cent can afford a mortgage
- Increasing access to high quality affordable housing has a profound impact, both for the individual and the society at large. Yet, housing is a challenging and capital-intensive sector characterized by delays and regulatory difficulties
- Social investors and impact investors can catalyse and support the production of affordable housing in the following ways:
- Government – The government should step in by offering incentives to developers. Since the government is not a profit making entity, it should waive value added tax to developers who build low-income houses valued in the excess of a certain amount, say Sh12 million.
- Project finance
The cost of finance is one of the most prohibitive factors in the Kenyan market. Most banks are currently charging an interest rate of 18 per cent. Banks should consider giving developers reasonable rates to enable them finance their projects. Banks should also disburse funds within a reasonable time.
- End user finance
Once a project is completed and the homes are built, the big question is: How will the buyer finance it? This is a critical question especially when it is in relation to low-income buyers. Banks in Kenya typically lend to high- and middle-income clients.
Banks should develop products that target low-income home owners. They should lower the interest rates at least for the low-income earners.
Developers should offer homes targeting low-income earners. They should liaise with the government and financial institutions to come up with a way to provide homes that are affordable to low-income owners. The market for high-income houses is becoming saturated; low-income housing is the next best avenue for developers to focus their attention on. This is where most people who don’t own homes are; developers should realize that there is money in numbers.Read more
Analysis of expected returns on the Fusion D-REIT offering, and recommendation to investors to participate in the offering. PDM announces plans to begin development in Uganda, while Stima Sacco seeks to raise a Kshs 5 bn bond to finance its mortgage business
10/07/1991 : Kenya Retail Report, & Cytonn Weekly Report No.27
Analysis of Fusion Capital D-REIT
- A REIT is a regulated investment vehicle that enables investors to collectively contribute capital as consideration for the acquisition of rights or interests in a trust divided into units with the intention of earning profits or income from real estate as trust beneficiaries.
- Kenya has two major types of REITs, which are:
- Income REITs, I-REITs, which generate income from yielding real estate assets, and
- Development REITs, D-REITs that acquire real estate properties for development and construction purposes.
- These two types of REITs can either be
- open ended in that they can issue additional units or,)
- Close ended in that you can only issue units once
- Here are some of the expectations from Fusion Capital;
- Fusion Capital, the promoter of the REIT, aims to raise Kshs 2.3 bn through the sale of 100.0 mn units closing on July 15th 2016, and will be listed on the Nairobi Securities Exchange on July 28th 2016,
- Units in the REIT are targeted to professional investors, with a minimum application size of Kshs 5.0 mn, equivalent to 218,000 units,
- The trust will be a close-ended fund and existing unit holders will have the right to approve the additional issuance of units for further funding of the REIT’S activities,
- The Kshs 2.3 bn of money raised will be used to develop a mixed use development comprising of residential, office and retail project in Meru, Kenya, a project known as Greenwood City,
- The base case construction period for the development is at 24 months, with a post-development period of 12 months for the REIT to earn rental income,
- As per estimates from Fusion, the project will deliver Kshs 1.2 bn of profit, and a project IRR of 20.3%.
- Cytonn carried out a valuation on the REIT and the project to analyze the offer and project returns associated. Using their cost and price provisions and assumptions, and factoring in our assumptions where necessary, we were able to deduce an expected total residue of Kshs 1.6 bn, a project IRR of 18.0%, and a return to equity holders of 20.0%.Read more
PDM enters Uganda
- Kenyan developer PDM Holdings has announced plans to start construction of high-end residential housing in Kampala, Uganda.
- The USD 10.2 mn development will comprise of 30 three-bedroomed luxury apartments, which will cost between USD 200,000 and USD 500,000.
- The development, targeting mid to high-income individuals, is set on a 1-acre land parcel in Kololo, an exclusive suburb of Kampala.
- Construction of the high-end units is backed by a 105.0% increase in high-net-worth individuals in Uganda between 2005 and 2015, according to Knight Frank’s Wealth Report 2016, creating demand for luxury living standards.
- Real estate in Uganda is still at infancy stage with the residential sector set to grow supported by:
- Population Growth: Uganda has a large population of about 37.8 mn people and a very high growth rate of 3.0% compared to the overall world population growth of 1.2% and Kenya’s growth rate of 2.4%,
- Large Housing Deficit: According to the Uganda Bureau of Statistics, there exists a large housing deficit of 550,000 units, with about 160,000 of the backlog being in urban areas,
- Rapid Urbanization: Uganda’s urban population stood at approximately 7.4 mn in 2014 and is likely to increase to over 20 mn in 2040, according to World Bank. This is backed by large young population, who currently account for 75% of the population, migrating to urban centers in search for employment and education especially in Kampala, and,
- Infrastructural Development: A 10-year plan to upgrade Uganda’s transportation network, amounting to USD 11.0 bn, and power generation is likely to open up new areas for real estate development. Other expected infrastructural developments include construction of Kabaale airport in Hoima, upgrade of Entebbe International Airport, as well as construction of the Standard Gauge Railway from Kenya, through Uganda, Rwanda, South Sudan and Burundi.
- Despite its growth potential, Uganda’s real estate is likely to be set back by the following limitations:
- Fluctuating Ugandan Shilling: Depreciation in Uganda’s currency undermines real estate growth due to high costs of importing building material, which results in higher overall project costs. In addition, it results in buyers spending more for the dollar-denominated property prices, as seen in 2015 when Uganda recorded a 17.5% depreciation against the US Dollar,
- High Mortgage Rates: A tightened monetary policy has resulted in high mortgage rates averaging between 21.0% and 23.0%. Investors are therefore likely to defer borrowing for development purposes, and individuals less likely to take mortgages for house purchase,
- Bureaucracy in Property Registration: Developers continue to face hurdles in property registration, due to lengthened processes and exorbitant costs. According to World Bank, Uganda ranked 161st in terms of dealing with construction permits, and 120th in property registration in 2016 while Kenya ranked 149th and 115th, respectively, and,
- Low Income Population: Uganda is still ranked a low-income population with over 50.0% of its population being poor (earning less than USD 2.0 a day), according to World Bank. This means despite the high demand for housing, a large majority cannot afford a low cost home costing USD 33,000.
Stima Sacco seeks to raise Kshs 5.0 bn
- As part of its strategy to expand and diversify funding sources, Stima Sacco has announced intentions to tap into the debt market through issuing a Kshs 5.0 bn corporate bond to finance its mortgage business.
- The Sacco intends to offer long-term loans of between 10 – 15 years at a fixed interest rate with reducing balance. The move is expected to increase mortgage uptake, which is currently below 25,000 mortgages due to high interest rates and lack of long-term funding.
- Stima Sacco has been a developer of residential properties, and now seeks to finance buyers by requiring them to raise a maximum of 20.0% of the price as a deposit, then financing the remaining amount pegged on their contribution to the cooperative.
- Saccos are increasingly enabling property-ownership through their investment cooperatives by exploiting economies of scale to acquire property, and then sell to its members at affordable prices.
- In addition, they have enabled access to loans for property ownership at rates as low as 1% per month. At a period of prevailing high interest rates and a tough operating environment, homebuyers and developers are likely to shy away from bank loans.
- There is therefore need for developers and financiers to explore means of issuing low cost financing options so as to increase mortgage uptake and consequently uptake of housing units. Read more