Her voice beamed through my car speakers as I drove to work. “Should I invest with Cytonn”? This particular morning, I was extra late to work as I had slept late reading my latest book on war and woke up late in the morning, after I had prepared to leave the house, I noticed how bushy my chin was. I hate bushes, infested by snakes or not. I like everything clear and smooth. So, I had to undress and shave before starting to work. On our road, I delay of ten minutes will cost you one hour in the jam.
“Hey my dear”, I replied to my caller, “you are like the seventh person to ask me that question this week, hold on I deal with a traffic cop here first”. The Police woman, directly ahead of me and on the road, had her hand raised and she signaled me to the side.
As I pulled slowly to a stop, and as she turned to come to my passenger window, a rowdy matatu overlapping on her side send her scampering to the side of my car window. Embarrassed she retorted, “Nawajua, watanijua” (I know them, they will know me). “Just go”, she ordered me, as I grinned widely and drove off. In the rear mirror, I could see her adjusting herself, chest and waist, before positioning herself for the next victim. I was lucky.
Back to my conversation, “The cop has released me”, I told my caller, a former colleague who retired recently. “Last week I attended a Cytonn event at the Panafric and I asked many questions”. I continued.
Let me explain who Cytonn is. They are an investment company dealing in real estate building and renting or selling property around and about Nairobi. They also have a cash management arm that provides investors with options to invest their cash short, medium or Long term.
To invest in real estate through Cytonn, you can choose among various options offered to clients including the real estate backed fixed income notes that offer a fixed rate of return over an agreed period or through the purchase of the completed buildings in the projects.
Under their belt, Cytonn boasts of many real estate developments, a number already completely and disposed off and counting. The Ridge, The Alma, The River front, Newton are some of the fancy names accorded to their developments.
One thing is clear, investing in Cytonn is currently promising high returns and that could be the reason most people are skeptical and cautious, some giving it a wide berth altogether. For example, the notes yield returns in the tune of 12 to 20% depending on amount and period. Most clients who invest Kes1m and above for periods of a year and over get returns of 18% annually.
This raises the question, is Cytonn a pyramid scheme? How are they able to offer such lucrative returns in the market? What is the future outlook of this organization and what is the best approach to investing there?
I sort to get answers from the organization by attending their event and asking those questions.
How are you able to offer such high returns?
One Cytonn presenter provided the explanation, which he called the 50:50 formula. Once you give them your one million, they will split it into two, one half is invested in traditional assets which include treasury bills, bonds, corporate notes etc. This portion yields an average of 10% per annum.
The other half is invested in real estate which yields an average 7% per annum in rental income and 20% in capital gains. In total, the real estate arm offers yields in the range of 26%.
Your whole investment will therefore return an average of the traditional returns and the real estate yield of 18% = (10+26)/2. This is the return accorded to investors.
The capital gains portion is particularly troublesome in my view.
When you own real estate, the value of your house will keep increasing year on year because the demand for houses keep increasing with the growing population. In the Kenyan market, under supply persists which allows real estate to be overvalued. However, until you sell your house, the increase in value remains unrealized. This therefore follows that for the company to realize the 20% capital gain, they must sell the units.
Most buyers are retail customers procuring units for residential purposes and with the squeeze in credit due to the interest rate capping laws introduced in Kenya in 2016, demand is stagnant and or declining.
Due to overvalued houses, the young generation who are generally access instead of ownership oriented, prefer to rent instead of buying, in the same way they are preferring to Uber instead of buying cars. This therefore introduces an element of uncertainty in the sales.
Cytonn, to manage this trend, have a strong research wing who interrogate consumers and map out areas and units that are in high demand and then engage partners to come up with concepts that are then sold off plan. So far this has worked. However, the risk of non-selling of units can mean that the returns promised to an investor, including their capital cannot be realized at maturity. Such is business and this is the risk that an investor must evaluate and accept before committing his money.
Is Cytonn a pyramid scheme?
A pyramid scheme operates by paying investors through funds placed by other investors. In most cases there is no real product being sold and once new clients cannot be sourced at the rate of the maturing obligations, the thing collapses belly up on itself.
Cytonn is selling real houses. Their notes are backed by the real estate meaning that as an investor, you have been accorded some security in the tune of a recourse or claim on the real estate. Whether you can exercise this power singly, the jury is out there.
They are therefore not a pyramid scheme.
How are you able to fund these many projects?
Interestingly, Cytonn have introduced a new funding concept called the mezzanine fund. Just like its name, the mezzanine in real estate is the floor between the ground floor and the upper floors.
Applied to funding, capital is normally sourced from private equity investors and mainstream banks. This funding sometimes is not adequate to complete the project, hence to bridge the difference, the company gets individual investors to fund the balance through the mezzanine, which are the notes that command a high return.
The CEO, Mr Dande while explaining the funding concept explained that since traditional lenders like banks will only finance up to a max of 60% or less of real estate projects, 20% of is value of land, the remaining 20% is funded mezzanine. The yield on this mezzanine should be equivalent to what banks would have charged on their funds anyway, hence to make it attractive for private investors, the 18% yield is attractive.
What way forward?
Cytonn, as a private company, now working to have themselves regulated and become public, have come to the market with a different way of thinking. That thinking being unique will cause jitters among unsophisticated investors. If you have over a million shillings and wondering where to invest for returns of over 15% for periods of less than 3 years, then Cytonn could be ideal. Reversing the interest rate capping law could be the additional shot in the arm that this fledgling local company requires to fly higher. If investing for longer than three years, then you need further due diligence as the uncertainty and the stagnation of the mortgage market could lead to higher risks in the medium and long term.