A look at the components of a Real Estate Investment Business Plan in Kenya, as a must-have tool while seeking Real Estate Finance for your Investment Project in Kenya Real Estate Market.
A real estate business plan is a document that explains in detail the prerequisite of a Real Estate Investment project, how it will be accomplished, the marketing and financial strategies. The business plan identifies and analyzes the business opportunity and the projects’ technical, economic, and financial feasibility. As such, a real estate business plan is a communication tool that an investor can use to secure the financing of a real estate project from financial institutions or lenders.
The purpose of a business plan is to help articulate a strategy for a project. It also provides insight on steps to be taken and the resources required for achieving the goals sets within the set timelines. To have an excellent real estate business plan, a good understanding of the real estate market is essential, and the person preparing the business plan needs to have a complete sense of who is buying, who is selling, where and for how much, as well as the competition in the market.
The following are the essential components of a real estate business plan:
i.) Executive summary.
The executive summary is the first item on a real estate business plan. It summaries what the project involves in totality as well as a snap preview of the business plan. The executive summary also reveals the company’s mission, mission statement, and a short description of its products and services. The executive summary should also describe the funding requirements, the purpose for which it will be used, the collateral available, and the expected outcomes.
ii.) Project Description.
The project description is the other section that should appear in the real estate business plan. Under the project description, critical information about the real estate project, business goals, and the target customers should be included. The project description should also discuss how the real estate project will stand out from others in the market.
iii.) Organization & Management
This section contains the people in the organization, and their expertise, as well as the organizational structure, with details on the ownership of the company of Special Purpose Vehicle, profiles of the management team, and their qualifications.
iv.) Market Feasibility Study and Analysis.
The real estate feasibility study and analysis is an essential element of the real estate business plan as it depicts one’s level of understanding of the real estate market and the specific real estate product one is willing to offer into the market. This section involves using data and statistics to show the market performance and how one’s project fits in. In addition, this section provides details about the demand needs and supply analysis of similar products in the market.
v.) Competitive Landscape Analysis.
While preparing the real estate business plan, you need to recognize the direct and the indirect competitors and, as such, present a clear competitive analysis of your product with the competitions. The business plan needs to outline the strengths and weaknesses of the competition and show how your product type will stack up.
vi.) Real estate SWOT Analysis
The SWOT analysis identifies several key characteristics that will impact the real estate investment project, these being the Strengths, Weaknesses, Opportunities, and Threats. The SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis section of the real estate business plan further pulls together deeper understanding of the market, the competition, the demand, and the supply offerings.
vii.) Marketing Plan and Marketing Penetration Strategy.
The business plan should also describe how one intends to get his/her product in front of potential clients. As such, the business plan should pinpoint the steps you will take to promote your products, including sales and marketing strategies, as well as the marketing penetration strategies of various market products in the project. The business plan should also include sales targets and projections.
viii.) Concept Design
For Real Estate Development Projects, the Business Plan should include an outline of the proposed project design inform of Concept Design Proposal prepared by an Architect. This shows the land-use provision of the available land, as well as various project amenities. The Concept design also include artistic impression of the Final Market Product through 3D render images, walk-through videos.
ix.) Project Cost Plan
Project Cost Plan in a Real Estate Business Plan comprise a breakdown of all the Cost Input in the project. The Cost Plan allows appraisal of all the cost elements; which include the construction costs, statutory approval fees, professional fees, marketing fees, financing costs, and administrative costs.
x.) Project Management and Operational Methodology
This is the part of the business plan where the set goals are broken down into actionable steps for implementation during the project construction stage and operation stage of the final market product. This provides a clear pathway to the completion and operation of the project, as well as appraisal of resource required at every milestone in the project.
xi.) Financial Analysis
The business plan needs to illustrate the valuation and the financial model of the real estate product. As such, one needs to analyze the value and returns of the project. Furthermore, the business plan needs to reveal the financial goals of the real estate project and the expectations that are set based on market research.
The financial plan will include the income statement, cash flow, and balance sheet, and long-term goals regarding the profits and losses of the project. The information is helpful when making business decisions, raising capital, and reporting on business performance.
xii.) Risks Analysis
To come up with a strong Business Case for an Investor, various risks noted during feasibility study must be analysed, together with appraisal of detailed risks mitigation strategies of how the the risks shall be managed. This is important in order to give confidence to the Investor, as well as allow set objectives and goals to be realized in the project.
Above all, it’s always a good idea to provide a clear and accurate summary of your business goals in your business plan and discuss the essential components of the business plan, as explained above. As such, the business plan should be inspiring and informative. Besides, a detailed real estate business plan gives a guide for the project other than being used to secure funding.
Buildafrique Consulting Group is a specialist in Real Estate Finance in Kenya, Project Finance, and Capital raising, as well as conducting Real Estate Feasibility Studies, Development Project Management, and Real Estate Development Consultancy.
B.) WEEKLY NEWS HIGHLIGHTS
MAJOR ECONOMIC NEWS HIGHLIGHT.
i.) The National Treasury projects the economy to go below the 2.5 percent forecast
The Kenyan Treasury cut the economic growth forecast below its initial projection of 2.5 percent in April 2020 on adverse effects of the Coronavirus pandemic, which continue to hammer job opportunities. On 14th September 2020, the Cabinet Secretary for the National Treasury noted that the pandemic continues to cause a major shock to the economy, leading to underperformance in most sectors with consumption being depressed and new investments halted.
ii.) Diesel prices fall at a low margin as the prices for super petrol hikes
On 14th September 2020, the Energy and Petroleum Regulatory Authority adjusted fuel prices by the smallest margin since January 2020. Super petrol increased by Sh1.33 to retail at Sh105.28, while diesel decreased by 12 percent to retail at Sh105.28. The Energy and Petroleum Regulatory Authority attributed the changes to marginal adjustments in crude prices in the global market.
iii.) Kenyan shilling hit historic low
The Kenya shilling hit a new historic low on 16th September 2020, exchanging at 108.55 units against the U.S. dollar, signaling rising costs of importing raw materials and finished goods such as petroleum products, manufacturing raw materials, vegetable oil, and motor vehicles. The continued depreciation of the local currency was majorly attributed to an imbalance in demand and supply of the dollar in the country.
iv.) The national treasury plans to borrow up to Ksh9 trillion by 2022
The National Treasury, in the draft 2020 Budget Review Outlook Paper, is projecting higher borrowing for both financial years 2020/2021 and 2021/2022, due to expected lower revenue, with the deficit seen at 8.4 percent and 7.3 percent in the years respectively. As such, the National Treasury is projecting to borrow up to Ksh9 trillion by 2022 to compensate for the revenue shortfall in the current and next fiscal years.
CONSTRUCTION INDUSTRY HIGHLIGHTS
i.) Pangani low-cost houses to be completed in December 2021.
According to the Nairobi Metropolitan Service (NMS) Director of Housing Charles Sikuku, the Sh5 billion Pangani Estate redevelopment project continues to take shape with the first phase comprising 1,000 housing units expected to be completed by December 2021. He further stated on 13th September 2020 that 60 percent of the units to be constructed would be affordable, costing between Sh1 million and Sh3 million while the rest will be under market prices.
ii.) Construction GDP contribution on decline to 2.9 percent
According to the National Treasury macroeconomic projections, the construction GDP contribution is projected to decline to 2.9 percent, compared to an earlier projection of 6.4 percent in 2020 and the 4.6 percent projection for 2021. According to the report by the National Treasury, which was released on 9th September 2020, the construction sector declined in the second quarter of 2020, but saw improvement in cement consumption in May and June 2020, compared to April 2020.
iii.) Housing and construction sector to drive economic recovery post-Covid-19 pandemic
President Uhuru Kenyatta noted in a speech that was read on his behalf by the Cabinet Secretary Infrastructure, roads, housing, and urban development James Macharia that, housing and construction sector is one of the sectors that will rebound quickly post Covid-19 pandemic. The president noted at the opening ceremony of Shelter Afrique’s 39th AGM and Symposium that the construction sector will be targeted to lead the rebound in the broader economy as the housing construction provides opportunities for job creation.
iv.) Newly constructed buildings to run on renewable energy
The Kenya National Energy Efficiency and Conservation Strategy proposes the Kenyan developers to adopt a building code that ensures new buildings reduce electricity costs and are run mainly on renewable energy. That is in line with a new private-sector backed government policy on energy, which seeks to rally the country to save on energy costs and cut climate-changing emissions. According to the proposed guideline, a 10 percent share of the newly built floor area should be compliant with energy efficiency requirements in the total building stock from the current baseline of zero. The proposed guideline further states that two percent of the buildings should adopt the American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE) Standards for the energy efficiency of buildings.
COMMERCIAL REAL ESTATE HIGHLIGHTS
i.) Real Estate Sector to grow by 0.7 percent in 2020
According to the National Treasury macroeconomic projections, the real estate sector’s GDP growth is expected to shrink to 0.7 percent in 2020, compared to 5.3 percent in 2019. However, growth is expected to return to 5.2 percent in 2021 as the covid-19ituation eases and the economy recovers. According to the report which was released on 9th September 2020, property investors in the hospitality sector are expected to take the biggest hit, as the sector’s GDP growth is expected to move into negative territory – recording -18.7 percent in 2020 and -9.1 percent in 2021, with the growth expected to bounce back to 2019s’ level in 2024.
ii.) Upmarket rent plummets by 6.6 percent on foreigners exit
According to a report by the Knight Frank, which released on 10th September 2020, the average prime residential prices in Nairobi declined by 2.9% over the first half of 2020 compared to a decline of 1.8% in the first half of 2019 – pushing the annual decline to 5.1% in the year to June 2020. Prime residential rents also declined over the review period by 6.55% compared to 1.67% over a similar period in 2019, taking the annual decline to 7.62% in the year to June 2020. The report further showed that Nairobi’s office price for a square feet stopped at $13.99, dropping from $ 15.04 per month.
iii.) Affordable housing to get KSh37 billion credit line
The Kenya Mortgage Refinance Company (KMRC), in its annual report for the year ending June 2020, offered KSh37.2 billion credit line that is earmarked for affordable housing. The report, which was released on 14th September 2020, noted that those seeking residence in Nairobi Metropolitan Area, which also covers Kiambu, Machakos, and Kajiado, will qualify for up to Sh4 million, while other areas will get up to Sh3 million.
iv.) Ministry of foreign affairs seeks KSh5 billion buy houses for diplomats
The Ministry of Foreign Affairs is seeking at least Sh5 billion annually for 15 years to buy houses for diplomats, reducing the amount of money spent on rent by foreign missions. In a report to the parliament, the ministry said it had developed an acquisition plan which will see it buy at least three properties per year to reduce the rental expenditure, which currently stands at Sh3 billion annually.
C.) KENYA REAL ESTATE TRENDS
i.) Property Maintenance continues to be a priority among property owners amid Covid-19
Covid-19 pandemic has pushed property maintenance to the forefront among commercial and residential property owners. Amidst the Covid-19 pandemic, building owners continue to appreciate the fact that buildings need proper building maintenance management to allow residents to live in comfort, and as well to attract and preserve tenants.
Amid the Covid-19 pandemic, tenants are more concerned about disinfecting and well-maintained buildings, including everything from sanitization to regular, visible cleaning of the floor to fresh landscaping. As well, facility maintenance has become an important part of brand experience amidst the Covid- 19 pandemic.
ii.) Construction firms continue to appreciate the use of technology in the built environment
Construction firms continue to embrace technological innovations that help to save money and improve productivity in construction sites. Drones are continuously being used to Survey the entire subdivision or multiple job sites quickly and efficiently. At the same time, Property developers in Nairobi have increased the uptake of ready-mix concrete to cope with the fall in the number of workers allowed on-site due to strict Covid-19 prevention guidelines.
The use of technology in construction sites is allowing formpensation for the fall in the number of workers allowed on-site due to strict Covid-19 prevention guidelines. Also, technology reduces the time spent on processing different components in construction sites.
D.) GLOBAL REAL ESTATE TRENDS
i.) Prime country homes outperform other real estate classes in the U.K.
According to a report by Knight Frank, which was released on 14th September 2020, the U.K.’s high-end country home market prices has been outperforming other property types in the country throughout the second quarter of 2020, driven by demand for more rural living and the greater space.
According to the report, prices for prime country homes rose 1.2% in the second quarter of 2020 despite property markets experiencing a slow down due to the coronavirus pandemic, with the trend likely to continue through 2020. Similarly, the Kenya real estate market is experiencing a slow down due to the coronavirus pandemic; however, there has been an increasing demand for properties with enough space, such as the detached houses.
ii.) Ukraine’s housing market improves amid the Covid-19 pandemic.
Property prices in Ukraine are mildly rising, attributed to the recovery of the Ukrainian economy as the conflict with Russia calms, and the country reopens. According to S&V Development, existing apartment prices in Ukraine went up by 0.39% during the year to Q2 2020 (steady in real terms), to US$ 1,035 per square meter (sq. m.), following y-o-y declines of 3.34% in 2019, 4.03% in 2018, 6.02% in 2017, 1.61% in 2016, 2.31% in 2015 and a huge 36.62% drop in 2014.
Likewise, newly-built apartment prices in Ukraine increased by 0.43% y-o-y in Q2 2020 (0.1% in real terms), to US$930 per sq. m. Quarterly, newly-built apartment prices rose by 0.43% in Q2 2020 (1% in real terms). On the other hand, as the Kenyan economy reopens, and the positivity rate reduces, the Kenyan business conditions are improving; however, the real estate market prices are still on a downward trajectory.
E.) COMMON REAL ESTATE & DEVELOPMENT CHALLENGES, AND SOLUTIONS
Cost overrun in Construction Development Projects.
YOUR CHALLENGE:
As development projects become complex and real estate market evolve, various work elements are now required to be incorporated in Development Construction Works to allow the project to meet market expectations. The challenge comes in Cost Overrun in the Project out of various reasons; which results in exceeding of the project budget, and sometimes stalling of the project.
THE SOLUTIONS:
Management of Cost Overrun in a project takes various steps and requirements to ensure that a Development Project is finished within the set Cost Budget and limit. Below are precautionary measures that every developer or investor should consider in managing or avoiding Cost Overrun in a project:
- Cost Control by hiring Quantity Surveyor – A Quantity Surveyor professional is an expert in building construction who is responsible for budget costing, cost estimating, cost measurement, cost planning, cost control, and administration of the same in a project. Haring a Quantity Surveyor in your project therefore gives you that much needed professional expertise to not only appreciate the budget cost of a development project, but also in cost control to ensure that a project is completed within budget.
- Closing-in on Design before commencement of the Construction – It is recommended that all designs are closed-in or finished before commencement of the construction process. This helps in avoidance of cost variation which would otherwise be foreseen and budgeted for if all the design were completed and cost for before commencement of the construction process.
- Conducting Soil Investigation – Various soil types can give different cost variation during construction of foundation section of the building. It is therefore recommended that thorough soil test be conducted during the design process to help incorporation of all associated implication into the design process.
- Finishing the Project on Time – Delay in completion of the project results in costs overrun out of additional costs associated with labour, maintenance of the site, insurances, and administrative overheads. Its is therefore recommended that construction projects be planned and managed to allow completion of the same with the set timelines.
- Quality Control – Project whose quality is not monitored may results in poor quality workmanship which may result to repeat or abortive works, and which consequently results in more costs in the project due to making good of defective works. Quality control therefore become a crucial element in managing cost overrun.
THE CONSULTANT TO ENGAGE:
The Consultants to engage in management or avoidance of cost overrun in a project is a Quantity Surveyor.
F.) THIS WEEK ON FREQUENTLY ASKED QUESTIONS (FAQs), AND ANSWERS
QUESTION:
What is the percentage of Materials, Labour, and Contractor’s profit and overheads in a Development Construction Budget?
ANSWER:
Construction budget is built by constituting various costs inputs that forms the Rate for various work elements in a Project, for projects that are procured through a building contractor. The main cost input that constitute the rate of a work element include the cost of Materials, Labour, Contractor’s Profits and Overhead, and Tax to the Government.
A question on the percentage of the cost input that constitute the rate or budget is one that bothers many developers during cost budgeting, cost control, or cost analysis of bids issued by various contractors during procurement of various construction projects.
Below is an approximate breakdown of percentage of cost inputs that build up the rate of various works elements in a construction project:
- Materials – 60%
- Labour – 20%
- Profits and Overheads – 10 to 15%
- Taxes – 8 to 16%
G.) THIS WEEK ON DEVELOPMENT COSTS ANALYSIS – RUAKA AREA, KIAMBU COUNTY.
This week’s focus on Development Cost Analysis is for Ruaka 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, and Shopping and Retail Complex.
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 – RUAKA, KIAMBU COUNTY.
The Real Estate price analysis focus for this week is on land, sale, and rental prices for a 2 and 3 bedroom apartment in Ruaka- Kiambu County. The data were obtained through surveys, and analysis of asking prices on property listings 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 Treasury bill auction remained undersubscribed in the week ending 17th September 2020 – that being the fifth straight week of undersubscribed Treasury bill sales. The under subscription was attributed to the limited pressure on the government to borrow heavily on short term paper due to the good performance of bond auctions.
91 day T-bill increased by 0.006 from 6.200% previous week rate to 6.26%. CBK offered a total of Kshs4 billion, and bids amounted to Kshs6.049 billion, of which 2.069 was accepted. The volume on bids received increased week on week basis. 182 day T-bill increased by 0.031% from 6.689% previous week rate to 6.720%. CBK offered a total of Kshs10 billion, and bids amounted to Kshs1.919 billion, of which all was accepted. The 364 day T-bill decreased by 0.007% from 7.564% previous week rate to 7.571%. CBK offered a total of Kshs10 billion, and bids amounted to Kshs8.915 billion, of which all was accepted.
J.) KENYA EQUITY MARKET INDICES
The equity market experienced a mixed reaction during the week ending 18th September 2020 as the total equity deals and NSE 20 share index plummeted by 41 percent and 0.41 percent, respectively. On the other hand, equity turn over, market capitalization, NSE all-share index, and NSE 25 share index rose by 140.13 percent, 0.69 percent, 0.696 percent, and 0.44 percent, respectively.
The I-REIT turnover and I-REIT deals decreased by 91.74% and 57.63%, respectively.
K.) KENYA CAPITAL MARKET ANALYSIS
The volatility of the capital market remained relatively stable during the week ending 18th September 2020, with Safaricom (5,894,100 shares), Uchumi (3,615,000 shares), Equity (3,286,100 shares), and KPLC (1,092,700 shares) being the most traded stocks during the week.
Top gainers at the bourse were led by Home Africa Limited, whose prices rose by 5% to KSh 0.42. It was followed by East Africa Breweries Limited, whose price rose by 4.84% to KSh 168. Other gainers were Sameer Kenya Holdings, whose prices rose 3.36% to KSh 4.0, Nation Media Group at KSh 15.75 (an increase of 3.28%), and Standard Chartered Bank closing at KSh164.50, an increase of 1.86%.
The biggest loser was Berkeley Group Holding, whose price declined by 10.00% to Ksh 13.50. Small Business Investment Limited followed it at Ksh 75.00, a decline of 6.25%, followed by East Africa Cables at Ksh 1.73, Uchumi Supermarket at Ksh 0.30 ( 3.23% decline), and Kenya Power Limited Company whose price settled at Ksh 1.81, a drop of 1.63%.
L.) CURRENCY HIGHLIGHTS
The foreign exchange reserves held at the Central Bank of Kenya (CBK) dropped by $471 million (Sh51 billion) in the week ending 17th September 2020 since the beginning of August 2020, attributed partially to external debt interest payments and efforts to support the shilling against volatility amid an increase in the country’s import bill. Despite the drop – where $98 million (10.6 billion) was recorded in the week ending 17th September 2020 – the reserves met the required statutory minimum of supporting at least four months of import cover. The Kenya shilling continued to depreciate in the week ending 17th September 2020, exchanging at a historic low of 108.63, on 16th September 2020.
M.) FACTORS THAT WILL SHAPE THE REAL ESTATE AND OTHER MARKETS IN THE NEXT ONE WEEK.
i.) Review of oil prices
On 14th September 2020, the Energy and Petroleum Regulatory Authority adjusted fuel prices by the smallest margin since January 2020. Super petrol increased by Sh1.33 while diesel decreased by 12 percent to retail at Sh105.28 and Sh94.51, respectively.
Consequently, the increase in petroleum prices is expected to increase the transportation cost and hence the cost of living among many Kenyans in the coming weeks; as a result, reducing the amount of money being freed to the economy for housing. However, the decrease in the price of diesel is expected to reduce the cost of transportation through trucking for construction goods, and hence the construction cost will be reduced by a small margin.
iii.) Depreciation of the Kenyan shillings
The Kenya shilling hit a new historic low against the U.S. dollar on 17th September 2020 to exchange at 108.63, as it continues to depreciate further.
The shilling’s weakening risks raising inflation and the cost of importation of construction raw materials such as steel and building fixtures and fittings in the short term. The weak shilling will also reduce the return on investment to foreignnvestors in real estate, as the value of the rental income will be significantly reduced when converted to US dollar. Furthermore, the weak shilling will continue to raise the cost of electricity, as the foreign exchange charge in power bills will go up substantially, straining on households and office bills.
Meanwhile, the Energy and Petroleum Regulatory Authority (EPRA) on 11th September 2020 adjusted the forex charge to 57.80 cents per unit of power purchased in September 2020, up from 47.69 cents per unit in August 2020. It is the highest since July 2018, attributed to the continued depreciation of the Kenyan shilling since July 2020.
N.) UPCOMING REAL ESTATE EVENTS AND TRADE SHOWS IN THE COMING ONE WEEK.
i.) Webinar: New Challenges in Architecture – The webinar will present new challenges in the construction sector along with solutions
Date: 24th September 2020
Time: 0800 PM
Venue: Online
Event Organizer: https://www.web.fibrenamics.com/pt/formacao/webinars-2020/
ii.) Webinar: Real Estate Taxation – The webinar will identify important real estate tax and non-tax issues.
Date: 21st September 2020
Time: 06:30 PM
Venue: Online
Event Organizer: https://www.calcpa.org/events-and-programs/event-details?id=3dc89bd5-ab0a-4dd4-bef5-ed9955798219