Kenya’s real estate sector is to compete with continental giants like
South Africa, it needs to widen its financial and development options,
says Anthony Kamande, a real estate business consultant at PDM. GRAPHIC |
NATION
Kenya’s real estate market is steadily growing, with economic growth expected to be around 6 per cent this year.
Increased
investment opportunities in the country, coupled with the expansion of
a middle class with a taste for fine things, has seen many foreign
firms and organisations opening offices in the country to tap into these
developments.
Indeed, Nairobi has registered remarkable development with regard to property development in the past few years.
The
city has attracted global attention, which saw it rank among the top
10 (out of 150 cities) to watch by global real estate firm Jones Lang
LaSalle.
Infrastructural development in the countries major towns has also been significant, opening up the country to more investment.
However,
even with such growth, developers and investors are still playing it
safe, focusing mainly on development options such as gated communities
and malls, and relying mainly on bank loans and equity for financing.
If
Kenya’s real estate sector is to compete with continental giants like
South Africa, it needs to widen its financial and development options,
says Anthony Kamande, a real estate business consultant at PDM.
Mr Kamande says that options that could propel Kenya’s real estate sector abound. Below are some of them.
FINANCING OPTIONS
Timeshares/fractional ownership
Kenya
has become an investment hub for international investors, some of who
visit the country for a week or two but want a homely environment for
the period they are in the country. Similarly, Kenyans travel abroad on
business, leisure or holiday and desire similar comforts. In such cases,
timeshares are the best option.
“Timeshares
are a development option where an investor owns a property for the time
they are using it, say for two weeks every year,” explains Mr Kamande.
This
means that a developer gets timeshares or fractional ownership of an
apartment, hotel or resort and becomes affiliated with an organisation
such as Resort Condominiums International (RCI), the largest timeshare
vacation exchange network in the world.
Investors
can sell or swap timeshares, such that you can, for instance, buy a
two-week holiday in Mombasa but, through RCI affiliation, be allowed to
visit a destination of equal status in another country.
As
a financing option, this model has yet to take off in Kenya, although a
development in Mombasa is planning to use it. It is widely used in the
West and has begun across Africa, notes Mr Kamande.
Moratorium in construction loans
This
is a finance model where a bank gives a project a grace period, usually
24 months, during which the developer does not repay the principal
amount. In this model, the bank continues funding every level that has
been certified completed for 24 months, regardless of speculative
expenditures during this period. After the 24 months, the bank starts
charging interest and collecting repayments of the principal. “However,
by that time the developer will not be paying from their pocket but from
the development, which is now earning them an income,” explains Mr
Kamande.
Rent-to-buy
An
investor might wish to invest in a property but not have funds in hand.
Such a person can get a homeowner, institution or company to lease the
property to him or her and pay some form of rent in installments, but
with the aim of buying the property when they have enough cash.
Refinancing
This
is where a developer or investor has a project whose cash flow cannot
comfortably sustain the loan repayments and other expenses. For
instance, a developer might put up an office block for which they have
to repay a Sh1billion loan. By the time they reach a point where can
comfortably repay the loan, they might be having only about 50 per cent
occupancy. During such a time, cash flow will be very constrained,
because everything the building generates goes towards the loan
repayment.
In such a case, a proprietor can opt for refinancing and get a “top up” loan.
“A
wise investor will use a top up loan to invest in more
income-generating assets, such as already occupied and income-generating
property, as long as the income is greater than the interest rate on
the “top up” loan. In this way, the developer not only completes
repaying the initial loan, but also gets additional assets.
An
ordinary investor would take the Sh1billion and simply strive to finish
the repayments while a wise investor will view this as an opportunity
to grow their portfolio, notes Mr Kamande. “The key is finding other
ways of generating cash that brings in more than the interest charges,
so that in five years, the developer will have repaid the bank loan,
grown his portfolio and acquired more as the building’s value continues
to appreciate,” he adds.
The earlier one invests in
property, the sooner they start benefiting, Mr Kamande says, adding that
banks now accepting balloon payment of mortgages (where one repays
the total remaining loan when one can), unlike in the past when one
would be charged for early repayment. PHOTO | FILE
Mezzanine financing
This
model borrows from concept of having mezzanine floors in a building. In
a mezzanine financing model, one has the ground loan, which is the
initial loan, but needs another loan to finish construction.
“Situations
occur whereby one is close to clearing their loan, but then the bank
informs them that the value of their development does not allow them to
get additional funding,” notes Mr Kamande?
In
such a case, a developer can get the necessary cash from a mezzanine
financier, who can then lay claim to a percentage of the income from the
property once it is occupied,” Mr Kamande explains.
The
mezzanine financier effectively becomes a quasi-equity partner, and in
case the developer fails to repay the loan, the financier can sell the
property to recoup the loan and share what remains with the developer.
“It
is a very risky option, although it’s better than having an incomplete
investment, so a developer should draw up a proper financial plan that
factors in any possible alterations to avoid finding themselves in such a
situation.
Interest rates are also higher in this model,” adds Mr Kamande.
Mortgage loans
Kenya’s
mortgage market is still very underdeveloped, meaning it is not an
appealing option for homeowners or a money spinner for the banks, Mr
Kamande says.
To banks, risks such as foreclosure are not very attractive.
However,
if insurance firms were to work hand-in-hand with banks, the mortgage
market would present fewer risks for both banks and the mortgage takers,
and grow as an option. Life funds are allowed to offer mortgages, but
they don’t.
“There’s little difference between giving someone life insurance and a mortgage of around 20 years,” Mr Kamande reasons.
“I
would say any type of financing is a good option for bringing about
personal growth, and mortgages, construction, or a bank loan should be
used as a means of improving one’s financial position, because even
ordinary loans are tied to time,” says Mr Kamande.
“Anyone
who can afford to put aside even a small amount for repaying a mortgage
can benefit because it means they do not have to wait until they have
saved up enough money to buy a property, by which time the property will
have become more expensive,” he adds.
The
earlier one invests in property, the sooner they start benefiting, Mr
Kamande says, adding that banks now accepting balloon payment of
mortgages (where one repays the total remaining loan when one can),
unlike in the past when one would be charged for early repayment.
Sacco financing
These
financial lending institutions are an attractive option for those who
want to invest in real estate but do not have adequate resources.
Saccos
have helped many Kenyans who could not qualify for bank loans — mostly
the self-employed — because they do not have a steady or fixed source
of income.
However, even with such a
significant market share, Saccos offer limited products, says Mr
Kamande. Although they now finance land purchases, with some even
offering small construction loans, “They have a real opportunity to
enter the real estate finance market in a bigger and more sophisticated
way, and should take advantage of this,” says Mr Kamande.
The property ladder – using investments to climb
Almost
everyone dreams of owning their own home, and many young people start
working towards this end as soon as they get a job. If you buy a house
when you are young, you can use your first house to get a better one.
For instance, if you buy a house at Sh5 million, within a few years, its
value is sure to go up. You can sell it and buy a better one since you
can now pay a much higher deposit. You can continue doing this
indefinitely.
Off-plan buying
If
a property is developed on a pre-sell model and one is offered a
24-month repayment period, by the time the building is completed, the
value will have shot up and the buyer will be able to complete their
repayments and also benefit from the appreciation of the property’s
value.
“The reason a pre-sell, more
commonly called “off-plan”, should be a great investment option is
thatit offers discounts. For instance, a property might go for Sh10
million, but that might rise to Sh13 million the following year. Upon
completion, the property might be valued even at Sh14 million. So one
can buy a property for Sh10 million and pay quarterly until
construction is completed. If at that time someone else is selling
their unit for, say, Sh15 million, the investor who came in with Sh10
million would have, in two years, made an extra Sh 5 million,” says Mr
Kamande. There are also fewer problems getting someone to buy the house,
since there are pre-sale financiers who sell the house for off-plan
buyers.
PPPs
In
2013, the government passed the Pubic Private Partnership Act, which
allows it and its parastatals to collaborate with the private sector to
undertake developments in the country. Under the PPP Act, a private
sector player can invest their money in the off-plan development model,
while the public sector works with developers and the construction
sector, financing the development by buying property under construction
and selling it.
“This model is very
beneficial to investors since the government is expanding the
previously limited avenues for the private sector,” says Mr Kamande.
However,
the government needs to do a lot more with regard to incentives in
order to rope in the private sector developers. For instance, the youth
and women’s funds could be attractively packaged for young people, as
well as for women, in order to allow more of them to own homes.
This
option would also avoid short-cuts that can lead to dangerous or
substandard housing. “A young person who earns Sh50,000 as salary before
tax will be very cautious when using such an amount to put up a house
for himself. They would prefer to build their houses step by step as
their income allows, and will cut corners at all costs to avoid paying
Sh20,000 to engage professionals or pay legal or approval fees because
that amount is equal to two lorries of bricks. This has greatly
contributed to substandard and poorly designed houses as they cut
professional costs in order to manage the little they have,” notes Mr
Kamande.
However, a PPP between the
government and a professional construction body allows the financially
insecure young generation to acquire well built houses at affordable
costs. Indeed, the vast sums lying idle in the youth’s and women’s funds
can thus be put to good use in this way, says Mr Kamande.
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