Topical Feature: A Guide to Real Estate Loan Structuring, and Risk Management Measures for Sustainable Project Funding, and Weekly Report #52/2020

When investors source funding for their real estate projects, the best loan structure that suits their situation and the market situation comes to mind. Most investors find a lending solution with the lowest interest rates, the best features, and the right repayment plan to suit their cash flow needs, all of which are fundamental elements that come into play when organizing property finance. Therefore, real estate loan structuring is how the loan product is set up to accommodate the investors’ best interest, either in short, medium, or longer term depending on their end goal.

The right loan structure enables an investor to maximize their interest savings and pay down their debt more effectively as well as build and expand their property portfolio. Furthermore, the correct loan structuring strategy could increase an investor’s loans’ tax effectiveness, help protect their assets, and make restructuring easier. Nevertheless, getting it wrong can have several negative implications for investors, such as reduced borrowing flexibility and putting an investor at far more significant financial risk, in case of default.

There are three areas in which a loan and its underlying asset can be structured. The actual loan type chosen, the asset ownership structure and borrowing entity, and how equity in existing properties is utilized. The following guide will help an investor to structure their real estate loan for sustainable project funding.

Loan structuring encompasses two main areas.

1. Product Selection: Here an Investor chooses a lender and the loan type that suits his/her needs, depending on the loan product’s true potential features. The following are different loan products types offered in the Kenyan market:

a.) Bank debt – This is where an investor obtains development capital from a bank or an institution lender. The interest rates are usually determined by market forces or controlled by regulatory authorities. Examples of bank debts include: Owner-occupied residential mortgage, Investment residential mortgage, Construction loan, and Top up loans also called Equity loan

b.) Private Lenders – Such capital is advanced by anyone with access to capital and a willingness to invest it.

2. The Loan Structure: An investor determines how the loan is going to be structured, the loan’s collateral requirements, offset account, redraw facilities, and the Principal and Interest repayments requirements

As such, an investor should:

i.) Choose the right loan type and features

An investor should go for a credit line that suits their financial needs under the prevailing market conditions. The credit line could be an interest-only loan, a loan with a 100% offset account, a plain old principle, or an interest loan.

ii.) Interest-only loan

An investor could structure their loan repayments as interest only – and not principal and interest. This allows a real estate investor to accumulate all surplus cash in an offset instead of reducing the loan principal, which preserves the loan principal at its original value that might be important for future tax benefits. The strategy also reduces an investor’s financial commitment to repay the loan to the lowest level.

iii.) Choose between Cross-securitization or stand-alone carefully 

Cross-securitization is where the lender uses more than one property as security for a loan. Cross securitization could also mean an investor loses control of their properties, and therefore they cannot maximize borrowable equity. An investor could avoid this strategy to be able to determine which properties to revalue and when, otherwise the lender would want to revalue all of them because they are financially linked to each other, which, depending on the valuations, could negatively impact an investor’s borrowable equity. Furthermore, Cross-securitization to a particular lender reduces an investor’s borrowing flexibility.

On the other hand, having a stand-alone security means a loan or loans are secured solely by one property. Having properties separately secured gives an investor more flexibility as they can be able to refinance one property to a new lender, which could probably help them maximize their borrowing capacity.

iv.) Diversify Lenders

Diversification of lenders is a risk management technique in which an investor uses more than one lender for their real estate funding to better maximize their borrowing capacity. Furthermore, having more than one lender allow an investor to maximize their borrowable equity, as lenders’ property valuations commonly vary significantly from one lender to another.

v.) Use an offset and borrow the maximum

For a property purchase, an Investor could maximize tax-deductible property loan by contributing more equity, borrowing a lower amount, and subsequently increasing the loan later. This allows an investor to structure their finances to give them as much flexibility as possible.


Getting the right loan structure in place when you start to build and expand your portfolio can be fundamental to your long-term success and financial protection. In order to meet your financial needs, it’s vitally important that you find a professional who understands how to serve and support your investment goals through a good project finance strategy.






i.) Microfinance banks record negative loan growth in quarter three (3) of 2020

The Microfinance banks cut lending in the third quarter of 2020 amid fears of default in the wake of coronavirus economic fallout that led to job cuts and businesses’ closure. According to a new Central Bank of Kenya (CBK) Financial Stability report, microfinance banks (MFBs) recorded negative loan growth of 1.5 per cent in quarter three of 2020. This was the first negative growth since June 2018, when the micro lenders reported a negative 1.1 percent loan growth.


ii.) Petrol prices up as pump pain looms in January

Petroleum prices rose marginally in December 2020 based on global oil price increases, which rose to the highest levels since March 2020 to hit the $50.36 per barrel on Friday, 11th December 2020. That was buoyed by hopes that more countries will soon roll out a coronavirus vaccine, accelerating economic growth and travel that will fuel demand for fuel. The petroleum cost increased by Sh0.97  per litre to retail at Sh106.82 in Nairobi while diesel and kerosene rose by KSh1.12 and KSh1.93 respectively to retail at Sh91.82 and 83.56, for the period between 15th December 2020 to 14th January 2020.




iii.) Kenyan MPS to debate tax reliefs on 22nd December 2020

Kenyan MPs were recalled from the Christmas recess to a special session on Tuesday, 22nd December 2020, to debate the ending of tax reliefs implemented in March 2020. According to the National Treasury, the tax reliefs introduced in the wake of Covid-19 were no longer sustainable due to persistent revenue collection shortfalls amid a subdued economic activity that affected government programs’ implementation.


iv.) Kenyan banks recorded 2.6 percent jump in bad loans

Asset quality for listed banks deteriorated in the third quarter of 2020, with non-performing loans (NPL) rising by 2.6 per cent to 12.4 per cent, up from 9.8 per cent reported same time in 2019. According to the latest report by Cytonn, high NPLs were witnessed in sectors such as tourism, real estate, hospitality and transport, and communication mainly due to the disruption of business and operations caused by the corona virus pandemic.






i.) Kiambu system glitch hits building approvals

Construction of homes and office blocks in Kiambu has stalled due to a breakdown in the system that approves the plans. On 14th December 2020, Kiambu property developers, noted that the approvals had been delayed for the past five weeks as the county struggles to solve the hitch on its electronic development application and management system. According to a letter by the Architectural Association of Kenya (AAK) to Kiambu county Land and Housing chief, James Maina, the negative impact caused by the system glitch extends to construction workers and other businesses that are direct and indirect beneficiaries from construction activity.


ii.) Centum real estate to construct affordable houses in Ruaka

Centum real estate is set to diversify its real estate portfolio, with the company planning to construct 1650 affordable housing units in Ruaka. In a regulatory filing on 11th December 2020, the Two Rivers Development revealed its plans to construct affordable housing units within its property in Ruaka, along the Northern Bypass. According to the notice, the project comprises one, two and three-bedroom apartments in 14 blocks of 17 floors each.





iii.) KAIST set to begin construction work at the Konza Technopolis

Kenya Advanced Institute of Science and Technology (KAIST), the Konza Technopolis’ anchor investor, is set to begin construction work in earnest in early 2021 following the identification of a contractor and the approval of the project. This was revealed on 16th December 2020, during a networking breakfast organized by the Konza Technopolis Development Authority (KoTDA). The meeting brought together investors who have already signed up to take space within the Technopolis.





iv.) Construction approval in Kajiado County digitized.

On 16th December 2020, Kajiado County launched the Kajiado Electronic Development Application Management System (KeDAMS) developed jointly by the County Government of Kajiado, and the Architectural Association of Kenya (AAK) to support the key function of physical planning and construction permit issuance. According to Kajiado deputy governor Martin Moshisho, the rise in urbanization has continued to attract large investments in residential housing, educational institutions, and industrial developments, calling for the deployment of new construction technology.




i.) Fund managers in real estate face inability to pay returns

The Central Bank of Kenya (CBK) has warned on the liquidity risks facing fund managers and pension schemes with real estate exposure. According to the bank, the liquidity risks could lead to fund managers being unable to pay matured returns or member benefits owing to a property slump in recent years now worsened by the Covid-19 pandemic. According to the Financial Stability Report (FSR) 2020, pension schemes and fund managers who have invested in buildings and land face liquidity risks, occasioning delays in settling member benefits.


ii.) Apartment buyers to have title deeds

In the week ending 12th December 2020, the parliament passed a law that guarantees houses’ ownership within an apartment block. The Sectional Properties Amendment Bill 2020, which was signed into law by President Uhuru Kenyatta on 12th December 2020, seeks to provide for the division of buildings into units to be owned by individual buyers and common property to be owned by the proprietors of the units. Furthermore, the law allows individual apartment owners to acquire title deeds for their units and use them as collateral in acquiring bank loans.




iii.) Appetite for apartments reduces amid the Covid-19 pandemic

According to a new survey by Knight Frank, which was undertaken between 15th September 2020 and 14th October 2020, the Covid-19 pandemic has reduced buyers’ appetite for apartments. According to the survey, 50% of respondents said they are less likely to want to live in an apartment in the future. The survey established that Home offices, greater privacy and outdoor space are now top priorities for the upper mid-income earners looking to buying homes. Furthermore, Up to 77% of respondents said they are more likely to work from home following the pandemic.



iv.) Centum real estate raises Sh3 billion from real estate bond

Centum real estate, a subsidiary of Centum Investment Plc raised KSh 3 billion from a project bond intended to finance the construction of its ongoing housing projects in Ruaka and Kasarani. According to the firm, the bond, which closed on 16th December 2020, will pay investors a return of 12.5 percent for the plain vanilla bond and 12-14 percent for the Equity Linked Note. The firm further stated that the subscription level was 50 percent above the minimum target of Sh2billion.







i.) Nairobi land prices in the suburbs and satellite towns show negative growth amid the Covid-19

Land prices in most suburbs and satellite towns in the Nairobi Metropolis showed a negative price growth in the six months to September 2020 at the peak of the coronavirus economic hardships that cut demand for property, indicating a strain on the real estate market.

According to the latest land index by the Hassconsult, Loresho saw a -6.0 percent land price growth, Parklands recorded a -8.8 percent, and Riverside -8.1 percent. According to the index, overall land prices in the suburbs dropped by 0.94 percent over the third quarter of 2020, while in the satellite towns, the drop was 0.06 percent.



ii.) Real estate developers turn to Bonds to fund construction projects

The Kenya real estate developers are increasingly using REITS to raise funding for construction projects. According to Kenya developers, the continued issuance of real estate construction bonds offers an opportunity for both foreign and local investors to get a piece Kenya’s real estate pie without taking the risk of getting involved in actual development of the projects.

The Capital Markets Authority (CMA) approved the issuance of a development and investment real estate investment trust (Reit) by student hostel developer Acorn, setting the stage for accelerated student housing development in the city. The Reit approval follows the issuance of a Reit Manager license to Acorn in October 2020, with the firm also having issued the first country’s first green bond in October 2019. Centum Real Estate, on the other hand, floated Sh4 billion housing bond in November 2020 to finance its construction projects that would deliver more than 1,400 residential units to the market.




i.) Property Prices Rise in Ireland in Q3 amid the Covid-19 pandemic

According to Draft report, a property site in Ireland, the average listed price of housing in Ireland rose by 4.8% between June and September 2020. The report indicated that the average nationwide sale price in the third quarter of 2020 was €263,750, a 2.7% rise from €256,628 during the same period in 2019 and 60% higher than its lowest point in 2013.

Listed prices rose in all 54 markets contained in the Draft Report between June and September 2020, although there were significant differences around the country. The largest increases were in urban areas, with prices in Waterford city rising 11%, Galway city 10% and Cork and Limerick 9% in just three months. By comparison, prices in Dublin rose by an average of 2.2%. Outside the cities, the average increase between June and September 2020 was 5.8% – with larger increases in Leinster (7.3%) and smaller increases in Connacht-Ulster (3.5%). On the contrary, housing prices in Kenya has been plummeting amid the Covid-19 outbreak due to the reduced disposable income among households.

ii.) U.S. Multifamily Construction Sentiment Upticks in Q3

According to the latest Multifamily Market Survey by the US National Association of Home Builders, confidence in the market for new multifamily housing increased in the third quarter of 2020. The Multifamily Production Index (MPI) rose 11 points to 48 compared to quarter two of 2020. Meanwhile, the Multifamily Vacancy Index (MVI) decreased 18 points to 44, with smaller numbers indicating fewer house vacancies.

The MPI is a weighted average of three key elements of the multifamily housing market: construction of low-rent units-apartments that are supported by low-income tax credits or other government subsidy programs; market-rate rental units-apartments that are built to be rented at the price the market will hold; and for-sale units-condominiums. All three components posted increases in the third quarter of 2020, with the component measuring low-rent units rose four points to 46, the component measuring market rate rental units jumped 19 points to 53 and the component measuring for-sale units posted an 11-point gain to 46. On the other hand, in Kenya, Covid-19 pandemic has reduced home – buyers’ appetite for apartments, as the desire for Home offices, greater privacy and outdoor space increases.




Managing the Cost of Finance (Interest) on a Real Estate Investment Project.



In modern real estate investment; a need to source external funding is inevitable because of the huge capital requirement coupled with relatively big scope in modern projects, as well as the need to leverage through borrowing or seeking an equity partner into the Project. The challenge comes in finding ways to reduce the cost of finance in the project; which can also be interpreted as to how to reduce the interest rate for debt or equity funding.







There are a number of ways to reduce the cost of finance in a project, as outlined below:

a) Increasing the Equity Contribution Share in the Capital Structure: One of the ways of reducing the cost of finance is to increase your Equity Contribution share into the project, or into the Capital Structure. This way, you borrow less thereby reducing the overall cost of capital into the Project. This can be done by liquidating other assets whose overall returns or capital gain is much lower than the cost of borrowing.

b) Paying the Investor early, for Equity Finance: The other ways of reducing the cost of Finance into a Project is to pay the Investor early into the project, through the first proceed that comes from sales of the Real Estate Investment Product. This is done through a systematic Tier formula, whereby a considerable amount is paid to the Investor or Lender in tier one and two, through negotiated interests that much lower than if the proceeds were paid at the end of the project.

c) Seeking Equity Partners in Potential Buyers: Another way or reducing the cost of finance is to seek equity partners in potential buyers. These are Buyers that you negotiate with so that they can pay a bigger percentage of the price of the sale units in off plan or initial stage, but at a much discounted price, such that the partners benefit through lower price premium discounts while the developer benefit in equity capital.

d) Selling Off-Plan to reduce to Capital Deficit: Selling off-plan still remains a viable way of reducing the cost of finance. The idea is to break ground at the site when you have raised a considerable amount through off-plan sales of Units.

e) Avoiding High Risk Finance Instruments, like Mezzanine Financing: Another way of reducing the cost of finance is to seek cheaper equity and debt finance instruments, and avoiding expensive debt instruments like Mezzanine Finance. One way of doing this is to negotiate the entire debt fund through one Senior Debt Capital.




The Consultant to engage for this exercise is a Project Finance Consultant.












What are the merits and demerits of importing Building Finishes materials, against buying them locally?














We have seen a trend in recent past where developers imports building materials, especially finishes from other countries especially China, for reasons ranging from cost cutting measures to search of better quality materials. So what are the merits and demerits of this kind of an arrangement.

a) Merits: One of the merits is that developers are able to access a wide variety of finishes to choose from, thereby having an opportunity to explore on their taste and preference. Another merits is the wide range of quality to choose from, due to the huge variety of materials. Cost saving has also been cited by many developer as a merits to importation of building finishes, mainly being as a results of savings in profits and overheads for traders of the same materials, once you import the materials yourself. The cost saving also comes in discounts and economies of scale once you purchase materials in bulk, for large real estate development.

b) Demerits: Demerits for importation of building finishes includes uncertainty of the life cycle of the finishes, especially equipment due to unavailability of servicing parts locally, which means that you would have to import the serving parts, say for Lift Elevators every time there is a breakdown. Another demerit is technical compliance, especially for fittings equipment, whereby you may end up having a fitting that does not comply with counterpart local fitting during installation. Sustainability of sale guarantee also become an issue because of logistical issue related to an equipment imported from another country, when you want to activate a replacement through a sale guarantee.




This week’s focus on Development Cost Analysis is for Syokimau, Machokos County, this being a fast growing satellite residential and commercial area 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.




The Real Estate price analysis focus for this week is on land, sale, and rental prices for a 2 and 3 bedroom apartment in Syokimau – Machakos 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)




The money market remained liquid over the week ending 18th December 2020, supported by government payments, which offset tax receipts. The interbank rate, which is an indicator of liquidity levels in the banking sector, went up by 1.36 percentage points to 5.885 percent, indicating increased banking sector activities.

91 day T-bill increased by 0.01 from 6.901% previous week rate to 6.916%. CBK offered a total of Kshs4 billion, and bids amounted to Kshs 8.629 billion, of which 8.513 billion was accepted. The volume of bids received reduced week on week basis. 182 day T-bill increased by 0.04% from 7.363% previous week rate to 7.399%. CBK offered a total of Kshs. 10 billion, and bids amounted to Ksh 7.856 billion, of which all was accepted.  The 364 day T-bill increased by 0.04% from 8.246% previous week rate to 8.283%. CBK offered a total of Kshs10 billion, and bids amounted to Ksh 5.207 billion, of which Ksh 4.972 billion was accepted.




Investors trading confidence at the Nairobi Security Exchange (NSE) reduced in the week ended 18th December 2020 as evidenced by decreased trading activities. During the week, foreign investors assumed a net buying position by accounting for 49.57% of the total market sales and 50.53% of the total market purchases.

The NSE All-Share Index, NSE 20 share index, NSE 25 share index, market capitalization, total shares traded, and equity turnover, which are the main measures of the equity market’s performance, changed by +1.418%, +0.8316%, +0.55%, -44.63%, and -26.54%, respectively. The I-REIT turnover and I-REIT deals plummeted by 6.9% and 46.15% respectively, majorly attributed to the deteriorating real estate market conditions in the Country.




The Kenya Shilling weakened against major international but strengthened against regional currencies during the week ending 17th December 2020. The local currency plummeted to a historic low of Ksh111.591 per US dollar on 17th December 2020, attributed to the increased demand for the greenback as the year approaches the end.

The usable foreign exchange reserves remained adequate at USD 7,837 million (4.81 months of import cover) as of 18th December 2020. That meets the CBK’s statutory requirement to endeavor to maintain at least four months of import cover and the East Africa Community (EAC) region’s convergence criteria of 4.5 months of import cover.




i.) VAT reversion to 16pc

On 4th December 2020, the Kenyan government, through the Cabinet Secretary for Treasury, confirmed to reverse the April 2020 VAT rate cut from 16% to 14% on 31st December 2020.

The reversion of taxes to 16 percent is expected to increase the cost of residential developments and sale prices, while maintenance and management charges will also be inflated. That is likely to result in reduced demand and, therefore, slower absorption. Furthermore, under the current market conditions, many office occupiers are looking to reduce their office space, and the imposition of higher VAT on commercial leases may further reinforce this trend.

Also, the reversion of VAT rates is expected to have more impact on developers than tenants, as current market conditions mean that landlords cannot pass on the full impact of the higher costs in the form of increased rents and sale prices. The most immediate impact of pressure on developer’s profit margins could be delays in commencing new projects and a slowdown in the delivery of projects under construction.

ii.)  State-Backed SME loans

In an effort to revive the Small and Medium-Sized enterprises, the government, through the National Treasury on 9th December 2020, unveiled credit guaranteed scheme loans to be accessed from banks. According to the National Treasury Cabinet Secretary Ukur Yatani, the loan will enable small enterprises affected by the pandemic access cheap loans from seven local banks, including the KCB, NCBA, Co-op, Absa, DTB, Stanbic, and Credit Bank

Affordable loans will facilitate more retailers to fund their restart strategies and increase their stocks. Therefore, the commercial real estate cash flow is expected to be sustainable in December 2020, as more tenants meet their rental obligations and more businesses reopen, increasing the retail occupancy rate.




i.) Webinar: Realtor Property Resource: Residential – The webinar will cover Property research, understanding property history and details for a residential property.

Date: 27th December 2020

Time: 9:00 AM

Venue: Online

Event Organizer:



ii.) Webinar: Residential, Commercial and Mixed-Use Property Management – The webinar will illustrate how to streamline accounting, marketing, and leasing in a digital platform.

Date: 28th December 2020

Time: 7:00 PM

Venue: Online

Event Organizer:




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:

  1. Feasibility Studies and Market Research.
  2. Project Finance and Capital Raising.
  3. Project Management.
  4. Investment Design Appraisal.
  5. Quantity Surveying
  6. Construction Cost Consultancy
  7. Physical Planning and Planning Permissions
  8. Environmental Management and Impact Assessment
  9. Real Estate Development and Structured Investment Solutions
  10. Property Valuation
  11. Marketing and Property Sales Agency
  12. Property Management and Facility Management

Our Contacts:



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.