Centum’s Flagship Failure: A Deep Dive into Two Rivers’ Escalating Crisis and the Erosion of Investor Confidence

Centum Investment Company, once celebrated as the quintessential Berkshire Hathaway of East Africa, finds itself grappling with a crisis of confidence as its flagship real estate project, Two Rivers Development, continues to hemorrhage capital. The ambitious mixed-use development, envisioned as a transformative urban hub and a cornerstone of Centum’s long-term value strategy, has instead become a monumental financial burden, casting a long, dark shadow over the entire investment portfolio and testing the patience of its long-suffering shareholders.

The latest half-year financial results for the period ended September 2025 have intensified market scrutiny, revealing a troubling acceleration in losses across Centum’s key real estate subsidiaries. The primary casualty remains the core Two Rivers Development subsidiary, which saw its losses widen to Sh90.68 million, an increase from Sh67.7 million recorded in the corresponding period of the previous year. While concerning, this figure is dwarfed by the spectacular deterioration in the performance of the Two Rivers Special Economic Zone (SEZ) entity.

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The SEZ subsidiary’s losses more than doubled, reaching a staggering Sh584.5 million from Sh288.04 million previously. This half-a-billion-shilling loss from a single segment has become the primary drag on Centum’s bottom line, forcing a critical re-evaluation of the company’s strategic direction and its capacity to execute large-scale projects successfully in Kenya’s volatile property market. For investors who have witnessed the company’s share price languish on the Nairobi Securities Exchange (NSE) for the better part of the last three years, the persistent bleed at Two Rivers represents a failure to deliver on years of high-profile promises.

The Financial Hemorrhage: IFRS vs. Investor Reality

Understanding the sheer scale of the Sh584.5 million SEZ loss requires separating accounting reality from operational performance. Centum’s management, led by Chief Executive James Mworia, attributes the significant hemorrhaging to two main factors: finance costs related to the development loan secured for the first office tower, and large setup and establishment expenses.

Under International Financial Reporting Standards (IFRS), specifically rules relating to property development and the SEZ structure, all operating expenses must be recognized immediately in the income statement. Crucially, IFRS often mandates the deferral of the corresponding revenue until key milestones are met—such as project completion, hand-over, or full payment. Mworia has repeatedly argued that this creates a fundamental revenue-expense mismatch, particularly in the early phases of large, multi-year projects like an SEZ office park.

While the technical explanation may be sound from an accounting standpoint, it offers little comfort to shareholders whose equity value is visibly eroding. The pre-tax loss for the broader Centum group widened more than threefold to Sh622.85 million, illustrating the deep operational malaise. Stripping out a Sh296.71 million tax credit, which provided the only relief and narrowed the overall net loss to Sh326.14 million, the core operational picture is considerably bleaker. The SEZ losses alone are now so vast they threaten to consume the profits generated by the company’s historically more stable Financial Services and Investment Operations divisions, both of which ironically saw declining earnings in the same period.

The Two Rivers SEZ: A Strategic Miscalculation?

The decision to designate parts of the Two Rivers complex as a Special Economic Zone was a strategic pivot intended to attract Foreign Direct Investment (FDI) and high-value tenants, capitalizing on the lucrative incentives offered by the Kenyan government. These incentives include:

1. Reduced Corporate Tax: Significantly lower tax rates for SEZ enterprises (e.g., 10% for the first ten years, 15% for the next ten).
2. Duty Exemptions: Exemption from duties and taxes on imported machinery, raw materials, and other inputs.
3. VAT Zero-Rating: Zero-rating of VAT on certain supplies.

However, the creation of an SEZ requires substantial initial investment in infrastructure and compliance—costs that Centum is now absorbing. The staggering losses indicate that the tenant uptake and occupancy rates within the SEZ-designated commercial spaces (specifically the first office tower) have been far slower than initially projected in the original feasibility studies. The market has faced an oversupply of high-grade commercial office space in Nairobi, a challenge compounded by the structural shifts of the post-pandemic work environment, leading to prolonged periods of vacancy across the city’s newest commercial districts. The high finance costs tied to the tower’s debt, therefore, continue unabated without corresponding rental income to offset them.

Adding to the SEZ’s woes are the utility subsidiaries—the internal power and water operations—that were created to offer tenants premium services and generate ancillary income. The latest reports confirm these operations are running well below the utilization levels required for them to break even. This points to a deeper issue: the entire Two Rivers ecosystem, from the mall to the residential and SEZ components, is severely underpopulated, undermining the ‘mixed-use’ synergy that was central to the original business case.

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The Proposed Lifeline: The US Dollar REIT Sale

Faced with mounting pressure, Centum’s management is staking its immediate future on the successful execution of a major asset sale. Centum insists that the SEZ is at an advanced stage of concluding the sale of its first office tower to a US dollar denominated Real Estate Investment Trust (REIT).

The rationale for this transaction is clear and multifaceted:

1. Debt Clearance: The sale proceeds would immediately settle the substantial development loan, eliminating the crushing quarterly finance costs that are the primary driver of the SEZ’s losses.
2. Capital Recovery: It would recover the extensive setup and establishment costs that have been recognized as losses.
3. Future Capital: It would release significant capital for investment in the next phase of development (the second office tower or other profitable ventures).

This strategic move is less about long-term ownership and more about rapid asset monetization and de-risking. However, investors remain skeptical. Promises of imminent, large-scale deals have been made before. The Kenyan real estate market is currently characterized by cautious international investment, and closing a high-value, dollar-denominated transaction requires overcoming significant hurdles, including currency risk, local governance perceptions, and the complexity of transferring SEZ benefits to a foreign-linked REIT. The failure to conclude this sale promptly could necessitate a radical shift in strategy, potentially involving distressed asset sales or significant capital restructuring.

The Broader Portfolio Malaise

The difficulties at Two Rivers are so pronounced that they overshadow the fact that underperformance is widespread across the Centum portfolio. The firm owns 60% of the Two Rivers Development, meaning its troubles flow directly to the parent’s bottom line, but the remaining 40% of the group’s operations are also faltering.

Centum Real Estate (Centum Re), the subsidiary handling residential and other non-Two Rivers commercial property, also posted a significant loss of Sh88.33 million. While this was marginally narrower than the prior period, the explanation remained the same: a revenue expense mismatch caused by accounting treatment, where current development costs are recognized while sales revenue is deferred until completion and payment—a common theme across the group. The slow pace of project completion, however, directly impacts the timing of revenue recognition, keeping the books firmly in the red.

Even the previously reliable, profitable segments showed signs of distress:

• Financial Services: Earnings dropped by a third, falling to Sh53.74 million. This decline suggests a weakening performance in its asset management and investment banking activities, possibly reflecting broader regional economic challenges or increased competition.
• Investment Operations: Earnings fell sharply by 31.6 percent to Sh388.9 million. This segment, which relies on generating returns from Centum’s diversified minority stakes in various industries, indicates challenges in liquidating assets at desired valuations or reduced dividend payouts from portfolio companies facing their own economic pressures.

Four out of Centum’s six business units posted losses in the review period, confirming that the company is not just suffering from a single, isolated property flaw, but from a systemic operational and strategic malaise running deep through its structure.

The Crisis of Trust and Strategic Direction

Centum’s original corporate identity, leveraging the “Berkshire Hathaway” model, was built on the premise of superior capital allocation and long-term, patient value creation. The recent performance has severely undermined this narrative.

The central question facing Centum management and its board is whether the persistent losses are a correctable structural issue—fixable by the tower sale and elimination of finance costs—or if they stem from a more fundamental flaw in the business model and market timing. Property development inherently involves upfront losses, but the scale and duration of Two Rivers’ red ink suggest that the projections for tenant uptake, residential sales velocity, and the timing of the market recovery were potentially overly optimistic.

Market watchers note that the Nairobi real estate sector is currently favoring mid-market housing and specialized logistics facilities over high-end commercial mixed-use developments. Two Rivers, despite its SEZ status and premium positioning, appears mismatched to the current demand curve and prevailing market conditions, potentially leading to a decade-long wait for the promised returns.

The pressure on CEO James Mworia and his team is immense. As the principal architects of the Two Rivers vision, their credibility is tied directly to the success of the proposed tower sale. The failure to execute this transaction quickly will lead to continued balance sheet distress, forcing management to address the need for a possible strategic review of all non-core assets to shore up the cash reserves and prevent further erosion of shareholder equity. For investors, the promise of a transformative urban hub generating returns for decades has devolved into a nightmare where they are simply waiting for the financial bleeding to stop. Until the losses reverse course, the clamor from shareholders about poor strategic direction, over-leveraging, and faulty capital allocation decisions will only intensify, making the next six months the most critical in Centum’s recent history. The survival of the company’s reputation as a reliable investment giant depends entirely on delivering the promised resolution to the Two Rivers crisis.

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By: Montel Kamau

Serrari Financial Analyst

4th December, 2025