A Guide to Real Estate Due Diligence in Kenya, and what to look into during a Commercial Property Buy Transactions, for Investment Risks Management for Kenya Real Estate Investors.
Regardless of the number of Real Estate transactions in Kenya an investor has been involved in, due diligence remains to be the bedrock of real estate deals in Kenya. As such, investment in properties has become very cautionary because of the amount involved in the transaction, as well as unreliable systems in our society that are marred by fraud and corruption. Equally, compromise in technical work by some building contractors and practitioners has brought the need for Technical Due diligence to establish the stability and soundness of the building structure and services, together with general quality of the building finishes. Meanwhile, the Due diligence process is very critical in commercial transactions as these investments have long-lasting consequences, including the ability to gain or lose a significant amount of money.
Therefore, an investor needs to investigate a potential investment before committing to transact to confirm that all facets of the investment are intact and that his/ her resources are safe before entering into a buy transaction. As such, the due diligence period can be complicated, and sometimes experts and inspectors are involved as the process requires one to be extremely meticulous. Below is a an overview of the legal, financial, and technical due diligence.
Market Survey
When doing a commercial real estate buy transaction, an Investor should first take a market survey to find out what the current market offers in terms of the value of similar properties, as well as comparable sale prices in the area. The Kenyan market is led by demand and supply drivers; therefore, when an investor knows the state of the market, he or she will not end up paying more than what they ought to pay.
Technical Due Diligence
Furthermore, the Investor should confirm the existence of the property as well as the structural status of the same before committing to the buy transaction.
Technical Due Diligence can involve one or all of the following exercise:
a) Hiring a Structural Engineer to inspect on the structural status of the property, in order to give a clean bill of health on the structural elements of the building.
b) Hiring a Services Engineer to inspect on the services of the building, these being all mechanical and electrical work and services, and associated user manuals and maintenance schedules, to establish that they are working as per recommended standards.
c) Hiring a registered surveyor to confirm the actuality of the property on the relevant maps and check if its dimensions and position on the ground are in order.
d) Inspecting Documentation related to the Technical Well-being of the property, these being occupation certificates and As-built drawings, with the help of a building profession.
Make a Financial Appraisal and Valuation of the property
Besides, the Investor should make an appraisal, that is, an estimate cost of the property, followed by a proper valuation to find out how much the property is worth inexact. The Investor should assess the potential revenue streams from current leases, potential costs, and liabilities that he/she may run into after the transaction. Furthermore, he/she could use the help of a financial analyst in scrutinizing documents such as tax returns, account receivable documents on rental income of the property, balance sheets, annual financial statements, profit and loss statements, bank statements, insurance policies, outstanding debts documents or any other relevant documentation related to the property’s financial status.
Legal Due Diligence
Legal ownership of the property is another very crucial step in the due diligence process, and adequate time needs to be reserved for this process to be conducted comprehensively. As such, the Investor/ lawyer should check if the property is subject to a lawsuit as this could stall developing or even occupying the property. Additionally, the Investor should take note of information like the properties legal description, its land-use policy, and insurance policies (if any). Existing leases should also be scrutinized to determine the Investor’s obligation in those leases. It is as well essential for sellers to provide specified documents within a specific time frame to ease the transaction. Besides, the Investor/ lawyer should confirm that the property has a history of proper transactions. Legal Due Diligence is a Technical process, just like the other due diligence processes. The Investors is therefore advised to seek the guidance of the legal practitioner, that as a Lawyer of Legal Officer, for this exercise.
Meanwhile, Commercial Real Estate Investment provides numerous benefits and considerable return; nevertheless, the risks involved in transacting the business are equivalent. It is, therefore, vital to have a due diligence checklist to allow an Investor to determine the obligation liabilities, problematic contracts, intellectual property issues, and litigation issues they will be assuming once they sign the deal and as well determine whether the deal fits in their budget.
Buildafrique Consulting Group is a specialist in Property Sales Transaction and Transaction Advisory in Kenya, including conducting of Real Estate Investment Appraisals, as well as Property Sales and Letting Agency, and Property Management, together with conducting Real Estate Feasibility Studies, Real Estate Finance, Quantity Surveying, and Development Project Management and Consultancy.
B.) WEEKLY NEWS HIGHLIGHTS
MAJOR ECONOMIC NEWS HIGHLIGHT.
i.) Kenya to get Sh107bn loan from the World Bank
The World Bank has approved a Sh107 billion loan for Kenya to help it close its Budget deficit and tackle the economic slowdown attributed to the global coronavirus pandemic. The loan is a direct lending to the Kenyan budget from the World Bank, and besides, it represents the most substantial amount disbursed by the World Bank to Kenya.
ii.) The government plans sh53.7 billion Economy Stimulus package to battle Covid-19
The government is set to inject Sh53.7 billion shillings into the economy to stimulate growth, support businesses, and cushion families during Covid-19 crisis. While addressing the Nation on Saturday, 23rd May, the president issued an eight-point economic stimulus program that will focus on Infrastructure, Education, SMEs, Health, Agriculture, Tourism, Environment, and Manufacturing.
iii.) Forex reserves swell to a four-month high on IMF Sh79bn injection
Central bank of Kenya (CBK) forex reserve has risen to the highest level in four months, attributed to the Sh79 billion economic support loan from the International Monetary Fund (IMF). According to the CBKs latest weekly bulletin, the reserves stood at $8.532 billion (Sh913 billion) last Thursday, equivalent to 5.14 months of import cover, the highest since January 9, when they stood at $8.543 billion (Sh914 billion).
iv.) KCB, Equity, NCBA restructures Sh115, Sh92, and Sh35 billion loan respectively
The KCB bank led Equity and NCBA banks in reviewing their loans, by restructuring sh115.1 billion of its loans. Equity bank restructured Sh92 billion of loans, which was equivalent to about 25 per cent of its net loans at the end of last year, while the NCBA Group restructured Sh35 billion, which was equivalent to about 14.2 per cent of its net loans at the end of March. The measure was aimed at cushioning customers who are hit by the coronavirus crisis. Moreover, the relief also includes an extension of loan terms to cut monthly instalments as well as repayment breaks on the full or part of the credit.
CONSTRUCTION NEWS HIGHLIGHTS
i.) Budget delay hits plan to construct 1,540 vocational training hubs
Delayed disbursement of funds by the treasury stalls plans to construct 1540 vocational training hubs. Education Cabinet secretary George Magoha told Parliament that the Treasury is yet to release about Sh1 billion that was requested for in January for construction of 30 training hubs. Furthermore, the Education CS mentioned that the ministry of education has a pending exchequer request at the National Treasury amounting to Sh1.023 billion since January 2020. Besides, the concern of the ministry is that if it does not get the fund, projects will stall as there is no allocation for the project in the 2020/21 FY budget.
ii.) Government puts tight measures to fight shoddy contractors
Building contractors are in a tight corner after the Housing and Urban Development Cabinet Secretary James Macharia gazetted a new regulation under the National Construction Authority (Defect Liability) regulation 2020 which introduced a latent defects liability period for commercial buildings that give owners up to seven years to recall contractors back to the site to rectify flaws in projects. As such, building owners have at least a year to call back contractors to rectify flaws such as cracked plaster or issues with the paint (Patent Defects), and a further six years to have the contractor rectify structural flaws that were concealed during the construction (Latent Defects).
iii.) Kenya, through the Red Cross society, completes the construction of housing units in West Pokot.
Kenya, through Red Cross society, has completed the construction of housing units for families displaced by landslides in November last year in West Pokot County. The Kenya Red Cross Society was tasked by the government to construct 223 two-bedroomed semi-permanent houses after the massive landslides displaced hundreds and destroyed property in west Pokot County.
iv.) Construction of Kiambu-Ruaka water supply project begins
The project conducted under the Kenya Towns Sustainable Water supply and Sanitation Program, and estimated to cost approximately sh1.3 billion, kicked off on 20th May, 2020. The project will benefit over 100000 residents of Ruaka and Kiambu town with an improved supply of clean drinking water and sanitation.
COMMERCIAL REAL ESTATE HIGHLIGHTS
i.) Pension schemes back new home buying plan
Pension schemes have backed the new proposal that allows members to access up to 40% of their savings to buy a home. The Chairman of the Association of Retirement Benefits Scheme Simon Nyakundi said that members support the new law noting that it will encourage homeownership among them. Pension schemes have, for years, pushed for law reforms allowing them to introduce tenant-purchase schemes or rent-to-own plans where members buy houses via a plan in which they save and repay mortgages via their pension schemes.
ii.) The Government plans to enable SMEs to gain more from the affordable housing project
In her statement on May 19 to the Enterprise, Hilda Kaaria, the Head of Supply Chain Management at the State Department of Housing and Urban Planning, said that Micro, Small, and Medium Enterprise (MSMEs) would play a leading role in the delivery of the 500,000 affordable housing units as envisioned by the government under the Big Four agenda. Besides, the move will boost the earning of the MSMEs and, at the same time, deepen their experiences and skillsets on how to handle major projects. She further noted that the project had created thousands of jobs for the youth as the majority of them have been directly or indirectly employed in construction sites.
iii.) Kenyans to pay sh200 monthly to National Housing Development Fund
According to a new proposed law, Kenyans will have to pay sh200 per month to the National Housing Development Fund following President Kenyatta’s directive to the National Treasury and the ministry of housing a month ago to make amendments to the Housing Fund Levy. The new regulations, awaiting to be tabled before the parliament for adoption, proposes every member to contribute a minimum of sh200 per month as opposed to the previous proposition of 1.5% of the gross salary as the housing levy.
iv.) Landlords ignore rent relief as a third of workers default
The National Treasury revealed on 19th May that the majority of landlords had overlooked the government plea to reduce rent for workers hit by the effects of Coronavirus, which saw a third of households failed to pay their April rent. Furthermore, the KNBS survey on the impact of Covid-19 on households revealed that only 8.5 per cent of landlords had offered rent reliefs in April.
C.) KENYA REAL ESTATE TRENDS
i.) Investment in satellite towns on the rise
According to Kenya Bankers Association (KBA), Kenyans preference to buying apartment located in Nairobi satellite towns, and other major urban centres such as Nakuru, Nyeri, Likoni, Eldoret, Kilifi, Meru and Bungoma, has been on the rise in the recent past, mainly due to friendlier prices compared to areas closer to Nairobi city centre.
Furthermore, KBA’s Housing Price Index indicates that harsh economic times have seen buyers decline to pay the current high prices of houses in Nairobi. However, instead, they have invested in satellite towns and other urban cities, majorly attributed to increased investments in the construction of roads linking Nairobi to satellite towns.
ii.) Auctions of properties drop amid Covid-19
According to reports, only one in 10 properties end up being sold in the auction market in the last few months. An analysis by Homes and Away revealed that, of the hundreds of properties on auction – on the back of a slowing economy amid Covid-19, only a few have found buyers; the most affected ones being the high-end properties.
As such, auctioneers have tried to dispose off both residential and commercial houses, whose value was running into billions of shillings, in unison, but the market has been on a decline for months now. According to Auctioneers, only 10% of properties get buyers, and sometimes the situation could worsen to no buyers at all.
D.) GLOBAL REAL ESTATE TRENDS
i.) Home-buying demand is springing back in the USA
The latest data from Redfin in the U.S indicated that the number of customers who reached out to real estate agents was 5.5% higher in the week ended May 10 than it was pre-Corona Virus pandemic. The statistics further showed that new listings had increased weekly in the past month following the reclassification of the real estate industry as an essential business on 2nd April 2020.
Besides, the number of homes Americans delisted peaked in the 28-day period ended April 9, when 7.2% of active listings were delisted across Redfin’s business markets. Moreover, for the 28-day period ended May 8, that number was down to 6.6%. Additionally, top U.S. luxury brokers say that now could be the best time to buy or sell a home.
ii.) Real estate remains the most preferred asset for Investment across the globe amid Covid-19 crisis
Amid Covid-19 and the economic crisis, properties used by manufacturing and production industries grew at a 12 per cent average globally. A study by Knight Frank shows that there has been growth in the industrial sector based real estate despite the industry being “relatively undersupplied,” which was majorly attributed to an increase in demand of to various economic diversification initiatives adopted by governments across the world.
The report further projects that there will be an increased demand for warehousing facilities across the continent as a result of the growth of the online retail sector. The report further anticipates a period of market correction and stabilization in a majority of the markets in the short term but remarkable growth in the long term.
E.) COMMON REAL ESTATE & DEVELOPMENT CHALLENGES, AND SOLUTIONS
Developing on two plots with separate Title Deeds.
YOUR CHALLENGE:
You shall find yourself in situation where you want to develop on two plots with separate titles. Your challenge comes in getting building approvals at the Local Authority Planning Department, in this case the County or Sub-County Planning Department.
THE SOLUTIONS:
The solution to this is through a process called Amalgamation of the two separate plots into one. Amalgamation involves the combination of two or more contiguous / adjoining lots of alienated land. When combined, the land will be held under single title. Thereafter, a Developer can submit the building plans for approval at the Planning Department under the single title.
THE CONSULTANT TO ENGAGE:
The Consultant to engage for advisory into amalgamation is a Physical Planner.
F.) THIS WEEK ON FREQUENTLY ASKED QUESTIONS (FAQs), AND ANSWERS
QUESTION:
What Form of Contracts can I use in a Construction Development Project in Kenya?
ANSWER:
Development Construction Projects requires the Developer to enter into a Contract Agreement with a Contractor, for the sole aim of safeguarding interests through a smooth contract administration process.
There are various forms of contracts that a Developer can choose to use in entering into a Contract with a Contractor, depending on a number of factors ranging from the scope of work, jurisdiction, as well as parties in the Contract, as outlined below:
a) Standard Contracts:
Standard Contracts are prepared by organizations for use in certain envisaged situations. Many projects in a particular geographical area are very similar in nature. In such, the conditions of contract for such typical projects are normally expected be the same. Rather than repeating the tedious task of preparing Conditions of Contract for each and every project, standard form of contracts usually come into play for expeditious execution of the contract.
Standard Form of Contracts have been developed by many organization over the years. The most standard form of Contracts used in Kenya are as follows:
- Agreement and Condition of Contract for Building Works published by the Joint Building Council (JBC).
- Public Procurement Oversight Authority Standard Bid Documents for Procurement of Works (Building And Civil Engineering Works) prepared by Public Procurement Directorate.
- The Ministry of Works Contract Agreement.
- Various FIDIC Forms of Contract
b) Special Conditions of Contract:
These are contracts specially drafted and tailored to meet specific parties’ requirements.
The “Standard” also called “General” Conditions of Contract discussed above avoid unnecessary drafting work and because of their frequent use are normally familiar to the parties to the contract. They are drafted to cover matters of a general nature. They do not however cover nor negate responsibility to cover particular conditions relating to a specific project.
Large organizations such as Government Ministries adopt Particular Conditions of Contract, which qualify, modify or replace certain aspects of the Standard clauses to suit the requirements of the specific projects undertaken by them. To avoid confusion and to ensure consistency, the altered clause in the Particular Conditions of Contract is cross-referenced to the original clause in the Standard Conditions of Contract. Simple modifications are made by inserting brief descriptions, definitions and figures.
c) Simple Contracts (Short-Form of Contract).
A Simple or Short Form of contract is an agreement, express or implied, which give rise to legal obligations. Generally such a contract need not have any special form. It may be in writing, or agreed orally or implied from the conduct of the parties. As long as the good or service provided is legal, any oral agreement between two parties can constitute a binding legal contract. However in most times, written contracts are preferred for either of the parties, or by statutory law within various jurisdictions and for certain types of agreement.
G.) THIS WEEK ON DEVELOPMENT COSTS ANALYSIS – KIKUYU AREA, KIAMBU COUNTY
This week’s focus on Development Cost Analysis is for Kikuyu Area in Kiambu County, this being another fast growing satellite towns in the Metropolitan area of Nairobi. The Development type in this area according to the land-use and county zoning regulations includes Apartment Blocks, Maisonettes and Town House, Shopping and Retail Complex, and Warehouse and Godowns.
Below is an analysis of Construction Cost per Square Meter (SM), for the option of procuring the development project through a Building Contractor, or an option of direct procurement of the Materials and Labour through a Labour Contractor for recommended building types.
H.) THIS WEEK ON REAL ESTATE PRICE ANALYSIS – KIKUYU AREA, NAIROBI.
The Real Estate price analysis focus for this week is on land, sale, and rental prices for a 2 and 3 bedroom apartment in Kikuyu- Kiambu County. The data were obtained through surveys, and analysis of asking prices on property listing in Nairobi.
i.) Sales price – Apartment and houses
ii.) Rent price – Apartment and houses
iii.) Land price per acre (commercial/residential)
I.) CENTRAL BANK OF KENYA INTEREST RATE WATCH – (T-BILLS)
The money market remained relatively stable during the week ending May 21 on the back of government payment, including Value-added tax (VAT) refunds. The average interbank rate was 4.19 percent on May 21 compared to 4.21 percent on May 15, as market operation in the banking sector remained active.
91 day T-bill rose by 0.04% from 7.27% previous week rate to 7.319%. CBK offered a total of Kshs4 billion, and bids amounted to Kshs10.837 billion, of which Sh7.859 billion was accepted. Volume on bids received increased week on week basis. 182 day T-bill rose by 0.036% from 8.191% previous week rate to 8.227%. CBK offered a total of Kshs10 billion, and bids amounted to Kshs14.490 billion, of which Sh5.518 billion was accepted. The 364 day T-bill rose by 0.025% from 9.17% previous week rate to 9.195%. CBK offered a total of Kshs10 billion, and bids amounted to Kshs14.495 billion, of which 13.181 was accepted.
J.) KENYA EQUITY MARKET INDICES
Over the past week, the equity market scaled on the back of reduced investor risk aversion with the NASI, NSE 25, and the NSE 20 share index gaining by 3.33, 2.52, and 1.73 percent, respectively. The total shares traded during the week declined by a margin of 20% to 17,738,200 million from the previous session 22,444,600 million, while the Market capitalization gained by 3.34 percent, indicating an appreciation in prices due to increased trading. I-REIT turnover was 2,494,560 recorded in 50 deals.
K.) KENYA CAPITAL MARKET ANALYSIS
The new government economic stimulus raised volatility in the capital market that was experiencing a decline over the past few weeks. During the week, high dividend-paying stocks gained traction to investors with Safaricom, Equity, and KCB being the most active stocks. Meanwhile, Kenya Airways, Nairobi Security Exchange plc, Nairobi Business Ventures, and Liberty Life Assurance were the week’s top gainers with their stocks increasing by 9.96%, 4.42%, 4.32%, 3.77% and 3.75% respectively. TPS Eastern Africa, BOC Kenya Ltd, and Stanlib Fahari Income-REIT shares declined by 9.47%, 9.38%, and 9.06%, respectively, emerging as the week’s top losers.
L.) CURRENCY HIGHLIGHTS
Kenya’s shilling has been under intense pressure due to the rapidly depleting foreign reserves in the past few weeks, mainly triggered by a fall in diaspora remittances. However, the reserve grew by 9 percent a week after the IMF loaned the Kenyan government sh719million. Besides, the reserve is expected to grow further after the World Bank approved another loan to fund the Kenyan Government’s budget. Consequently, the stabilization of the reserve is likely to help the country guard the local currency against global volatilities.
In the past week, the shilling strengthened against the greenback due to a weak Dollar demand globally amid an increased usable foreign currency reserve. According to the CBKs latest weekly bulletin, the reserves stood at $8.532 billion (Sh913 billion) last Thursday, equivalent to 5.14 months of import cover, the highest since January 9, when they stood at $8.543 billion (Sh914 billion).
M.) FACTORS THAT WILL SHAPE THE REAL ESTATE AND OTHER MARKETS IN THE NEXT ONE WEEK.
i.) Rapid escalation of Covid-19 cases.
Over the past week, Covid-19 cases have been escalating at a high rate, raising concerns to both the government and other stakeholders as the number of caseloads exceed a thousand mark. According to experts, the escalation is going to have a severe social, economic, and political consequences to the Kenyan and the East African region economy and as well to the building and construction industry. Experts say that the escalation will see more businesses close in the next few weeks, causing a hitch to the economy leading to more job losses, and consequently, reduced money in supply. As a result, retail stores will delay paying suppliers- As seen with Tuskys supermarket, and some which cannot adapt, will eventually be closed.
ii.) The amount of Loans reviewed by Kenya Commercial Banks.
In last week alone, KCB, Equity, and NCBA banks restructured loans amounting to 241.1billion shillings in a measure to cushion their customers against the impact of Covid-19. The Kenya Commercial Bank led the trio by reviewing loans amounting to sh115 billion, followed by equity’s Sh92 billion and NCBA 35 billion, and as such more banks are likely to follow suit. Consequently, there will be cut in monthly instalments as well as repayment breaks on the full or part of the credit. As a result, more businesses will stay afloat and as well keep their supply chain open and functional while saving jobs. Besides, the measure is a relief to the economic strain caused by Covid-19 as more disposable income will be available to pay for rent and other bills.
N.) UPCOMING REAL ESTATE EVENTS AND TRADE SHOWS IN THE NEXT ONE WEEK.
1.) Delivering housing density and diversity.
Date: May 27, 2020
Time: 0900hrs EAT
Venue/Media: Online.
Event Organizer: https://www.criterionconferences.com/event/housing-density-conference/
2.) The Role of DFI’s & Financial Institutions in the Post Covid-19 Recovery
Date: May 28, 2020
Time: 1400hrs
Venue/Media: Online
Event Organizer:
https://event.webinarjam.com/register/63/k6y57sz0
Writer of the Report:
This Report is written by Buildafrique Consulting Group, Kenya multi-disciplinary consultancy, that offers END-TO-END DEVELOPMENT CONSULTANCY, REAL ESTATE, and PROJECT FINANCE solutions through specialized subsidiaries. Among our solutions includes:
- Feasibility Studies and Market Research.
- Project Finance and Capital Raising.
- Project Management.
- Investment Design Appraisal.
- Quantity Surveying
- Construction Cost Consultancy
- Physical Planning and Planning Permissions
- Environmental Management and Impact Assessment
- Real Estate Development and Structured Investment Solutions
- Property Valuation
- Marketing and Property Sales Agency
- Property Management and Facility Management
Our Contacts:
- Office: Navigators, Kindaruma Road, Nairobi.
- Website: buildafrique.com
- Email: [email protected]
- Tel: +254 20 8058493 / Mobile: +254 722 474285
Disclaimer:
The information contained in this report is for general information purposes only. While we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information contained on the report for any purpose. Readers are therefore advised in all circumstances to seek the advice of Registered and Licensed professionals in all matters related to Real Estate Investment and Project Development.