What we need to do to grow our real estate sector faster

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.

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 Public 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.