Economy

Kenya’s super rich return offshore cash in rare move

DNKNIGHTFRANKABSA0902D

Knight Frank chief executive officer Mark Dunford at a past function on February 9, 2023. PHOTO | DIANA NGILA | NMG

Wealthy Kenyans returned billions of shillings to the country to escape economic turmoil in Europe and the US, shifting their cash to local government bonds and luxury real estate.

A majority of Kenya’s super rich put their money in government bonds and properties targeting residential and retail clients, according to the 2023 “Wealth Report” compiled by luxury property firm Knight Frank.

They moved their cash from the US, the EU and China whose economies are slowing down simultaneously, with the IMF expecting a third of the global economy to be hit by recession this year.

Read: Where Kenya's super-rich are migrating to for investments

High-net-worth Kenyans have traditionally stashed wealth abroad to either escape the taxman’s scrutiny or to spread their risks by investing in the more politically and economically stable Western democracies.

But this practice has been upended by sluggish growth in the west following the continuing drag from the war in Ukraine as well as inflationary pressures and interest rate hikes by major central banks.

“The attitudes survey revealed a sharp portfolio shift in Kenya and Africa towards domestic markets, during this time of global turmoil…with Kenyan HNWIs [high-networth individuals] also tending to hold a far larger proportion of their wealth in property and bonds than the global average for HNWIs,” said Knight Frank Kenya chief executive officer Mark Dunford.

Globally, ultra-high net worth individuals (UHNWIs) saw their fortunes slashed by 10 percent on average, with Europe being the worst hit at 17.3 percent due to the Russia-Ukraine war, said Knight Frank.

On the other hand, their African peers suffered the lowest losses at 5.0 percent, faring better than those in Asia (7.0 percent), Middle East (7.3 percent), the Americas (10.1 percent) and Australasia (10.7 percent).

Knight Frank classifies as HNWIs persons with a net worth of $1 million (Sh127 million), while those whose net wealth is above $30 million (Sh3.8 billion) are classified as UHNWIs.

In this year’s report, Knight Frank did not give a breakdown of the number of Kenyans in each category in 2022. But a year ago it showed the country was home to 3,362 dollar millionaires and 88 ultra-rich individuals.

For the wealthy in Kenya, the flight from abroad was most pronounced in the property sector, where they reduced the share of their portfolio held outside the country from 19 percent at the beginning of last year to 11 percent by the end of December.

In 2022, the rich had 40 percent of their wealth in commercial property—mainly retail and prime residential rental segments held either directly, through funds or in Reits.

They have also continued to hold onto land for development purposes, riding on the sustained appreciation of land prices in the country.

Bonds accounted for 26 percent of their holdings, relegating equities to just 18 percent of their portfolios.

Government bonds in Kenya have provided investors with insurance against the capital erosion witnessed in other investment segments, in particular equities—which has seen a loss of billions of shillings in paper in the wake of foreign investors selling key stocks at the Nairobi bourse.

With returns of between 12.5 percent and 14 percent, the bonds comfortably beat the average rate of inflation of 7.6 percent in 2022, thus protecting wealth from erosion in real terms.

This focus on local investments also prompted fewer HNWIs to seek second passports through investment visas in pursuit of quality living and investments.

Kenyans have since 2010 been allowed to hold dual citizenship with the promulgation of the new Constitution.

Those seeking a second passport or new nationality normally do it to access better investment opportunities, healthcare, and quality education overseas.

“The stronger investment environment in Africa also combined with key changes to investor visas—including the UK’s closure of its Tier one investor visa scheme in February 2022—to reduce the number of Kenyan HNWIs planning to apply for foreign citizenship, which fell to 11 percent compared to 28 percent a year earlier,” said Knight Frank.

“In this general pivot away from international exposure and towards investment in Kenya and Africa, Kenya’s HNWIs are also the most optimistic in the world with 50 percent expecting their wealth to increase by more than 10 percent in 2023.”

In addition to the traditional investments, the wealthy have also been eyeing niche products such as jewellery, classical cars and art as a store of value.

Read: A third of Kenya's super rich seek second nationality

Half of them have invested in classic cars, while 45 percent have put part of their money into jewellery. Art (40 percent), watches, furniture (35 percent) and rare whisky (30 percent) are the other alternative investment options that the wealthy have been exploring in the country.

Some of the younger members of the high net worth club have also been investing in digital assets such as non-fungible tokens (NFTs) and digital currencies, but the amounts being pushed into this segment remain relatively low.

Knight Frank tracks the wealthy through established financial sector units like banks, wealth advisors and asset managers, meaning that it does not capture super-rich people with no links to formal wealth managers.

Local financial institutions which participated in the 2023 survey include NCBA, Absa Kenya, Stanbic Bank Kenya, insurers ICEA Lion and CIC Insurance, Genghis Capital, Nabo Capital and Dry Associates.

The World Bank in January lowered its growth forecasts for 95 percent of advanced economies and more than 70 percent of emerging market and developing economies, compared with six months ago.

Advanced economies will grow by just 0.5 percent this year, down from an estimated 2.5 percent last year, the bank warned. In the rest of the world, growth is expected to be unchanged at 3.4 percent.

However, excluding China, developing countries will grow by 2.7 percent this year, down from 3.8 percent in 2022.

[email protected]