Buying land for speculation is not making the best of it

That land is highly prized in Kenya is obvious, going by the skyrocketing prices around the country. The trend has seen many people rushing to buy land, with many doing so just for speculation. But is speculation a worthwhile reason for buying land?

Mr Reginald Okumu, a director at real estate and property valuation company Ark Consultants Ltd, says it isn’t.

Such people treat the appreciation of the value of land as a return on investment,” he says, adding: “Speculation does not fall into the strict definition of investment. For anyone buying land with no clear plan on what to do with it, it is no different from a bank account that earns interest.”

He says a smart investor buys land because for a specific, which  theref0re, makes land a means, not the end product.

“There are numerous reasons for investing in land. For instance, the investor might  be looking for a stream of income to grow his or her wealth, so the  plan is to build a residential estate or a commercial building. Or they could be doing it for cultural reasons because society expects it of them. For some it’s the result of a windfall such as winning a lottery that puts a lump sum in their pockets, and consequently the idea of buying land in their head,” says Mr Okumu.

SMART INVESTOR

For a smart investor, however, the question of land does not arise in the beginning. Instead, the investor first brainstorms on the nature of investment he wants to put his money in. For instance, he will scan the environment for a lucrative opportunity then establish the location and what is needed to kick-start the project. It is at this point that the question of land will pop up.

“Therefore, an opportunity, say the need for a shopping mall in South C, will require land there. After identifying the market, which should be big enough for the investment to make financial sense, land becomes a primary objective. However, if you can’t find land in South C, you cannot put up a mall in Ongata Rongai or Zimmerman Estate and say you want to meet the need in South C,” he says.

Instead of buying land and sitting on it hoping to reap big from it after a few years, Mr Okumu advises, it is better for people who  buy land to  add value to it to make it more attractive, then sell it for a profit.

“You can buy a chunk of land and subdivide it into small units but before you sell it, try to add some value. For instance, bring in water, electricity, and a road; you can also change the land’s use, for instance, if it was agricultural, you can turn it into residential, or if it was residential, you can make it commercial or mixed use. Also, have some floor plans and designs for residential houses so that whoever buys the land buys the designs as well so that they can readily build on the land. This will save the buyer some headache and will also make you more money than if you just sell the land the way you bought it,” advises Mr Okumu.

In the land business, an individual can either become an economic investor or a social investor. An economic investor, Mr Okumu explains, is driven by profits while a social investor seeks to make an impact on society. Social investors  (usually the government, an NGO or a philanthropist), acquire land then put up a university or a hospital for the neighbouring community’s benefit.

On the other hand, an economic investor, which is where most land buyers  fall, is usually after a return on investment. Therefore, to get into economic investment using land as a stepping stone, the investor should look at a number of factors in order to  succeed.

“The key factor is the market. Is there a market for your venture? If yes, is the market big enough and where is it?” he says.

Then look at the cost of money. A prudent investor will not use their own money. You should put a bit of personal equity but borrow a lot of money as well. So, is there money available on credit and what is the cost of borrowing? Is there professional expertise to help you conceptualise and execute the project? You need architects, engineers and a lawyer. Are there credible contractors with technology and equipment to carry out the project?

“Remember, it is only after identifying an opportunity that land becomes a primary objective.  There are also legal issues that you need to take into account. For instance, planning permission and environmental permits, among others,” he says.

So, with parcels of lands being sold left, right and centre, it is important to have a workable investment strategy in mind before making any payment.