Protect investors from rip-off by cowboy property developers
It seems to me that the property boom we have been experiencing in the last 15 years spawned a group of cowboy developers. FILE PHOTO
What you need to know:
- Financial regulators must act since the activities of these cowboys impact the health of the financial sector.
- Our banks are lending to these cowboys on the basis of dodgy collateral and over inflated valuations.
The game is all-too-familiar: A smooth-talking developer approaches you with an opportunity to buy a plot in a major property project where the signature development and main attraction will invariably be a golf course surrounded by 300 high-end villas and first-world standard amenities, all built behind high security walls.
The developer proposes to build all other ancillaries: Water supply systems, roads, electricity, swimming pools and a nursery school.
All that you are required to do is pay a deposit, typically, 10 per cent of the value of the plot, and enter into an arrangement committing you to make installments and complete payments within a year.
TITLE DEED
Under the arrangement, you are required to build your own high-end villa to an approved design.
Months later, hints of trouble start showing. The title deed is nowhere, the golf course is not happening, water, electricity and other infrastructure are not being built.
A year later, you get frustrated after you notice that your title deed is not being processed.
You withhold monthly installments. There are just too many examples of half-completed development projects where unsuspecting individuals have paid millions in deposits, but have no title deed many years later.
DEVELOPERS
How do we tame the cowboy developers who have collected deposits from unwitting citizens, invested elsewhere and left the projects in deep financial distress.
Where did the rain start beating us? It seems to me that the property boom we have been experiencing in the last 15 years spawned a group of cowboy developers who approached the business with too much debt and without putting in equity of their own.
The model used by these cowboy developers was as follows: Borrow money from the bank to buy and partition a coffee estate into plots, present the same land as security for the loan, and finally, use the cash flow from the deposits and from the pre-sales you collect from members of the public to start building roads, gates, perimeter fencing, the club house and preliminary work on the golf course.
CASH FLOW
Since the cowboy developer has no money of his own to put into the project, he invariably, runs out of cash after a very short time.
Tribulations start the moment the people who deposited money for the plots start smelling trouble, and, especially when they realise that work on the golf course, on the water, electricity and internal roads, is not progressing at all.
The depositors stop payment of installments for the plots, with dire consequences for the developer.
Negative information starts filtering out and demand for the remaining vacant plots also begins to dwindle.
The developer finds himself in deep and crippling cash flow problems.
REGULATION
But the real crunch starts when interest on the money the cowboy developer borrowed to buy the coffee estate kicks in and starts building up.
The unsuspecting individuals who squandered their hard-earned savings paying for plots, which remain unserviced, are left holding the wrong end of the stick.
What should be done to protect these private individuals from exploitation? I propose some form of prudential regulation.
Any entity that collects deposits from the public should be designated as a deposit-taking institution and, therefore, made subject to prudential regulations by the relevant financial sector authority.
We must not forget that under both the Sacco Act and the Micro Finance Act, the Finance minister has powers to designate the activities of these developers as deposit-taking institutions, bringing them under the ambit of regulatory authorities.
BANKS
Financial regulators must act since the activities of these cowboys carry major implications to the health of the financial sector.
Problems in the property sector, the so-called asset bubbles, have always been the trigger to systemic financial crisis.
Just how our banks ended up lending billions to these cowboy developers remains a puzzle to me.
What has changed? When you approach a bank with a project, the first thing they ask you is to demonstrate ability of the project to generate cash flows sufficient to cover interest charges, principal and a decent return for the promoter.
CBK
The bank will also take security or collateral in the form a tangible asset to cover itself just in case anything goes wrong with the main source of repayment.
Our banks are lending to these cowboys on the basis of dodgy collateral and over inflated valuations.
Just the other day, the Central Bank governor, Dr Patrick Njoroge, told us that property development projects and cement manufacturers were the biggest contributors to the recent spike in non-performing loans. We have a major problem on our hands.
