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CBK Bonds Versus Real Estate: What Does the Math Say?
Money Management

CBK Bonds Versus Real Estate: What Does the Math Say?

A few months back, an investment analyst got Kenyans talking after comparing the returns of investing in a bond with those of investing in a real estate. The comparison specifically compared the average returns from a single unit apartment in Kilimani vis a vis investing in the Central Bank’s recently announced 14-year infrastructure bond. 

The analysis went viral - partly because Kenyans have traditionally placed a premium on real estate investments. Multiple surveys indicate that real estate is the predominant area where wealthy Kenyans direct their investments. 

In 2019, a report by the Standard Chartered Bank surveyed Kenyans with a networth of at least Ksh100 million. Nearly one third (28%) indicated that they preferred holding land while 27% preferred property. 

Can government bonds be more lucrative? The CBK recently announced a 14-year infrastructure bond that allows individuals to invest up to Ksh20 million per person. Money254 delved deeper into the comparison to look at the government bonds in general vis a vis investments in real estate - with consideration for both property and land. 

Overview of Kenya’s Real Estate Investments

Real estate assets have for a long time been hailed as having the highest return on invest in Kenya. Indeed, during the vetting of Cabinet Secretaries, a significant majority of nominees had their wealth in real estate - through land and property that were largely acquired years back but have appreciated due to inflation. 

Land has particularly been hard hit by inflation. Kenya’s urban areas are hard-hit by the demand for housing which in turn pushes up the demand for land. According to the UNHabitat, Kenya has a demand for 250,000 housing units every year against a supply for only 50,000 units per year. 

The situation is further complicated in Nairobi and other major cities where there is significant foreign investment. Expatriates and international organisations are able to pay a premium for strategic property - further pushing up costs in some of the up-market residential and commercial areas. 

Also Read: Windfall: Areas in Nairobi, Environs Where Land Has Highest Returns

The boom, however, is mainly in purchase of property. The rental income yield does not necessarily match the growing cost of housing units and land in Nairobi. A HassConsult report on the Nairobi real estate market indicated an oversupply of housing units in high-end neighbourhoods such as Kileleshwa and Kilimani. Some landlords have been faced with low occupancy rates while others have had to significantly reduce rental prices. 

The average annual rental yield in Nairobi has fluctuated between 7 and 9 per cent over the past three years. It's higher or lower in some estates depending on specific market forces. Kenya’s national average is 6.6 percent - lower than Tanzania which has an 8.5 percent return. 

Our spotcheck showed that with Ksh7 million, you can comfortably buy a modern one bedroom apartment in Kilimani with amenities such as a swimming pool and a shared gym facility. A house in the same area, with similar features, fetches about Ksh50,000 per month. 

Pros of Real Estate Investments in Kenya

The major advantage of real estate investments is the high appreciation rates. Some real estate investments appreciate at rates as high as 50 percent per annum. This is particularly so in areas where there are huge infrastructural developments such as roads, malls, schools, etc. 

Real estate investments also bring in rental income as is the case with rental houses, land for leasing, etc. They can also be used as security for loans and surety in courts of law. 

On the flip side, real estate investments have the disadvantage of low disposability - i.e. the process of resale is much higher than with other assets. They are also more prone to insecurity and physical damage. Rental income can be considerably low in some areas. 

Overview of CBK Bonds

A government-issued bond is a form of investment where the investor lends money to the government for an agreed period of time and for an agreed interest rate. In Kenya, government bonds are issued by the Central Bank of Kenya. 

The interest rates (known as the coupon rate) vary depending on the type of bond - but interest is paid bi-annually (every six months). For example, if you purchase a Ksh100,000 bond, with a coupon rate of 10 percent per annum, you will be receiving Ksh5,000 every six months. All CBK bonds are issued for a specified period of time, for example 5-year, 10 year 20-year bonds. The end of that term is known as the maturity date. For example, an 18-year bond issued by the CBK in July 2022 will mature in July 2040. Upon maturity, the investor receives back the principal amount. 

Any person can invest in a CBK bond. To do so, you open a Central Depository System (CDS) account with the CBK - it is a free service. You can either purchase directly at CBK offices or through a stock brokerage firm, which may charge about 0.02 percent of the value invested. The maximum value for infrastructure is Ksh20 million for individual investors. 

A simple comparison with the example highlighted above (a one bedroom in Kilimani) shows that with Ksh7 million, you would qualify for an infrastructure bond with at least 12 percent coupon rate. 

Pros and Cons of Investing in CBK Bonds

Government-issued bonds are largely regarded as one of the most secure forms of investments. The government, unlike individuals or organisations, has a very low chance of defaulting on its debt obligations. 

CBK bonds offer relatively high interest rates of up to 14 percent per annum. This compares above what most banks offer as interest rates on long term savings. It is also significantly above the rates offered in the Money Market Funds and Treasury bills. 

Bonds also have the advantage of regular income through the bi-annual interest payments. For an investor looking to have a regular source of income while retaining the principal, this is a convenient investment option. Moreover, if the investor wishes to resell the bond - bonds offer an easy way out as they can easily be sold to other investors before their maturity dates. Some types of bonds, particularly the infrastructure bonds that typically mature after at least ten years - are tax free.

The major disadvantage with bonds is that they are susceptible to inflation. Unlike assets that can generate income and appreciate at the same time, bonds depreciate with regard to the principal amount. 

For example, if you invested Ksh1 million today, you will be paid interest every year but upon maturity, you will get Ksh1 million whose value - say 10 years from now - will have a much lower value. 

Also Read: Is Investing in Government Bonds a Good Idea? (Pros & Cons)

Practical computation factoring in value after 14 years

To get perspective of the comparison between rent real estate and a CBK bond investments, we compare the two examples above and look at the returns from all angles.

Kilimani One Bedroom Apartment:

For Ksh7 million, the rental income is an estimated Ksh50,000. This totals to Ksh600,000 per annum - before discounting expenses such as maintenance and unoccupied days. 

For purposes of this comparison, we assume that 10% of the gross rental income is used for maintenance. This leaves you with Ksh540,000. Under Kenyan law, rental income is charged at 10% of the gross rental income which means another Ksh60,000 goes to the taxman. This leaves you with a net rental yield of Ksh480,000 (6.8%). Over a period of 14 years, this increases to Ksh6.7 million. 

Over the 14 years under comparison, it is not practically possible that the rent will remain the same. Recent surveys have shown Kilimani has an annual rental increase of about 6 percent annually. We used a compounding calculator and calculated the extra income (on top of the Ksh480,000 would total to Ksh629,531. 

Thus total income from your rental investment after 14 years would be Ksh7.3 million. 

CBK Bond Returns

On the other hand, the income from the CBK bond is as follows:

The 18-Year Bond released in May had a coupon rate of 13.742%. The current 14 Year Infrastructure bond is seeking to raise Ksh60 billion and is still open until November 8 when the bids close. The exact coupon rate will not be revealed until bids have closed but based on the May bond coupons and increased inflation, it is largely expected to be above 13 percent. For purposes of this comparison, we will work with a 13% coupon. 

For Ksh7 million, you will get Ksh910,000 annually (455,000 every 6 months). The infrastructure bond is zero-rated so there are no deductions (we assume you bought the bond directly and not through a brokerage firm).  

The total income over the 14 years is Ksh12.7 million from the bond. On income alone, the real estate investment will have earned Ksh5.4 million less than the CBK bond. 

Value After 14 Years

However, for a better perspective, we also consider the value held after 14 years. The real estate investor will be owning the house while the bond investor will be holding the cash invested as principal. 

The value for the two assets varies due to inflation. The value of the Ksh7 million cash depreciates while the rental unit appreciates - all factors being constant. 

Also Read: To Rent or to Own? 4 Things to Consider in the Kenyan Market

For the real estate investor, recent reports indicate that the annual growth rates with regard to rental sales in Kilimani is 4%. Thus, we subjected the Ksh7 million investment to the compound interest calculator. The value of the house comes to Ksh12.2 million in the 14th year (2036). 

For the cash invested in the bond, Kenya presently has an inflation rate of 6.1% per annum. This means that the value of Ksh1,000 held today will have gone down by Ksh60 - same time next year. 

There have been relatively high inflation rates in 2022 so we assume that the average annual inflation over the next 14 years will be 5 percent. Thus, Ksh7 million held today will have a future value of Ksh3.5 million in 2036 (also calculated using the compound interest calculator). 

Wrapping Up

Kenya’s economic vibrancy offers investors a wide range of investment options to consider. There is no universal rule on what is the better investment opportunity, as long as there is some profit at the end of the day. 

However, it is advisable to understand your investment preferences before you commit your money to any investment option.For example, if your most important factor is income, CBK bonds have a relatively higher income. However, if your main goal is to leverage on appreciation of assets, then the real estate option would probably interest you more. 

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Tony Mukere is the branded content lead at Money254. He is a trained journalist with a passion for impactful storytelling. Before joining, he worked as an editor at, and as a reporter at Connect with Mukere on Twitter.

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