A look at Kenya Real Estate Equity Financing – The Untapped Potential in Local Investment Groups and SACCOs in financing real estate projects in Kenya Real Estate Market.
Regarding, Real Estate Finance in Kenya, the Country has registered remarkable development in regard to Equity and Debt Finance, as well as Capital Funding for property development in the past few years. Infrastructure development in major towns has also been significant, opening up the country to more investments. However, even with such growth, a lot of developers and investors are still playing it safe by focusing on retaining full profits and relying on bank loans for financing. Construction activities require a lot of funds to execute. In equity funding, one of the most critical steps is identifying a source of finance and a selling strategy that communicates the highest value attainable to a financier. This article discusses the available potential in local investments groups (Chamas) and SACCOs as potential alternatives in real estate equity financing.
Local Investments Groups (Chamas), for Real Estate Finance in Kenya.
For a long time, local investments groups have been in the spotlight as one of the leading social saving systems in Kenya. According to statistics, there are about 1.2 million chamas is Kenya with 300,000 registered and 90,000 unregistered. In common practice, most chamas are not risk-averse and tend to focus on short-term investment projects. These include; land purchases with the intent to sell as soon as it appreciates in value, lease of property for a pre-defined period at rents that exceed the cost of holding the asset, and purchases of property with the intent to renovate, create value and make quick sales.
However, in the wake of large cash-flows, professional services consultation, and investments training, more chamas have graduated from small-scale projects to making large investments to the tune of billions of shillings. The vibrant and dynamic chama movement is estimated to control assets worth at least Ksh 300 billion, which represent the 300,000 chamas currently registered.
Such investments groups have interests in long-term investments opportunities with high rates of return, which provide guaranteed returns to their members. For developers, this is an avenue that could be exploited to benefit both parties by guaranteeing a viable investment strategy complete with a skilled, reputable workforce.
Savings & Credit Cooperative Societies (SACCOs)
SACCOs are the more formal domestic organizations whose evolution began in the early 1970s. Over the years, many farmers, teachers, doctors, and other professionals have continued to form SACCOs for diverse financial reasons. Today, the sector is estimated to have mobilized over Ksh 200 billion deposits and savings amounting to Ksh 210 billion. Unlike Investments groups where everyone can join, membership into savings societies are restricted to groups of people in a certain profession and are restricted from pursuing risky business activities. However, this was up until recently, where major financial reforms have been introduced; such as the Vision 2030 that has promoted a competitive financial sector and high levels of savings to finance Kenya’s investments needs. Among the financial institutions needed to accomplish the mission include about 2700 SACCOs in both rural and urban areas.
Additionally, the Kenyan population has evolved into a culture that puts more emphasis on wealth creation. Today, SACCOs are at the forefront driving the Kenyan housing finance through housing loans and equity financing through Joint Ventures. While these are broad steps towards financial freedom, there is little impact on wealth generating investments and vehicles which could be a crucial selling point for developers looking for equity and debt financing in the sub-sector (SACCOs).
Opportunities for Developers and Investors.
Investments groups and SACCOs are geared towards increasing income and investments. Where returns are high, and risks are shared, they are more inclined to forge partnerships with real estate developers. Buildafrique Consulting Group keeps a database of Investors and Financiers for equity and debt financing and investment match making with developers seeking capital funding. Investment Groups and SACCOS are therefore one of our equity financing sources of financing and fund-raising avenue, in our product solution and mission of real estate fund raising and project finance sourcing, to help developers and real estate investors access capital funding for their project. We make this possible by striking an allowable balance between risk and returns that inspires an investment or partnership decision between the Financier (Investor) and Developer. Buildafrique Consulting Group is a specialist in Real Estate Finance in Kenya, as well as structuring Real Estate Joint Venture in Kenya. We offer these solutions Real Estate Project Finance after conducting Real Estate Feasibility Studies in Kenya.
B.) WEEKLY NEWS HIGHLIGHTS
MAJOR ECONOMIC NEWS HIGHLIGHTS
i.) Kenya Debt Ceiling expected to rise above 9 Trillion mark
Kenya debt ceiling is expected to rise to accommodate growing expenditure needs amid underperforming tax collections. The National Treasury said that this was a result of the public debt stock was fast approaching Kes 9 trillion’s statutory ceiling set out in the Public Finance Management Act, 2012.
According to the National Treasury, public debt stood at Kes 7.28 trillion by the end of December, 2020 equivalent to 65.6% of the country’s gross domestic product in nominal terms. The Treasury had earlier on projected the total public debt would hit Kes 7.66 trillion by the end of the current financial year in June and rise to Kes 8.59 trillion in June 2022. This comes following the Treasury announcement of the country’s entry in its fourth Eurobond in six years to raise Kes 123.8 billion from sovereign bonds sold to foreigners in the next four months and an additional Kes 124.3 billion during the fiscal year starting in July to help finance the budget.
ii) IMF and Kenya Government agree on KSh 262.5 Billion Financing Package
International Monetary Fund (IMF) and Kenya Government have come into an agreement on a three-year, KSh262.5 billion ($2.4 billion) loan to assist Kenya in its ongoing response to the covid19 pandemic, as well as to help Kenya to reduce the country’s debt levels relative to GDP.
The IMF program is expected to provide support to the vulnerable Kenyans and boost the Kenya government’s efforts to revive the economy, as well as reduce debt vulnerabilities by raising tax revenue and reducing government spending thereby safeguarding resources to protect the vulnerable groups in Kenya. Additionally, the program aims to address weaknesses in some state-owned enterprises, strengthen transparency and accountability in government agencies, and strengthen the monetary policy framework and support financial stability.’
iii) Kenya Foreign Exchange Reserves rise to $7.64 Billion
In the week that ended on 12th February 2021, Kenya’s foreign exchange reserves increased by $21 million to reach $7.638 billion. Despite the increase, the exchange reserves remain at relatively low levels having dropped from $8.496 billion a year ago in 2020. In the week that ended on 4th February, the reserves had reported a drop to $7.617 billion, the lowest level reported in more than two years.
According to Central Bank of Kenya data released on this development, the reserves are adequate to cover 4.69 months of imports, above CBK’s statutory requirement of at least 4 months of imports cover and East African Community’s requirement of at least 4.5 months of imports cover.
CONSTRUCTION INDUSTRY HIGHLIGHTS
i.) Spanish firm set to build Sh3bn flyover to replace Lang’ata Road roundabout
A Spanish engineering company by the name CENTUNION is set to begin construction of a four-lane flyover on Lang’ata Road in a project meant to reduce traffic jam at the target locations. This comes after the completion of detailed designs of the T-Mall Flyover on Lang’ata Road and related footbridges across Mbagathi Way and at Nyayo Stadium.
The project is being implemented under the EPC/Turnkey Contract framework and was signed between KeNHA and the Contractor. According to KeNHA, the 36-month project is the product of a bilateral financial cooperation agreement between the government of Kenya and its Spanish counterpart. The project will be implemented in seven phases to minimize traffic disruption.
ii.) Construction of Sh17bn Nairobi Western Bypass project kicks into high gear
The construction a Sh17 billion Western Bypass highway that seeks to ease traffic congestion in the Kenyan capital city is well underway, with the project now nearing its halfway point. The 15.3km highway, starts at Gitaru on the Nairobi-Nakuru highway and will link the Southern Bypass in Kikuyu town. The bypass will then terminates at Ruaka where it shall joins the Northern Bypass.
Funded by China Exim Bank, the project is expected to be complete by end of next year; 2022. It will become the last of four Nairobi ring roads that include the Nairobi Southern Bypass, Nairobi Northern Bypass, and Nairobi Eastern Bypass.
iii.) Development of the loft residences at two rivers starts
The construction works of Loft Residences at the Two Rivers Development in Kenya have started following a groundbreaking ceremony by the project developer, Centum Real Estate Limited. The Loft residences shall be built for the high-end segment of the property market include 4-bedroom+DSQ duplexes, each on two floors.
The construction also includes a multifunctional clubhouse, a heated infinity pool and several jogging tracks within the Two Rivers development. As of January 2021, almost half of the units at the Loft Residences had been sold off-plan, a clear indicator of the market for this specific commodity. The project concept will also contain nine unique residential courts, three of which are currently under construction.
COMMERCIAL REAL ESTATE HIGHLIGHTS
i.) More mortgage borrowers risk being listed as economy limps
The abrupt shrinking of income due to Covid-19 socioeconomic disruption sparked a high loan default among households. At least 14 million borrowers have been listed by Credit Rating Bureaus as of February, 2021, accounting for more than 20 per cent of the country’s population.
The blacklisted accounts jumped by a significant 45 per cent in the five months between August, 2020 and January, 20201 after the Central Bank of Kenya lifted a three-month moratorium. According to the report, the most vulnerable sectors are trade (18 per cent of the sector’s gross loans at end-2019), personal lending (17 per cent), real estate (16 per cent), manufacturing (15 per cent) and tourism (14 per cent).
ii) Kiambu land prices drop as speculator steam cools
Land prices in Nairobi’s satellite towns in Kiambu County fell at the end of 2020 and beginning of 2021, halting years of growth that was driven by speculative buying and infrastructure development.
In a report by HassConsult, Kiambu Town, Ruiru and Limuru had the biggest annual drops in asking prices of 11.4 per cent, six percent and three percent, respectively, with Ruaka and Juja also recording drops of 1.5 per cent and 0.3 per cent in that order. The Land prices in the Kiambu were said to be moving towards a maximum of what the development market can bear, until we see a hike in economic activity and therefore some space for property prices to rise further.
iii) Kenya warehousing market defies pandemic to register growth
According to Knight Frank’s Kenya latest Market Update, Kenya Warehousing Market witnessed positive growth despite the coronavirus pandemic that negatively impacted the demand for office space and prime residential properties.
At the peak of the pandemic, new, well-located smart warehousing meeting international standards were opened while many more are under construction. Cold storage in particular experienced the highest growth, as a result of an e-commerce expansion into the grocery business. A number of warehouse projects have been commissioned after the pandemic, including Phase 1 of Africa Logistics Properties (ALP) second Grade-A logistics and distribution park, ALP West located in Tilisi Logistics Park, and Nairobi Gate Industrial Park, which is located off the Eastern Bypass.
C.) KENYA REAL ESTATE TRENDS
i.) Sectional titles and property ownership set to gain momentum in Kenya
Sectional titles describe ownership of sections of units within a complex. While unpopular in Kenya owing to the lack of understanding in matters relating to the management of common areas, the increasing number in the development of sectional property and its relative affordability compared to stand-alone property is set to rise owing to the rising preference for homes within gated communities, apartments and sectional commercial space ownership, as well as change in legislation that has eased ownership of sectional property.
Unlike stand-alone homes, flats and apartments are advantageous in that several housing units can be put up on a small parcel of land thereby increasing occupancy density. Statistics indicate that in the months of November and December 2019, the sale of apartments made revenues in the sum of 14.45 billion and 2.75 billion compared to the sale of houses which recorded revenues of 7.58 billion and 1.36 billion for the same months. With the demand for condominiums growing, buyers are more knowledgeable in the law regarding sectional property ownership. With the ever-escalating value of land and cost of building, supply and increased ownership of sectional title properties is likely to grow.
ii.) Mixed Use Developments Continue To Gain Traction Among Kenya Real Estate Investors
Integrated developments that combine residential, commercial and retail units, have recently become popular within the city as developers struggle with low occupancy and take-up rates in various classes of properties in the market. This has also been led by the current infrastructure being unable to keep pace with a rapidly growing population and new real estate developments, creating a demand for mixed use developments, according to Knight Frank’s Global Cities Report.
Developers are also undertaking Mixed-Use Developments (MUDs), which integrate various uses which include residential, commercial, hospitality, retail among others in one, so as to maximize land use whilst increasing uptake through creation of a live, work, play and invest environment for building occupants. MUDs are not a new trend in Kenya with several developments particularly in the commercial zones having a mix of office and retail space, while those in townships areas have retail space on the ground floors and residential areas on the upper floors. In the recent years, however, we have seen the emergence of large-scale integrated mixed-use developments, composed of extensive retail malls, Grade A office spaces, residential precincts with apartments and/or villas, restaurants, hotel rooms and serviced apartments. The growing popularity of mixed-use developments is mainly driven by the following advantages;
- Higher returns
- Operational synergies
- Risk diversification
- Economies of scale
- Greater efficiency for occupants
D.) GLOBAL REAL ESTATE TRENDS
i) US existing home sales edge up as supply plummets
The hot US housing market continued in January, as sales of existing homes rose again, but high demand drove supply to a record low, according to industry data released on 19th February, 2021. Home sales have remained solid, consistently one of the strongest sectors of the pandemic-ravaged US economy, fueled by record low borrowing costs, even as builders have struggled to keep up with demand.
Sales of existing single-family homes, townhomes, condominiums and co-ops increased 0.6 per cent from December to a seasonally adjusted annual rate of 6.69 million in January, the National Association of Realtors (NAR) said. That put sales up 23.7 per cent from the 5.41 million annual rate in January 2020, the data showed. The hot buying environment has continued to push prices higher, driving the median existing-home price in January to US$303,900, up 14.1 per cent from January 2020, marking 107 straight months of year-over-year gains.
This is contrary to the the situation in the Kenya Market, whereby Developer continues to experience low demand for real estate housing products from potential buyers, as a result of ailing economy and slow activities in the real estate market.
ii) UK house prices fall for first time since start of stamp duty holiday
UK House Prices fell month-on-month in January for the first time since the introduction of a stamp duty holiday, according to the Nationwide Building Society, suggesting the mini property market boom might be over as the end of the tax break approaches. The UK Nationwide house price index fell 0.3 per cent in January compared with the previous month, the first fall since June and down from a 0.9 per cent expansion in the previous month. This is a much weaker reading than the 0.3 per cent expansion forecast by economists polled by Reuters.
Compared with the same month last year, house prices were 6.4 per cent higher, a slowdown from the 7.3 per cent annual growth recorded in December. The slowdown reflects a tapering of demand ahead of the end of the stamp duty holiday, which prompted many people considering a house move to bring forward their purchase. A softening of prices is expected as those likely to miss out on the stamp duty saving due to backlogs are said to prefer to compromise on price rather than miss out on the property they have set their hearts on. Demand is however expected to remain relatively strong as it still costs less to own a house than to rent in the UK and the cost of borrowing is still exceptionally low, contrary to Kenya where cost of borrowing is significantly high.
E.) COMMON REAL ESTATE & DEVELOPMENT CHALLENGES, AND SOLUTIONS
Reducing the Life Cycle and Maintenance costs of a Real Estate Property.
YOUR CHALLENGE:
Life cycle costing analysis (LCCA or LCC for short) is the most accurate way to increase your building’s project savings by comparing different design alternatives. As opposed to more commonly used ROI-based calculations, LCC is conducted based on long-term costs and savings, keeping in mind the fact that they are interconnected. The “life cycle” part means that LCC assesses all costs that occur over the building’s lifetime including construction costs, maintaining, operating, and end-of-life related costs. To be more specific, the lifespan of a building consists of five main stages: concept planning, design, construction, operations, and replacement or disposal. The challenge comes in establishing these long-term savings in a development project and the concept planning and design of the building.
THE SOLUTIONS:
Life cycle costing (LCC) analysis process consists of three key steps:
- Structured cost analysis to see what cost sources influence your total cost of ownership the most.
- Identifying hotspots for improvement in your baseline design, when the major expenditure sources are clear,and testing different solutions for the existing objectives.
- Knowing your alternatives, and comparing their benefits and accordingly relocating the coststo gain maximum value out of your project.
LCC should be implemented as early in the project as possible before any major decision has been made. The whole team should be involved in creating alternatives to capture the full potential of your project.
LCC should also be regarded as an ongoing process during the life of the building, and calculations should therefore be repeated several times as the transition through construction stages takes place. Keep it up to date to ensure accuracy and high analysis quality, and it will be your easiest way to succeed in reducing the life cycle costs.
It can be time-consuming to go through all the data sources in a big-scale project, so one good option is hiring a Quantity Surveyor or a Costing Specialist to perform the calculations.
Overall, life Cycle Cost (LCC) analysis allows you to find the most optimal costing solution for your building project, by comparing between design alternative, and choosing the one that will boost your project’s value.
THE CONSULTANT TO ENGAGE:
The Consultants to engage in Life Cycle Cost analysis and consultancy is a Quantity Surveyor or a Property Manager.
F.) THIS WEEK ON FREQUENTLY ASKED QUESTIONS (FAQs), AND ANSWERS
QUESTION:
What Yield Returns can I realistically expect to see from various Rental Properties Investment in Kenya?
ANSWER:
Rental yield is defined as the rate or the percentage of returns from the rental income of an investment property.
There are two ways to look at rental yield: gross rental yield and net rental yield.
Gross rental yield is the annual rental income from the property value, which does not include the charges you pay towards the maintenance of this property or the amount that you pay in taxes. It simply is the money you earn as rent yearly.
For calculating the net rental yield, first of all, research about all type of cost which is associated with the property. This can be transaction costs, taxes, ongoing fees, expenses, maintenance cost etc. You arrive at the net rental yield after deducting the annual expenses from the annual rental income.
Rental Yield is important for home buyers to understand how good the property can be if they want to earn a healthy income from their investment. Rental yield is often compared with interest rate offered by other investment channels such as stocks, mutual funds, fixed deposits and gold. Below is an analysis of rental yield for various property types in Nairobi for the year 2020, for investment decision analysis:
- Apartment –6.0 to 7.0% in Nairobi.
- Serviced Apartment – 7.0 to 8.0%
- Detached Houses – 4.0 to 5.0%
- Commercial Offices – 7.5 to 9.5%
- Commercial Retail – 9.0 to 11.0%
G.) THIS WEEK ON DEVELOPMENT COSTS ANALYSIS – KITENGELA AREA, KAJIADO COUNTY
This week’s focus on Development Cost Analysis is for Kitengela Area in Kajiado 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 – KITENGELA AREA, KAJIADO 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 Kitengela Area – Kajiado 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 interbank rate, which is an indicator of liquidity levels in the banking sector, rose by 0.48 points to 4.03% which is indicative of increased banking sector activities.
91 T-bill rate rose by 0.006 points from 6.905% the previous week to 6.91% . CBK offered a total of Ksh 4 Billion and bids amounted to Ksh 4.674 Billion of which Ksh 4.655 Billion was accepted. 182 day T-bill rate increased by 0.04 points from 7.644% previous week to 7.684%. CBK offered a total of Ksh 10 Billion and bids amounted to Ksh 11.403 Billion of which Ksh 10.681 Billion was accepted. The 364 day T-bill increased by 0.107 points from 8.824% the previous week to 8.931%. CBK offered a total of Ksh 10 Billion and bids amounted to Ksh 13.901 Billion of which Ksh 13.471 Billion was accepted.
J.) KENYA EQUITY MARKET INDICES
At the Nairobi Securities Exchange, the NASI and NSE 25 share price indices increased by 1.11 percent and 0.79 percent, respectively, while the NSE 20 share index declined by 0.37 percent during the week ending February 18. Market capitalization, equity turnover and number of deals increased by 1.12 percent, 15.45 percent and 4.48 percent, respectively.
Equity turnover at the NSE increased by 18.79% to KES 0.49Bn from KES 0.41Bn recorded in the previous session. The top traders were SCOM, EABL and SCBK. The counters’ turnover stood at KES 286Mn, KES 92Mn and KES 22Mn respectively. Foreign investors were net-sellers recording net outflows of KES 0.08Bn as compared to net outflows of KES 0.04Bn in the previous session. In terms of company specific foreign activity, foreigners were net-buyers on SCOM and net-sellers on EABL & SCBK.
K.) CURRENCY HIGHLIGHTS
The Kenyan shilling remained relatively stable against major international and regional currencies during the week ending 19th February 2021. It exchanged at KSh 109.55 per US dollar on February 18, compared to KSh 109.45 per US dollar on February 11.
The Shilling’s strength is attributed to increased forex inflows from exports in the agricultural sector, including tea, coffee, and horticultural exports. But traders expect dollar inflows to decline due to poor performance of other sectors such as tourism.
L.) FACTORS THAT WILL SHAPE THE REAL ESTATE AND OTHER MARKETS IN THE NEXT ONE WEEK.
i.) Resurgent of Covid 19 Cases
As of Sunday 22nd February, 2021, Kenya reported 28 deaths in the last one week as a result of covid 19 related cases, and a positivity rate of 6.2%. This shows a resurgent and spike of covid 19 cases, after weeks of containment measures that resulted in low positivity rate until now.
The resurgent of Covid 19 cases is expected to be a blow to the hospitality industry (Hotels, restaurants, country homes and serviced apartments), which majorly relies on social gatherings and meetings. This development is also expected to inhibit global tourist arrival in to the country, reducing the bed occupancy rates as well as occupancy rate for commercial building as more companies may opt to continue working from home instead of taking office space.
ii.) Rising Cost of Construction Materials
A comparison research survey of construction materials and building rates in 2020 and 2021 building rates show that overall, construction costs in Kenya have increased by 0.3% in some areas to as much as 4.29% in other areas. One of the main reason to this increase is the pressure on the Kenya shilling against major international currency. Consequently, it now costs more to import even basic construction materials and fittings.
Another reason is the escalating cost of construction steel for the last three weeks since January, 2021. The high demand for steel amid low global supply has seen prices of construction metals and steel shoot by up to 25 percent in Kenya, with a kilogram currently selling at Sh125, up from Sh85 in December 2020. As such, manufacturers of steel products have increased prices of goods ranging from construction bars to galvanized sheets and steel tanks to reflect soaring metal prices in the global market.
The increase in the cost of construction material is expected to impact the cost of construction negatively. Consequently, the high cost of construction is expected to increase the sale or rent price.
M.) UPCOMING REAL ESTATE EVENTS AND TRADE SHOWS IN THE COMING ONE WEEK.
i.) Webinar: CSC Building Expo – Canada’s longest running technical trade show for architects, designers, developers, engineers, facility managers, specification writers, and construction professionals. This year’s theme is Technology in Construction, advancements and future opportunities for the construction industry to build faster, safer, and better.
Date: 24th February, 2021
Time: 9:00 AM
Venue: Online
Event Organizer: https://10times.com/e1z2-f4h0-s5rs
ii.) Webinar: SPACE International Conference – Computer Aided Design in Architecture and Urban Planning
Date: 26th February, 2021
Time: 12:00 PM
Venue: Online
Event Organizer: https://10times.com/e1s5-2×28-fkpr
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.