Last year saw the stabilizing of the residential real estate market in Kenya. Even so, land costs have increased significantly, and there has been an inclination towards the demand for multi-unit buildings.
Land inflation has also resulted in developers seeking to build upwards, rather than compete for the limited space with stand-alone buildings.
Despite this trend, the real estate market has continued to record steady growth. The country has seen a rise of a middle class, who appreciate getting involved in investment opportunities in the property market.
Many local and international companies are currently looking for ways tap into these opportunities. Indeed, the country’s capital (Nairobi City) is the perfect example of these developments.
The city has witnessed a remarkable growth in property development in the last decade. Recently, the global real estate firm Jones Lang Laselle ranked Nairobi as among the top ten (out of 150 cities) to watch in terms of real estate development. The trend is now being replicated across major urban centers in the country, with property developments sprouting up everywhere.
Despite this upward trend, there is little diversity in regards to development options by investors. The most common developments are apartments, malls, and gated communities, which indicates there still exists some uncertainty as to the viability of residential units.
However, of most concern is the dependency of investors on equity and bank loans for real estate financing. If the local real estate sector is going to compete with more developed markets in the continent, then it is crucial investors take advantage of more financing options.
There are a variety of options currently used on a small scale, that if adopted could increase the gains for property developers.
Real Estate Financing Options
Investing in the right property in Kenya has the potential to double, or triple your investment within a year or two. So, how else can an investor finance a property development in Kenya? Here are some options available:
- Sacco financing
This is an effective option commonly used by self-employed or lower income earners who may not qualify for mainstream bank loans. A good number of SACCOs offer loans to finance land purchases. Others offer loans for small construction projects. To qualify for these products you must be a member of that SACCO and saved money with them for some time.
An investor may wish to purchase a property but does not have adequate funds. Such an individual can get a company, homeowner or institution to lease the property to her/him. The individual will then be obligated to pay rent in monthly installments, with the goal of purchasing the property when they have acquired the total funds.
- Mezzanine financing
A situation may occur when a person is about to clear their loan, but the lender informs them that the value of their development does not qualify them for additional funding. In such a scenario, an investor can get the necessary funds from a mezzanine financier. The mezzanine financier will then lay claim to a portion of the rental income once the property is occupied.
In this case, an investor may have a project, whose cash flow cannot cover their loan repayment and other costs. The investor may go for a ‘top up loan’ or refinancing, to invest in additional income generating assets to pay the initial and top up loan, and increase his asset base.
There are two more financing models that are yet to take off in Kenya and if they do they can be largely beneficial to real estate investors:
- Fractional ownership/ Time Shares
Kenya has transformed into an investment hub for foreign investors, who frequently visit the country, and are looking for a homely environment for the period of their visit. Timeshares are the perfect option in this case. This is where an investor acquires ownership of a property for the period he uses it such as two to three weeks. Therefore the investor gains fractional ownership or time shares. Though a relatively new concept in Kenya, some developments in Mombasa have begun to embrace the model.
- Moratorium on development loans
This is a financing option, where the bank gives a developer a grace period, typically 1 year, during which they do not repay the principal sum. The bank will continue financing every stage of the development project, irrespective of speculative costs during this period. After 1 year, the lender then begins to collect the principal and charges interest. However, by then the development income will cover the loan repayments, and not out of the investors pocket.
Financing in Kenya remains a costly endeavor not just for developers but buyers as well. To meet the demand for housing units, the government is providing both non-financial and financial incentives to private developers, to boost construction of more housing units. The incentives include:
- Easy access to affordable financing
- Parliamentary reforms to land-related laws
- Setting up a national housing fund to assist in financing low-cost housing
Therefore, if you are looking to invest in the property market, lack of funds should no longer hold you back. The current conditions in Kenya are suitable for more investments in residential or entry market developments, as an alternative to conventional high-end properties.
What are your thoughts on investing in the property market? Comment below and let us know what you think.