A look at Paralysis in the Construction Sector in Kenya, and How Kenya Real Estate can recover from the Covid-19 crisis, for Investment Risks Management.

Covid 19 pandemic has taken a toll on the economy and all the facets of the real estate business, including the construction industry. According to KEPSA, the construction sector is among the hardest hit at 70% as the coronavirus continues its rampage worldwide. As such, many of the real estate operations have been left in the air given that the outbreak has pushed sentiments in real estate to its all-time lowest level in this quarter. The sector has been hit in term of project launching, project completion, sales and prices, and supply chain.

Government restriction on movement has made a more significant part of the population to stay indoors. The duration for project completion is already lengthened given that most construction sites remain closed. Moreover, with the fear of the pandemic looming large, projects have been put on hold, and others reassessed.

In addition, the closure or disruption at the Land Registry offices has been the most painful nail to the entire real estate sector. One has to wait until the offices resume normal to get the most crucial documents and services such as land leasing, change of user of land, issuance of title deeds, survey, along with other critical paperwork.

Moreover, there will be a reduction in Foreign Direct Investment (FDI) inflow as noted by KEPSA. In 2018, the EAC Trade and Investment report shows that the region received USD 5.7 billion, of which USD 1.0 billion went into the construction sector. China and India accounted for USD1.1 billion and USD 281.02 million.

Nevertheless, to counter the primary threat of the virus on real estate sector, the following measures will aid in recovery of the real estate and construction industry from the COVID-19 slowdown.

Technological innovation

Property sellers should control physical customer site visit numbers and explore the delivery of construction updates digitally. Virtual tours and realities continue to provide a way for buyers to continue with their property search from their homes. Firms can also be able to perform an inspection on sites using tools like facetime, skype and google Duo, hence cost-cutting, and at the same time allowing for social distancing. In addition, Technology will keep the transaction moving given that many businesses are being conducted online.

Rental relief initiative

Landlords should support their tenants around this challenging time. Business viability of tenants is of crucial importance to the stable occupancy of office space and hence long term rental income. Landlords should also step up to offer rental and management fee concession to their tenants. Coupled with other measures taken by landlords, this will prove an attractive means to retaining occupants.

Wellness and safety management

As the pandemic looms, we expect landlords and tenants to place great emphasis on wellbeing and smart working place with factors such as intelligent building management, wellness and safety management key to enhanced office property competitiveness. Moreover Covid 19 precautionary measures as directed by ministry of health such as fumigations should also be put in place. The addition of those facilities and measures will create trust both between landlord and tenants and between tenant and employees. In turn, this trust will help landlords better attract and retain tenant and the tenants better attract and retain employees.

In the short run, developers and property owners would have built and strengthened relationship.

Force Majeure Contract Clauses

A force majeure event – literally translated as “superior force” – is the occurrence of an event which could not be foreseen and is out of the control of all parties to a contract, example being the covid-19 pandemic. Most standard contracts in construction and real estate supply chain have Force Majeure clauses that excuse performance of some contract obligations for so long as Force Majeure event prevents it from performing them, by providing remedies like extension of time to complete the project beyond the contract completion date. Contract parties can therefore negotiate the contractual obligations that have been disrupted by the Covid-19 pandemic, through Force Majeure clauses in their contract.

Fiscal and Monetary Policies

Businesses and developers should take advantage of fiscal policies such as the new tax law that allows new hospital buildings to make a 50% deduction on costs in the first year of use and 25% of the residual value per year on reducing balance subject to licensing by the competent authority. The fiscal policies also include reduction of the Investment deduction allowances from 100% to 50% in the first year of use for construction of hotels and manufacturers plants. That will help developers have liquidity, reduce credit stress and prolonged number of economic inactivity, as well as protect their employees.

Central Bank of Kenya Measures

Developers should also take advantage of measures taken by the Central Bank of Kenya (CBK) providing restructuring loans by commercial bank and extension of payment periods, to renegotiate their loan contracts. That will enable them to increase on their capital and hence be able to fund stale projects.

However, Real estate sector players should remain optimistic given that Covid-19 outbreak may drive demand for new property types, such as expansion of warehouses for food and logistics related businesses, as well as medical building facilities as seen in a number of Counties in Kenya. In addition, Land prices are projected to fall as more people strive to have liquid money.

Buildafrique Consulting Group is a specialist in Real Estate Project Development and Construction Projects Consultancy in Kenya, through its End-to-end development Consultancy business model, with consultancy services and solutions including: conducting Real Estate Feasibility Studies in Kenya, Real Estate Finance, Development Project Management, Quantity Surveying, Physical Planning, Property Valuation, and Property Management

B.) WEEKLY NEWS HIGHLIGHTS

       MAJOR ECONOMIC NEWS HIGHLIGHTS

i.) Big 4 agenda to be sacrificed as government cuts funds to fight coronavirus

According to a new report, Kenya’s Big 4 Agenda will be sacrificed as more resources are channelled towards curtailing the spread of the coronavirus.

Credit rating agency Agusto & Co. Limited also expects Gross Domestic Product growth to fall below 2 percent, should the Covid-19 pandemic and economic shutdown continue beyond the second quarter.

ii) Kenya to receive Kshs. 78.4 billion from IMF as Covid-19 pandemic loan.

The IMF has approved Kshs. 78.4 billion in emergency funding to cushion Kenya against the sudden economic shock caused by the Covid-19 pandemic. According to the IMF deputy managing director Tao Zhang, the Emergency financing under the Rapid Credit Facility (RCF) will deliver liquidity support to help Kenya cover its balance of payments gap this year. The director is also hopeful that the fund will provide much-needed resources for fiscal interventions to safeguard public health and support households and firms affected by the crisis.

iii) Investors at the Nairobi Securities Exchange (NSE) have gained Sh264.5 billion in a month.

Over the recent days, Nairobi stocks notched up healthy gains after investors sought to buy stocks at a bargain, hoping for outsized capital gains when the stock market recovers. By Wednesday, the value of all stocks stood at 2.265 trillion a notch higher as compared to 2 trillion in April with the telecommunication and banking sector accounting for 82.4 percent of the paper wealth gain.

iv) StanChart bank restructures KSH8 billion loans

Standard Chartered bank (StanChart) has resolved to restructure KSh. 8 billion of loans, equivalent to about 6.47 percent of its net loans at the end of last year. The lender has also announced repayment breaks of up to three months on all loans as customers hit by cash flow hitches seek flexible terms.

       CONSTRUCTION INDUSTRY HIGHLIGHTS

i.) Kenya’s construction growth slows to six-year low of 6.4%

The Economic Survey 2020, release on Tuesday 5th May by the Kenya National Bureau of Statistics (KNBS), revealed that the construction sector expanded by 6.4 per cent in 2019 down from 6.9 per cent in 2018 – the lowest rate since 2013’s 5.8 per cent expansion. According to the KNBS, that was largely weakened by a loss of momentum in public infrastructure projects and investments.

ii.) Construction sector reels under heavy coronavirus weight

According to a survey by the Architectural Association of Kenya (AAK) on the Impact of Covid-19 on the Built Environment, only 4.6 percent and 3.5 percent of respondents reported an increase in the number of prospective client enquiries for new projects as well as on ongoing projects respectively and almost nine in every 10 construction professionals have reported a drop in new project enquiries highlighting the heavy toll of the Covid-19 pandemic. Another seven in every 10 have reported drop in communications or follow-ups on some of the ongoing projects.

iii.) Construction of a 35 bed ICU unit in Muranga County completed in 19 days construction period.

The County Government of Murang’a has completed the construction of a 35-bed ICU unit at the Murang’a Level 5 Hospital within a period of 19 days from the day a foundation stone was laid in preparations for the novel Covid-19 virus. Over two hundred workers on site who worked day and night disregarding the dusk-to-dawn curfew to ensure things moved according to the plan.

iv.) Kenya set to construct a state of the art outpatient complex in Naivasha.

Nakuru County Executive Committee Member for Health Dr. Zachary Gichuki Kariuki has reported that they are finishing up the tendering process for a state of the art outpatient complex after which the construction works and site will be handed over to a contractor.  The project is expected to come to life in about 18 months. The complex will be equipped with a new trauma centre, a pharmacy, x-ray facilities and modern laboratories. As such, it is expected to ease congestions in other health facilities in the region. and neighboring counties.

       COMMERCIAL REAL ESTATE HIGHLIGHTS

i.)  Banda Homes in the news again

Off-plan developer Banda Homes, have once again come to the limelight after a section of their clients claimed they had been scammed of their purchase deposit of the housing units as a results of delay in completion and handover of the projects, whose housing units were selling at Ksh.3.9 million each. The report was exposed to the media by investors in two of the firms’ projects following reports that the firm had refused to meet them over project questions. The buyers have threatened legal action against the developer for the unfulfilled contract in development of the Pinewood and Rosewood estates along Thika superhighway.

ii.) Home loan rates reduced to 7 percent as government implements new regulation.

Kenyans earning monthly salaries of Sh150, 000 and below will from June, 2020 access mortgages from local commercial banks and saccos at a maximum annual subsidized interest of seven per cent. The move is likely to escalate the uptake of home loans in the country. That follows the establishment of State-backed Kenya Mortgage Refinance Company (KMRC) that will advance cash to financial institutions at an annual interest of five per cent for onward lending to homebuyers at seven per cent, nearly half the current market rates offered by commercial banks.

iii.) Land prices ease as rent drops in the city.

According to latest report, there has been an oversupply of homes amid reduced demand and as such rent dropped by 0.7 percent in the three months of 2020 to March (Quarter 1, 2020), compared to a growth of 8.7 percent in a similar quarter last year. As a result, prices for land have been eased in Nairobi and the surrounding counties of Machakos, Kiambu and Kajiado, with effects of the coronavirus pandemic expected to further hurt the property market on reduced demand.

iv.) Court halts 14 Billion estate row.

On Thursday, 07 May 2020, the court brought to an end a succession feud involving the family of former minister Mbiu Koinange over an estate with an estimated value of over KSh. 14 billion. The High court ruled that the property would be distributed equally among his 10 children and two widows who are still alive. The public was also allocated space for utilities like roads, police stations and schools on some of the huge tracts of land owned by the family.

C.) KENYA REAL ESTATE TRENDS

i) Malaysian Home Building Technology continues to gain traction among Kenyans

Over the past few months, developers have been employing new technology to enable them cut cost and maximize profit while maintaining standards. Rising construction cost has denied many Kenyans a chance to own homes, and in response Property developers across the country are finding a new way to deal with the rising building costs. Affordable housing technology from Malaysia is being employed to build quality and affordable houses. A two bedroom bungalow in suburb cost between 3 million and 5 million to build but with the technology the cost is reduced to an average of 1.5 million. According to Kenya Project Budget Homes Chief Executive David Kanyi, the project started 10 years ago and 920 families have been housed through the housing schemes.

The technology includes the use of interlocking blocks made from ballast, sand and cement and does not require plastering. The fittings include wooden doors, louvres for windows, PVC plastic ceiling, and low level cabinets for the kitchen. Moreover, EPS building technology (the use of expanded polystyrene panels), precast concrete panels, and Ferro cement building technology, among other modern building technologies continue to be on rise in Kenya.

 ii Use of technology continues to rampage in Kenya real estate sector

The industry has seen a rise in the use of technology over the past decade. With the internet continuously seeing rise in the number of users, currently at 22.86 Kenyans, Technology is changing how agents and developers are doing business. Companies like BlackRhino VR are commercializing the potential that virtual reality holds in selling properties development both off-plan and finished, allowing prospective buyers to walk through and experience the space even before construction starts.

The covid-19 pandemic has also allowed some property companies to show case their property to their clients using video technology at the site, allowing customers to view the property at the comfort of their homes amid the need for social distancing in the face of the corona virus crisis. In addition, virtual reality is becoming an important part of real estate business, as well as presentation in the construction industry.

D.) GLOBAL REAL ESTATE TRENDS

i) Weekly mortgage applications rise in USA as rates continue to drop.

Mortgage rates continue to tread water near record low levels in the USA as a result of weaker growth expectations. Mortgage rates have dropped to the lowest level ever in the Mortgage Bankers Association’s 30-year-old weekly survey.

According to Washington Post, the average contract interest rate for 30-year fixed-rate mortgages of up to $510,400 decreased to 3.45% from 3.49%, causing yet another rush to refinance mortgages. According to Mortgage Bankers Association’s (MBA) seasonally adjusted index, total mortgage application volume rose by 7.3%. Non-conforming or Jumbo loans are becoming rare as home equity lines of credit are going away. The trend has been the same in Kenya as the mortgage rate has been reducing and with time mortgage application might rise.

ii) Private housing market gain popularity in China as covid-19 is abating.

China’s private housing market is springing back to life as more sales offices reopen across the country following a nationwide shutdown. According to China Real Estate Information Corporation (CRIC), transactions in at least eight large cities – Shenzhen, Chengdu, Fuzhou, Hangzhou, Huaian, Yangzhou, Jiaxing, and Shantou – indicate buyers have returned in recent weeks, with volume surpassing the average levels in the final quarter of 2019.

Prices of some new projects were capped [by the government], lower than the market price, so some projects are popular with the buyers. Restrictions on housing and land prices also created some room for arbitrage, so people are rushing to buy houses and property while developers scramble to buy land. The Kenyan market may also experience a boom in private house buying post covid-19, as a result of reduction in mortgage rate.

E.) COMMON REAL ESTATE & DEVELOPMENT CHALLENGES, AND SOLUTIONS

Project Finance and Capital Raising for Real Estate Investment Project:

 YOUR CHALLENGE:

One of the major challenges to many Real Estate Investors and developers is roping in Finance into their development projects, in order to bridge the finance deficit occasioned with not having all the financing to meet the project Budget.

THE SOLUTION:

There are various forms of Real Estate and Project Finance solutions in the Market, common being:

1. Equity Finance, for joint venture structured project.
2. Contractor Debt Finance, whereby the Contractor comes into the project as both an Investor and Contractors in two separate contracts, one as investor in either equity in form of labour and materials, or structured debt, and at the same time having a separate contract as the building contractor for the project. The model is common with Chinese Contractors, through building materials equity or debt financing.
3. Institution Debt Finance, from local and international Debt Fund institutions.
4. Bank Debt Finance, from your local or international banks.
5. Pre-Sale Finance, whereby you can raise part of financing through off-plan sale of the development units or products.
6. Consultancy Services Finance, whereby the Project Consultancy Team contribute part of their professional expertise as equity into the project, for higher return payment later in the project.
7. Islamic Finance, or Sharia-compliant finance.

Capital raising for a development project takes various structured step processes which includes Consulting and Advisory Phase, Investor Relations Phase, Transaction Phase, and Implementation and Recovery Phase.

THE CONSULTANT TO ENGAGE:

The Consultant to engage for Project Finance and Capital Raising for your development project is a Project Finance Consultant.

F.) THIS WEEK ON FREQUENTLY ASKED QUESTIONS (FAQs), AND ANSWERS

QUESTION:

Amid cries by many Kenya in recent past as a result of being shortchanged in purchase transactions of off-plan house development, we look at the “Question” of what you should look into when buying Off-Plan Housing, or House Unit?

ANSWERS:

Below are the area to look into while purchasing an off-plan Housing Development in Kenya.

1. Carry out dues diligence of the project and the developer. The due diligence should include checking the track record of the developer, as well as previous works that he has undertaken, including past relationships with previous buyers, and project consultants.
2. You should review the Contract agreement with your lawyer before signing, to understand the legal terms of the contract and their implications in safeguarding your investment interest in the project or property. This shall reveal clauses in the contracts that may work against you.
3. The other things you should review is the Schedule of Payment in the sale offer agreement or contract, to make sure that it is commensurate with various delivery benchmark of the house or development, and stages of construction. Off plan projects should allow installment payment up to the end of completion.
4. On quality of works, you should inspect or review the quality of previous works by the developer, in past projects that have had occupancy of more than six (6) month. Talk to the occupants about quality. You may also hire the services of an independent Architect or Structural Engineer, to help you get a professional opinion on quality of works by the developer.
5. You should review the cost of the house, to tell if it within the Market Rate where you find some houses in the market that are lowly priced, against the construction budget. You should raise eyebrows when the price of the house is not practical as to accommodate the cost of land, construction costs, payment to professionals, and developer’s profits. This means that cheap is not always practical.
6. You should also get to know the landuse position of the property. This is to make sure that the project is not on illegal land or allocation, of which would result to your financial loss in the future. The property should also be recorded or registered in all other documentation at the land register including on the Survey Map and Registry Index Map, besides the property having a title deed. You may seek the services of a lawyer or a surveyor for these verification, which should include verification of legal ownership of the property by the developer.
7. Finally, get to know if the developer has met all the planning and development regulations, besides having approval drawings. Make due diligence to confirm that the developer has hired qualified and licensed consultants required for the quality delivery of the project, who include: Project Architect, Quantity Surveyor, Structural Engineer, and Mechanical and Electrical Engineer. This will provide you with guarantee on the quality of works to expect in the property that you are purchasing.

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 one of the fastest 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 Labour Contractor on recommended building types.

H.) THIS WEEK REAL ESTATE PRICE ANALYSIS – RUAKA AREA, 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. The data were obtained through survey, and analysis of asking prices on property listings in Nairobi.

i) Sales Price – Apartments and houses

ii) Rent Price – Apartments and houses

iii) Land price per acre (commercial/residential)

 I.) CENTRAL BANK OF KENYA INTEREST RATE WATCH – (T-BILLS)

91 day T-bill rose by 0.04% from 7.212% the previous week rate to 7.253%. CBK offered a total of Kshs 4 billion and bids amounted to Kshs 4.472 billion of which 2.505 was accepted. Volume on bids received increased week on week basis. 182 day T-bill rose by 0.03% from 8.121% the previous week rate to 8.151%. CBK offered a total of Kshs 10 billion and bids amounted to Kshs 2.674 billion of which 2.536 was accepted.  The 364 day T-bill rose by 0.05% from 9.110% previous week rate to 9.161%. CBK offered a total of Kshs 10 billion and bids amounted to Kshs 10.750 billion of which all were accepted.

 J.) KENYA EQUITY MARKET INDICES

The total shares traded during the week declined by a margin of 48% to 19.5 million from the previous session of 37 million while the NASI and the NSE 20 share index recoded an increase and a drop by 1.84 and 0.86 percent respectively.

Market capitalization declined by 3.16 percent indicating depreciation in prices due to reduced trading. I-REIT turnover was 104,828 recorded in 10 deals.

 K.) KENYA CAPITAL MARKET ANALYSIS

Four of the top performing stocks during the week were Uchumi Supermarket (UCHM), Kenya Airways, Sasini and Home Africa. Safaricom, Equity Group and KCB companies featured among the most traded stock in the telecommunication and banking sector moving 6.6, 4.5 and 2.3 million shares respectively. Stanlib Fahari (FAHR) share price dropped by 6.98 percent and featured it as the worst performing stock. KCB and Equity share price dropped by 6.44% and 5.36% respectively.

 L.) CURRENCY HIGHLIGHTS

The Kenya forex reserves plummet further to 5.15 month of import cover in the first week of May, 2020. Low diaspora remittance and limited activities in Kenya’s export market due to coronavirus pandemic continued to weigh down the country’s forex reserves. This week the shilling strengthened against the US Dollar, Euro and the Sterling Pound at 1.29, 2.29 and 2.5 percent respectively. It however weakened against the USHs and TSHs at 0.38 and 0.27 percent respectively.

 M.) FACTORS THAT WILL SHAPE THE REAL ESTATE AND OTHER MARKETS IN THE NEXT ONE WEEK

i) Extent of Cessation and lockdown.

As the mass testing for Covid19 continues, Government is set to announce new measures to combat the pandemic following laxity from Kenyans. The Cabinet Secretary of Health on Tuesday 5^th May, 2020 showed concern at the upsurge of infections which hit 582, with 47 cases confirmed in a single day. As such, the the Cabinet Secretary of Health Mr Kagwen Wednesday 6^th May 2020 announced the cessation of movement into and out of Eastleigh and Old town areas in Nairobi and Mombasa respectively. The CS also directed markets, restaurants and eateries to be shut effective 6^th May 2020.

As the directive is being enforced, the state is set to lose billions in revenue as economic activities are set to be derailed. The cessation and lockdown will further dent the operation of businesses and mainly the SMEs reducing the number of transactions.

In the next few weeks, people in neighbouring estates will likely be seen doing panic buying and hence more hoarding is likely to be experienced as food shortage rampage. The economy will experience a huge hitch if the state puts more places under cessation or lockdown, and consequently offices are likely to be vacated as stay at home becomes a norm.

ii) Heavy rains

Various cabinet secretaries cautioned people living in flood-prone areas against continuing to stay there as the rains continue to bring havoc. According to Energy CS Charles Keter, water levels at Masinga dam, Kenya’s largest hydropower dam has risen to 57.86 meters above sea level, the highest since the dam was built whilst Tukwel dam is overflowing and already causing destruction of properties. The floods are also claiming more lives as 194 were reported to have lost their lives due to floods by 6th May 2020 and another 50,000 displaced. Ongoing construction projects have also been stalled and properties destroyed.

In the coming weeks, more public resources will be spent as the Government ministries continue to provide cash, food and water aid to the displaced families. In addition, if the rains continue at the rate it is now, more property will be destroyed, power transmission and generation disrupted as well as losses in GDP due to the need for resources to be put toward recovery efforts and consequently a strain in the economy will be felt.

Commencement of some construction projects is also likely to be delayed, in particular those that requires significant excavation works, due to the rains.

N.) UPCOMING REAL ESTATE EVENTS AND TRADE SHOWS IN THE NEXT ONE WEEK

1.) The adoption of Proptech in Africa Real Estate – Will Covid-19 be the catalyst for Technology adoption in Real Estate?

Date: 7th May, 2020

Time: 15.00 E.A.T

Venue / Media: ONLINE WEBINAR

Event Organizer: API EVENTS

Event Details:  https://apievents.com/api-webinars/webinar-6-07-may-2020/

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:

• 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.