It is virtually every Kenyan’s dream to own a home. But the reality is that very few of us are likely to be able to save enough to pay for one in cash. The most likely fall-back plan? A mortgage.
But big changes are afoot in the industry. A few weeks ago, Equity Bank announced plans to sell its shareholding in Housing Finance (HF) to financial services group Britam.
The bank will be selling its 24.75 per cent (57.27 million shares) in HF to Britam, subject to regulatory approvals.
Equity is targeting an offer price of Sh41.48 per share, with hopes of raising an estimated Sh2.37 billion from the transaction. If the deal goes through, it will make a Sh1.2 billion return on its investment in HF.
On the other side of the transaction, Britam will be spending Sh2.37 billion to increase its total shareholding in HF from the current 21.46 per cent to 46.2 per cent.
This means that with Britam holding more than a 25 per cent stake in HF, the insurer is well positioned to push for a takeover of the mortgage firm.
But the big question is, will Britam push for a takeover? And following the planned exit, what is Equity boss James Mwangi planning?
A couple of years back when Equity Bank increased its stake in HF, the bank fell short of increasing its shareholding past the 25 per cent mark. Then there was speculation that Equity would take over Housing Finance and bring it under its control. But that did not happen. Instead, Equity Bank maintained its stake at 24.75 per cent.
In this latest deal, with the three players — Equity Bank, Britam and HF — playing their cards close to their chests and giving little information on the transaction, the best analysis can be drawn by going back and looking at the plans Britam and HF have been disclosing in their annual reports and information memorandums the last six years.
In September 2011, Britam sold its shares — at Sh9 each — to the public through an Initial Public Offering. The firm was looking to raise Sh5.8 billion, and the lion’s share of this amount, Sh2.5 billion, went into property development, according to the IPO prospectus.
Fast forward three years later to 2014 and Britam is planning to pay Equity Bank Sh2.3 billion for its stake in HF. But would Britam earn better returns if it took the Sh2.3 billion and invested it directly in property?
The other question is: how will Britam fund the acquisition of the HF shares, especially since it reportedly plans to also increase its 10.1 per cent stake in Equity Bank?
This is where the proposed deal becomes quite interesting and complex from a regulatory point of view.
Dr Mwangi, Mr Benson Wairegi (Britam Group MD, Equity Bank non-executive vice chairman and HF director) and Mr Peter Munga (Equity Bank chairman and director at HF and Britam) are among top shareholders in the triumvirate — Britam, HF and Equity Bank.
Together with long-serving HF MD Frank Ireri, they have done business together for a long time, they trust each other and they have probably have had their fair share of failings together.
In business, like it is generally in life, sometimes one has to sacrifice something for the bigger goal. Wairegi, Munga, Ireri and Mwangi have probably done this repeatedly, and therefore understand the small price to pay right now.
The bigger, more profitable goal would be for Britam to become a behemoth in insurance, and by extension, property development in East and Central Africa.
Britam already laid the ground work with the takeover of Real Insurance, giving it a presence in countries like Malawi. Last year, it also purchased a 25 per cent stake in real estate firm Acorn Group, which has a porfolio of projects in Kenya, Uganda and South Sudan.
The East and Central African region is rapidly urbanising, meaning there is a growing need for housing, especially among the middle and low income segments.
Britam would need expertise in property development, which Housing Finance can provide. In turn, sooner rather than later, HF will need a partner it can rely on to offer it financial muscle and long-term development funds.
Britam last month issued a corporate bond to raise Sh6 billion, and through its asset management division, it will have large pool of funds it can channel towards real estate.
“In the medium term, the Group seeks to provide a full range of property services, including development, consultancy, property management and valuation. The property development will also complement the planned development of property funds by Asset Management — taking advantage of the new proposed Capital Markets (Real Estate Investment Trusts) regulations 2009 (that are not yet in force as of the date of this prospectus),” Britam wrote in its IPO prospectus in 2011.
One of the advantages of having Equity on board as a major shareholder was that HF could access cash at an affordable rate from the bank.
For instance, in 2010, HF borrowed Sh1 billion from Equity Bank at 8.5 per cent on a reducing balance for three years. HF used as its security Sh1.6 billion it had in various fixed deposit accounts. The home loans financier also enjoyed the comforts of quarterly rather than monthly payments.
The few details that have been revealed on this latest deal, such as Equity Bank targetting Sh41.48 per share when HF shares closed at Sh44.50 on Friday, have left many shareholders asking questions.
But one suspects the men at the helm of the three firms know how to extract full value from a deal.
So what is in it for Equity Bank?
For starters, if this transaction is approved, the bank will have made Sh1.2 billion in profit. Equity purchased a 20 per cent stake in the mortgage financier in 2007 and increased its stake to 24.75 per cent in 2008 by participating in a rights issue. The total cost of its investment in HF as at December last year stood at Sh1.15 billion, representing an average cost of Sh20.18 for each of the 57.27 million shares it owns. This profit would put it on course to take on KCB in terms of full-year profits for 2014.
Moreover, one suspects the bank may want to focus on unsettling the dominance of Safaricom in the mobile money transaction space. After all, Equity has been disruptive before, unseating foreign banks like Barclays Bank and StanChart from the top of the list of most profitable financial institutions.
If Mwangi is able to crack mobile money transfer and transaction services in Kenya, he might want to replicate the same across the region. With East Africa’s borders slowly being erased when it comes to doing business, he would be pursuing the goal of bringing seamless financial services through the mobile phone, riding on the Airtel network, to close to 60 million subscribers.
It would mean being able to offer loans and other services to a very large pool of customers, and increasing transactional fees.
And so, on the face of it, this deal may not appear to be anything but a savvy corporate deal. But dig deeper and you realise the ramifications are not minor.
Potential home owners, market analysts and Government agencies might want to closely monitor the unfolding developments to see the impact they would have on property prices and mortgage rates.
This is especially given that there are barely 20,000 mortgages in the country.
Further, Kenya’s mortgage financing sector is still in the hands of a select few.
HF controls about 25 per cent of the mortgage market, while Kenya Commercial Bank’s home loans arm S&L has a market share of 26 per cent. CfC Stanbic and StanChart hold eight per cent each, while the rest is held by the mortage arms of other institutions.
In its note to shareholders, HF has indicated is it keen to increase its market share to 50 per cent, and Britam may be able to give this goal the financial muscle it requires.
But the deal is now coming under sharp focus, with fears that the multi-billion-shilling transaction could be a slap in the face of minority shareholders in HF.
It is argued that the transaction is tantamount to a related-party transaction, where shareholders who are understood to own shares in both Equity and Britam are involved in the deal.
The trouble with this is that minority shareholders might have been denied a chance to participate in the deal, and it also raises questions about the competitiveness of the offer price.
A former chairman of the Capital Markets Authority (CMA), Mr Kung’u Gatabaki, has added that the deal is “tantamount to creating a monopoly in the mortgage and property financing sector”.
According to Mr Gatabaki, the deal between Equity and Britam might have denied the mortgage company an opportunity to look for an anchor shareholder elsewhere.
“The CMA board should take all these into consideration before approving the transaction. It is a fact I’m concerned and I believe others are also concerned even when they are keeping quiet,” he told Business Beat.
When contacted, CMA Acting Chief Executive Paul Muthaura refused to respond to our questions, saying that “given this is an ongoing application, we cannot comment on the issues under consideration”.
Competition Authority of Kenya (CAK) Director General Francis Wang’ombe said the authority would carefully review the share sale proposals by the two parties (Equity and Britam) before granting approval.
“We are expecting the parties to seek approval for the transaction prior to consummation as stipulated under competition law, and we shall analyse the transaction as provided by the Act.”
The Equity Bank Board denied it unilaterally sold its shares to Britam without consulting other shareholders.
“Once Equity Bank made the initial decision to consider selling its stake, several offers were received and evaluated. Britam was one of them. Transaction advisory was sought and Britam was recommended as the best offer,” said Ms Mary Wamae, Equity Bank’s company secretary.
“The Equity board recognised that, while a sale to Britam could offer significant advantages to HF in that Britam was already a significant shareholder in HF, Britam is a related party of Equity Bank through its cross shareholdings and the fact that the two entities have directors in common.”
According to Ms Wamae, the Equity Board was determined to ensure it put in place appropriate mechanisms to overcome potential conflicts of interest in terms of evaluating Britam’s offer, and to ensure that any resulting transaction with Britam would be completed on arm’s-length terms.
Conflicts of interest
“These mechanisms included seeking legal advice on this matter, and appointing an independent financial advisor to help evaluate the offers and negotiate the terms,” she said.
“Also, all the directors who faced conflicts of interest declared their interests and did not participate in the evaluation and decision-making process as required by Equity Bank’s corporate governance policies. Instead, a sub-set of the board strategy sub-committee, comprising mainly the independent directors, took charge of the evaluation and decision-making process.”
According to Wamae, the Equity board is satisfied that the resulting decision represents a fair deal for all the bank’s shareholders.
“In particular, the price offered for each share represents a 10 per cent premium over the price at which the HF shares have been trading on the NSE, and this premium is higher than that offered by the independent bidder,” she said.
Wairegi and Ireri refused to comment on the matter, saying the transaction is yet to be concluded. The two also declined to discuss the impact of the megatransaction in the mortgage market.
“You have to direct the questions to Equity,” said Ireri.
“Britam is not in a position to give any comments at the moment as the transaction is yet to be concluded,” said Wairegi.
Interestingly, however, the deal might have been crafted with HF’s planned rights issue in mind. Already, HF is harbouring intentions of raising fresh capital from existing shareholders to fund its ambitious growth and expansion drive.
In April this year, shareholders approved HF’s resolution to increase its authorised share capital by an additional 265 million shares. Under the plan the Nairobi Securities Exchange (NSE)-listed housing financier’s capital will increase to 500 million shares from the current 235 million shares.
Ireri indicated the cash call could be executed next year, giving shareholders an opportunity to increase their stake in the company.
“These new shares will not be used this year. We are just preparing ourselves so that we may do a rights issue earliest by next year (2015) or 2016,” said Ireri
This means Britam might have another opportunity to increase its stake in HF, whose capital base currently stands at Sh6 billion, including reserves.
But even with the unfolding corporate realignments in the mortgage industry, questions still linger as to whether this deal could translate to lower costs of owning a home.
A cross section of analysts expect the Equity-Britam deal to benefit the firms, not necessarily property buyers.
“I don’t see an immediate impact on property prices and lending rates. The industry already has other players,” said Kingdom Securities CEO Geoffrey Odundo, adding that the transaction is meant to be a win-win situation for both Britam and Equity Bank.
“Britam will be able to focus on strengthening its real estate business. They will also have a financier who is more likely a partner. Equity Bank will have to reinvest the proceeds of the share sale in other areas that guarantee them high returns, and they will also be able to carry out their mortgage business independently.”
Mr Kenneth Kaniu, a chief investment officer at investment management company Stanlib Kenya, pointed out that HF and Britam stand to benefit from each other in terms of financial support.
“I think what happened has been viewed quite positively. Obviously Britam is going to enter the property market and acquire a financial partner who is able to provide capital when the need arises,” he said.
“It is a good opportunity for Britam in terms of access to capital and distribution of its products in the real estate sector.”
According to Mr Francis Mwangi, head of research at Standard Investment Bank, the likely impact of the transaction can only be evaluated once Britam outlines its strategies after the acquisition.
“It is important to wait and hear what Britam will have to say about the acquisition. So far, they have not commented, but I don’t believe they would want to be passive after acquiring a huge stake in HF. They would want to do business.”
The state of Kenya’s mortgage market has become a matter of public concern, with the low uptake of these loans largely attributed to inadequate access to finance for low-cost housing and lack of appropriate financial solutions.
Further, limited access to long-term funds has made commercial banks reluctant to commit huge portions of their short-term deposits to long-term mortgage loans.
Other barriers to the development of a vibrant mortgage market in Kenya include complex legal and regulatory frameworks, complicated land and property registration procedures and volatile inflationary pressures.
The high cost of construction combined with the difficulties in accessing land have not helped matters.
Kenya has a large housing deficit, which is widening every year. Out of a total 150,000 housing units required annually in urban areas, only 35,000 units are produced. The deficit is largely filled by slum dwellings and own-construction of poor quality shelters.
Other impediments to home ownership cited include limited research on low-cost building materials and construction technologies, and stringent planning regulations and standards.
According to the World Bank, the housing gap can only be partially ?financed by mortgages. Lower income groups require other solutions, such as housing microfinance.
Among the measures proposed by commercial banks to spur growth of the mortgage sector are Government support for institutions such as the National Housing Corporation (NHC), digitisation of the ministry of Lands office to reduce the time taken to process transfer of properties, and full disclosures of all charges related to funding of mortgages to enable buyers make informed decisions,
Others are Government initiatives to oversee valuation to avoid arbitrary pricing of properties, reduction of stamp duty as well as taxes levied on construction materials, and support of the development of secondary mortgage markets as an alternative source of financing.