How to avoid the pitfalls of Kenya’s real estate sector

On a cold Wednesday morning last week, about 25 houses sprouting majestically from the soils of a gated community in Nairobi’s South B neighbourhood became the centre of the country’s real estate attention as bulldozers rolled towards them, their massive metallic fangs outstretched for the kill.

The earthmovers did not wait for consultations or directions, or even listen to the pleas of the developers.

Instead, as if they were part of a choreographed macabre dance, they swung into action, knocking down a couple of buildings in a matter of minutes.

This, at least according to the hundreds who watched the drama from a safe distance, was always coming though.

The 243-acre land on which Diamond Park II stood has been the subject of an intriguing ownership wrangle between the Executive Housing Company and the Kenya Veterinary Vaccines Production Institute (KVVPI) for close to a year now.

In March 2014, Agriculture Cabinet Secretary Felix Kosgey asked developers who had genuine documents proving they owned the disputed land to present them for scrutiny.

Days earlier, Mr Mohammed Khalif Ali, the director of the Diamond Park housing company, had said his firm had bought the land from the National Social Security Fund (NSSF) in 2003.

Bring down structures

But Mr Kosgey said that many unsuspecting people may have been duped into buying the land, which he said belonged to the veterinary department.

“There are people who are innocent in this whole saga, especially the second, third even fourth buyers,” said Mr Kosgey.

“We at the same time invite the others to court, failure to which we will bring down their structures.”

A number of investors have constructed several properties on the controversial parcel of land, including the multi-billion Diamond Park Estate and the magnificent Winners Chapel, but Mr Kosgey warned that the government would not be “held hostage by people who do not want us to expand our institutions”.

And so Mr Kosgey’s warning came to pass last week when the bulldozers rolled in, sparking off yet another debate on the security of real estate investments in the country.

The demolitions in South B were just a few of the many that the country, and especially Nairobi’s property hotspots, have witnessed in recent times.

And, when that happens, the government is quick to blame the investors, who always claim to have valid ownership documents.

How safe, then, is it to invest in real estate in Kenya today?

How sure are you that the title deed you have is genuine, even though issued by a state officer at Ardhi House?

In the business of verifying the validity of those documents, where do you start?

Who do you approach? And are they trustable or in bed with the legion fraudsters making a killing from the highly profitable land business?

Also, are you, as a developer or buyer, getting value for your money?

In a country where, according to Mr Sam Manjau of Abec Real Estate company, a rapidly growing middle class is demanding a better lifestyle and hence driving up property values.

And, even though everyone is angling for a piece of the pie, not all are offering what they are promising on paper.

The risk of fraudulent land ownership processes, says Mr Manjau, is real in Kenya today, as are spikes in interest rates that render property development economically unviable and mortgage repayments too high; not to mention, for home buyers, the poor workmanship that only becomes apparent after you move in and the cracks start appearing.

Though the real estate sector in Kenya is much more developed compared to other countries in East Africa as it offers a greater diversity and choice to investors and home owners, poor implementation and development of physical planning and environmental policies compared to countries such as Rwanda, coupled with a rapid growth in demand, are continuously painting a negative image of the sector, says Mr Manjau.

Nairobi may have its problems, but it still stands out among its East African neighbours as it offers the lowest risk profile due to its significant middle-class and regional diplomatic hub status, thereby it naturally attracts a greater investment choice.

While, for instance, other countries in the region are still highly reliant on the Central Business Districts of their respective capital cities, in Kenya even the older estates are benefiting from commercial centres offering financial services, employment opportunities, medical care, schools and social amenities that render them self-sufficient and independent of Nairobi’s CBD, says Mr Manjau.

But, although Kenya’s real estate market is growing in sophistication, especially with the securitisation of the industry through Real Estate Investment Trusts, the frequent cases of demolitions may be disorienting some investors.

Mr Manjau says the investors affected by the demolitions in South B have the right to sue their legal advisor, assuming they possesses adequate professional indemnity insurance — a form of liability cover that helps protect professional advice and service-providing individuals and companies from bearing the full cost of defending against a negligence claim made by a client and the damages awarded in such a lawsuit — for negligence in carrying out proper searches and due diligence.

They can also sue the developer for selling them fraudulently obtained properties, and the government for accepting payments of property rates and ground rent for land it later deems fraudulently obtained.

Mr Manjau advises that when one has identified a suitable piece of land for purchase, one should always be careful and get a legal adviser with the requisite professional indemnity insurance.

“There is no substitute for thorough due diligence and search for good title.

If a copy of the title deed has been supplied by a vendor, one should check against the records at the local Lands office.

In addition to the above, and if practically possible, one has to consult the previous land owners listed in the official search document to detect any fraud along the line,” he says.

Check Ndung’u Report

Potential homeowners or developers should also insist on more than the official searches from their legal advisers.

They should maintain that their legal advisor consults the Ndung’u Report to ensure the piece of land under scrutiny is not on the list, and also with the roads agency in the jurisdiction to ensure that they are not purchasing a road reserve.

They should also personally visit neighbours of the property under scrutiny and seek information on the current and previous ownership, adds Mr Manjau.

“Land and property located near airports, roads and railway stations should almost always invite greater due diligence, as should any land previously owned by institutions that were prone to political control and manipulation,” he says.

As the government works towards digitising land records, a developer or home owner may want to consider waiting until there is proper record keeping at the lands registry in order to ensure a higher degree of authenticity when carrying out a search for title, advises Mr Manjau.

Regarding financing, the entry into the market of cheaper money from foreign investors, and the government’s sourcing of cheaper credit like the Eurobond as opposed to Treasury Bills and Bonds, is also likely to affect the sector.

As a result, home buyers should seek cheaper financing options and negotiate with banks regarding loan or mortgage interest rates.

“Most people accept the first offer given by a lender and many do not know that the lending terms can be negotiated to provide greater flexibility to the borrower.

One may employ a mortgage broker to negotiate and seek a suitable mortgage or project finance facility,” he says.

If one has taken a loan, also, one should endeavour to pay off more than the agreed-upon monthly repayment on the principal element of the mortgage to reduce monthly payments and interest payable.

And, if possible, avoid borrowing as you will always remain subject to the lender.