by Webupdater 
The higher the leverage, the higher the risk but as we saw last time the higher the profit margin.
We all agree that in Kenya, a developer’s world only makes a lot of sense when the concept of OPM (Other Peoples’ Money) is utilized to the maximum. So then along the same line of thinking, developers in Kenya are clever enough to utilize the less risky of the OPM. Off plan sales
The idea is of course to sell concepts on paper and expect that potential buyers will show up, pay deposits for yet to be built units. As the construction goes on, the buyer injects more cash and preferably by the time the construction is over, the buyer has fully paid for the unit. This is clever coz it essentially means the developer utilizes the cash from the would-be buyers and makes some coins. However, this arrangement works best when there is a show house and buyers can see how the end product will look like. In some cases even without the show house buyers could still trust the developer especially if they have a name…importance of a name?
The other very important idea that developers consider is to ensure that a loan is structured with several draw downs. Interest is normally charged on the amount drawn as opposed to the total loan amount. After the first few draw downs. A clever investor is able to gauge on the response from clients on the units. One can reasonably tell whether there is interest on the units once the ground breaking is done. Most buyers will be comfortable once they see progress on the site. And by the way, one might be very happy to see so many would be clients visiting the site and commenting on the good work done, but a seasoned investor knows that a lot of demand may not translate to effective demand.
Effective demand is quantity of a good or service that consumers are actually buying at the current market price.
Of course we also have latent demand when a customer/consumer is unable to satisfy their demand, mostly due to lack of money.
What if you already have the loan and the sales are not forthcoming? One option would be to re-negotiate the re-payment terms with the bank so that they extend the period where u service the loan interest without paying the principle and whenever a sale is done, the bank receives their cash. Kenyan banks are kinda flexible and are also alive to the market conditions.
Developers are also keen to change the prices as the construction continues. In other words, the buyer who buys off plan will always get a very good offer and the one who comes in when the unit is ready, then pays much more. Sometimes the increase would be as much as 10-15% so it is always wiser to buy off plan or at least when the ground is broken.
Next, we shall talk about how best to involve your kids in your business
Question: As you are an insider in the industry, I would like to hear your thoughts on the issue of a property bubble in Kenya as some have alluded to. Is a bust really on the cards?
Answer: This is a topic you’ll hear all over. My take is as below:
Property prices are to a large extent driven by demand. The rise in prices which seems abnormal is simply because we got abnormal demands. If you consider like demand for housing around Nairobi, research has shown that we need 150,000 units developed per annum but what ends up in the market is around 10% of that. In essence, the demand for houses and plots may be sustainable if factors affecting demand are not adversely affected. What I have in mind as regards to these expected changes are as follows:
1. The county government may pull quite a number of people away from Nairobi to the counties hence reducing significantly the demand. Take note that 15% of our budget will go to mashinani. This means that demand for housing in Nairobi may go down a bit and at the county (esp the HQs) will go up. A wise investor may thus position themselves at the county level.
2. The rise in cost of construction and exorbitant cost of credit will also affect a huge number of would be buyers of houses and plots in the sense that the amount of disposable cash available to them either by way of mortgage or any other source will not match the property prices. This means that unless developers start targeting properties whose price is worth up to 5M or thereabout, then majority of would be owners will be locked out. This is happening (read SUCASA by Suraya).
3. If the govt decides to invest heavily in housing (like they’ve done for infrastructure), then private developers may be in for some shock. Good thing with the government deciding to do this is the fact it can even enter into pacts with foreign donors (like china) to invest in this sector and satisfy the demand. This maybe a matter of policy.
In summary, my take is that these factors will most likely stabilize the property prices where the abnormal rises will no longer be witnessed. However, as to the bubble bursting (read property prices getting way down), the market fundamentals don’t point towards this happening in the near future (read 10ys) but the stagnation may be witnessed especially around Nairobi.
