Common risks related to Property Development and their Management structures.

The continued growth in the Kenyan real estate sector continues to attract both local and foreign investors. As a potential investor in Kenya, your goal is to minimise project risks while maximising your return on investment. It is therefore a good practice for you to understand the potential risks associated with the real estate development process and related management structure of the same.

Contractual Disputes

A development investment project can be a complex process for an investor and demands a constant monitoring of cost, time and quality. In an effort to ensure successful implementation of a project, the services of different consultants and contractors to constitute the Project Management Team is mandatory for the success of the Project. The Project Management Team brings into the Project different professional opinion and personalities and disputes become inevitable during project implementation. Such conflicts may result in delay of turnaround time of a project, which in turn means budget overflow of which may also result to increased holding costs in a Project.

Hiring a Project Manager ensures co-ordination of all the design consultants and contracting team through well-defined management and communication structures for the successful implementation and delivery of the project within set objectives.

Increase in Interest Rates and Cost of Finance

Real estate Investment through debt finance is volatile and likely to be affected by increase in interest rates. When interest rates are low, developers borrow money as it costs less. When the interest rates are high however, credit becomes expensive, making developers to shy away from debt finance. According to research, the skyrocketing interest rates for mortgages have slowed down the real estate development in Kenya, with commercial banks offering mortgages with interest rates as high as 28%. For Investors holding completed projects or property, it is all well and good to be able to service a debt and make repayments when interest rates are at an all-time low, but you must always factor in the possibility of the rise in the cost of debt finance over the life of your development. Increase in interest rates ultimately result in increased holding expenses for your real estate development project.

RISK

Market variations of supply and demand

Like any market, the real estate industry is controlled by supply and demand market variables. Variation in the real estate market between supply and demand causes adverse fluctuation in real estate prices. When consumer confidence is high and interest rates are favourable, there is often increased buyer activity, which in turn creates heightened demand and ultimately pushes prices up as purchasers compete for sought after fairly priced real estate products. According to a report by Hass Consult for the first quarter of 2016, the acreage prices in Nairobi rose five-fold to an average of $1.73 million due to increased demand.

At the same time as of the third quarter of 2016, the growing demand for office space in Nairobi led to oversupply of office space in areas like Upperhill and Westlands. Experts predict that the current over construction of offices in places like Upperhill will lead to 19% of the total stock of new buildings delivered since 2009 lying vacant by end of 2016.

Increase in construction costs

Another common risk associated with real estate development is increase in construction costs as a result of increase in the cost of building materials and labour. Normally developers account for these set construction costs in their budget at the time of commencing their project. Inflation and tax regulations (in cases of materials that are being imported), or labour loss could have an impact on the initial set prices. A good practice is to have a contingency in place for a potential rise in these costs to prevent borrowing more capital or selling-off your unfinished project. It is further advisable to have a contingency fund to cater for any unforeseen increase in the cost of building materials and labour.