This post is primarily for those of us in Diaspora. There are a lot of attractive opportunities to invest in Kenya. One should think about whether they want to be a passive investor or an active investor.
If a passive investor, I recommend real estate and stocks. While I have very little confidence in the NSE and CMA, it is still possible to get attractive returns primarily on momentum rather than fundamentals. However, following the numerous scandals in the last couple of years, CMA might acquire some teeth which are critically needed as an oversight body for NSE and the listed companies. The beauty of the NSE is that the money and the assets remain in your name. You might appoint a manager you trust to trade on the account if your doesn't allow, but they won't have the ability to withdraw funds. Real Estate is ideal if you can do the due diligence yourself and plan to sit on the property for while before offloading it. Appreciation alone gives a more attractive return than treasuries and savings accounts in the West. With no capital gains tax and the possibility to develop the land in the future, it makes sense. However, cannot emphasize enough on location and due diligence.
For the active investor here are some additional thoughts. By active investor, I mean someone who is looking to find an opportunity to either buy an existing business, start a new business or partner with someone else to start a business.
1. Barrier of Entry: Kenyans are smart, hardworking, knowledgeable and well capitalized - to a point. So, if you start a business that even appears to be profitable, there will will be a gazillion other people starting similar businesses. And if you've been in the west for any period longer than 24hrs, you do not have the skills to "hustle" on the level that your competition does. On capitalization, all you need to do is look at Kengen and the amount of money that came from "under the mattress" to buy those shares. As for competition - think about the matatu industry for example. These are industries that "seem" to make money and attract a lot of people. So you are competing with someone who knows how to "talk" to the police, who knows where to repair their vehicle at a more competitive rate and who drives their own matatu. You have a driver. Your overheads are obviously higher than theirs. Talking about the matatu business, City Hoppa has been successful ( I guess it is important to define success) because the owners had a lot of experience with KBS. They were also capitalized enough that in order to compete with them, one needs $2m in initial investment. They also positioned themselves not as a matatu but as a luxury shuttle. That positioning allowed them to charge a premium and not destroy their vehicles through the "hustle" that other matatus are involved in. They invested in developing the brand. The guy who buys a single matatu expects dinner, rent, fuel and school fees from that matatu from the get go. So there is no money to maintain the vehicle, to develop a brand etc. City Hoppa had those resources.
So, look for opportunities that allow you to position yourself differently from the guy on the street. This will help you sell your offering not on price (which you cannot compete) but on positioning. Also, make sure you have a significant amount to invest. This will eliminate a large portion of the competition.
2. Sweat Equity doesn't work. In the US, a lot of companies are founded on sweat equity before angels, VCs and capital markets. In Kenya, for the most part, this doesn't work. This is primarily because very few people if any, have credit cards, savings accounts, trust funds, student loans, mom and pop loans etc that help pay for their living expenses while they found their company. So if you are going to start a company with partners in Kenya, make sure you offer them competitive salaries right from the get go. That allows them to focus on growing the business rather than on survival tricks which more often than not, are at the expense of the venture you are starting together.
3. Lawyers. A lawyer, accountant and security guard are important people to have. Your accountant should be your best friend. A lawyer should be someone you talk to before any major transaction. That said, all contracts, however strongly worded, are no excuse for due diligence and getting things right the first time. This is because enforcing those contracts is very expensive in cash and time. So do the contract thing with your lawyer, but make sure you have all the necessary safeguards yourself. For example, if you are renovating or building a house, pay based on performance. No deposit or very minimal deposit, then pay as milestones are achieved. This calls for much more engagement, but that is what it takes to keep your money.
4. Once money leaves your pocket ( or bank account or mattress) it is very difficult if not impossible to get it back. So set things up so that money never leaves your control. If its acquiring assets, pay for them from your account rather than issuing cash to a said third party to buy and deliver these.
5. Local knowledge is critical. Find people you can trust and get different perspectives on issues relating to your business. If there are discrepancies, walk. Local knowledge however, should only be a small component of your due diligence. Anecdotal evidence on the potential of a particular opportunity should only be a first step, never the premise on which an investment decision is made. Get data. In my experience, correct data is the difference between a viable investment and a black hole for your money.
6. Availability and time commitment. Any new business, whether in the West or in Africa, requires a tremendous amount of time to get right. Having been in the West, you offer a different perspective that could be the difference between a scalable business and a barely breaking even mom and pop shop.
7. Talking of scalable - If you are making an income in dollars, you should consider investments that have the potential to compensate you on the same level whether in Kenya or wherever. Think about it from a time invested perspective. And no, life in Kenya isn't cheaper than in the West. You are used to a certain lifestyle which comes at a premium in Kenya. Two movie tickets at the village market are $15 to $20. Gas is 2 to 3x more than in the US and housing in most places is $400 to $1000 a month. A year 2000 corolla will cost you around $10k, and no, financing isn't an option - the interest rates just don't make sense. And we're not even talking about Runda. That said, there are enormous advantages to being in Kenya. So when structuring the business, find a business that will throw off enough cash over time to allow for an income equivalent to or higher than your income in the USA. Particularly since there is a risk premium associated with being in Africa - actual or perceived.
There are people who have moved to Africa and after going through their savings, returned to the West. There are those who have gone back been very successful and stayed. And there are those who split their time between Africa and the West. I think it would be interesting to interview these people and learn from their experiences................
Thursday, March 13, 2008
Sunday, March 9, 2008
Real Estate
With the crisis in Kenya having land as one of the underlying issues, one should be concerned about making real estate investments in Kenya. However, the risks involved can mitigated by due diligence and exercise of extreme caution.
My experience has been both on very successful property investments and a couple that ended up disastrously and taught me invaluable lessons on buying land in Kenya.
The successful deals involve acquiring large tracks of land, 10 to 100 acres, outside Nairobi and near urban centers such as college towns. This size of land usually belongs to a family that has owned it for a couple of generations. Acquiring land that has previously been owned by a family reduces the potential for fraudulent transactions because in addition to the due diligence one has to do at the Lands Office, one can also get oral evidence of who owns the land from the community.
After buying the land, we subdivided them into .1 of an acre. By subdividing the land into these small portions, developing dirt roads and producing share certificates, we provide a very affordable piece of land for a family. The client usually builds a structure over time and moves in as soon as they can. This helps them move away from paying rent to actually investing in something they own. Depending on the client, we provide 3 to 6 months financing. Once they complete paying for the property, we issue them a share certificate for that plot.
The challenge in this projects is ensuring that the land transaction is not fraudulent. We do that by retaining an attorney who verifies ownership of the land with the ministry of lands. This however, is not a guarantee (as I will explain shortly) that the land belongs to whoever the lands office says it belongs to. Once this step checks, the next step is to interview people who have lived in that neighborhood for a couple of generations to see who the community believes owns the land. If there is the slightest doubt or inconsistency, the best policy is to walk - nay - run.
The other challenge is that the customer buying a .10 acre, while best intentioned, has limited control of their income. If their business has a bad month, they will default on their payment. So we build in a certain amount of room for late payments. If one's fortunes change irreversibly - for example, the bread winner dies, we return the client's money to the family and resell the land to someone else. While this may seem as charity, it also makes business sense as the land is consistently appreciating and we are often able to get a higher price than we had originally agreed on the piece of land. This especially so if other people who had bought neighboring plots have started construction on their land.
Identifying suitable land to acquire is also important. Here comes the cliche - location, location, location. Land closer to the highway, to urban centers, to economic centers such as colleges, plantations etc, always sells faster and at more attractive prices. The ideal situation is to acquire land closest to the highway as possible, and before selling this land, acquire the neighboring land. This ensures that when development of the initially purchased land starts, the appreciation in neighboring pieces is captured as it is already in our portfolio.
Land in Nairobi: So I do not invest in Nairobi. This is because it is very difficult to verify ownership. Again, the rule of land that has been in one family for generations is a good first step. But these are few and far between.
A few years back, buying half an acre to .75 of an acre in Nairobi suburbs such as Kileleshwa, Lavington etc was all the rage. Acquire the land for ksh. 10m to 16m. Build an apartment complex of 16 to 24 units with a pool, gym and parking. Add a concrete fence and voila, you have a neighborhood. The apartments were selling out before construction was completed. Banks over the last 5 years, while still eons behind banks in the West in issuing mortgages, have been consistently improving on their offering. Purchase, construction and selling of the development could be completed in 18 to 24 months for a return of 40% of leveraged capital.
Based on this assessment, I set out to acquire a piece of land in Kileleshwa. Through an attorney who has done business with my father for ages, we verified the land ownership. However, as I came to learn millions of shillings later, the seller of the land had colluded with officers at the ministry of lands. Every inquiry made on this particular piece of land was routed to a specific officer who gave a consistent story. I had my suspicions and used different lawyers to double check the land ownership, I personally went to the lands office and met with "some commissioner" in a big fancy office. During this due diligence phase, there was numerous complaints in the media on fraudulent land transactions at the lands office, so I stalled on completing the payment for the land I was buying. During that period, a bunch of people were fired from the lands office. So when I engaged a different attorney to double check on the land ownership, she found that the land didn't belong to the gentleman who was selling it to me. And that the story had always been carefully managed by a team at the lands office who each stood to make some money from the fraudulent transaction. I of course, sued everyone I could. But unfortunately, this is usually a waste of valuable time and money. It is always best to avoid the courts by getting the transaction right the first time.
I should of course, have listened to my instincts and walked. However, I did learn some valuable lessons.
The opportunities to develop neighborhoods exist. There is a shortage of housing in Nairobi. With an improving economy, a growing middle class and better managed fiscal spending which diminishes the attractiveness of TBills, the banks are actively developing mortgage lending. There are opportunities to get funding for such development from the US - will discuss this on a different post.
There are professional contractors that do exceptionally good work on time and on budget. There are really good quality architectural firms that are capable of maximizing the utilization of land in a development. However, like everywhere else on earth, it is your project, your investment and its success is directly related to the amount of time you spend on it. I highly discourage remotely managed projects.
Some of the related industries that are growing in this space include: Earth moving and construction equipment rental businesses, Sand and Quarry businesses, Paint and finish businesses and financial service firms.
My experience has been both on very successful property investments and a couple that ended up disastrously and taught me invaluable lessons on buying land in Kenya.
The successful deals involve acquiring large tracks of land, 10 to 100 acres, outside Nairobi and near urban centers such as college towns. This size of land usually belongs to a family that has owned it for a couple of generations. Acquiring land that has previously been owned by a family reduces the potential for fraudulent transactions because in addition to the due diligence one has to do at the Lands Office, one can also get oral evidence of who owns the land from the community.
After buying the land, we subdivided them into .1 of an acre. By subdividing the land into these small portions, developing dirt roads and producing share certificates, we provide a very affordable piece of land for a family. The client usually builds a structure over time and moves in as soon as they can. This helps them move away from paying rent to actually investing in something they own. Depending on the client, we provide 3 to 6 months financing. Once they complete paying for the property, we issue them a share certificate for that plot.
The challenge in this projects is ensuring that the land transaction is not fraudulent. We do that by retaining an attorney who verifies ownership of the land with the ministry of lands. This however, is not a guarantee (as I will explain shortly) that the land belongs to whoever the lands office says it belongs to. Once this step checks, the next step is to interview people who have lived in that neighborhood for a couple of generations to see who the community believes owns the land. If there is the slightest doubt or inconsistency, the best policy is to walk - nay - run.
The other challenge is that the customer buying a .10 acre, while best intentioned, has limited control of their income. If their business has a bad month, they will default on their payment. So we build in a certain amount of room for late payments. If one's fortunes change irreversibly - for example, the bread winner dies, we return the client's money to the family and resell the land to someone else. While this may seem as charity, it also makes business sense as the land is consistently appreciating and we are often able to get a higher price than we had originally agreed on the piece of land. This especially so if other people who had bought neighboring plots have started construction on their land.
Identifying suitable land to acquire is also important. Here comes the cliche - location, location, location. Land closer to the highway, to urban centers, to economic centers such as colleges, plantations etc, always sells faster and at more attractive prices. The ideal situation is to acquire land closest to the highway as possible, and before selling this land, acquire the neighboring land. This ensures that when development of the initially purchased land starts, the appreciation in neighboring pieces is captured as it is already in our portfolio.
Land in Nairobi: So I do not invest in Nairobi. This is because it is very difficult to verify ownership. Again, the rule of land that has been in one family for generations is a good first step. But these are few and far between.
A few years back, buying half an acre to .75 of an acre in Nairobi suburbs such as Kileleshwa, Lavington etc was all the rage. Acquire the land for ksh. 10m to 16m. Build an apartment complex of 16 to 24 units with a pool, gym and parking. Add a concrete fence and voila, you have a neighborhood. The apartments were selling out before construction was completed. Banks over the last 5 years, while still eons behind banks in the West in issuing mortgages, have been consistently improving on their offering. Purchase, construction and selling of the development could be completed in 18 to 24 months for a return of 40% of leveraged capital.
Based on this assessment, I set out to acquire a piece of land in Kileleshwa. Through an attorney who has done business with my father for ages, we verified the land ownership. However, as I came to learn millions of shillings later, the seller of the land had colluded with officers at the ministry of lands. Every inquiry made on this particular piece of land was routed to a specific officer who gave a consistent story. I had my suspicions and used different lawyers to double check the land ownership, I personally went to the lands office and met with "some commissioner" in a big fancy office. During this due diligence phase, there was numerous complaints in the media on fraudulent land transactions at the lands office, so I stalled on completing the payment for the land I was buying. During that period, a bunch of people were fired from the lands office. So when I engaged a different attorney to double check on the land ownership, she found that the land didn't belong to the gentleman who was selling it to me. And that the story had always been carefully managed by a team at the lands office who each stood to make some money from the fraudulent transaction. I of course, sued everyone I could. But unfortunately, this is usually a waste of valuable time and money. It is always best to avoid the courts by getting the transaction right the first time.
I should of course, have listened to my instincts and walked. However, I did learn some valuable lessons.
The opportunities to develop neighborhoods exist. There is a shortage of housing in Nairobi. With an improving economy, a growing middle class and better managed fiscal spending which diminishes the attractiveness of TBills, the banks are actively developing mortgage lending. There are opportunities to get funding for such development from the US - will discuss this on a different post.
There are professional contractors that do exceptionally good work on time and on budget. There are really good quality architectural firms that are capable of maximizing the utilization of land in a development. However, like everywhere else on earth, it is your project, your investment and its success is directly related to the amount of time you spend on it. I highly discourage remotely managed projects.
Some of the related industries that are growing in this space include: Earth moving and construction equipment rental businesses, Sand and Quarry businesses, Paint and finish businesses and financial service firms.
Sunday, March 2, 2008
Air Transport
We all know the poor infrastructure in most parts of Africa. For a one week safari, it is a challenging bone rattling experience. However, for a business that needs to move goods and people around, it becomes a costly experience buying and maintaining vehicles.
Air transport offers speed and cost savings from vehicle maintenance. It comes at a much higher cost and is therefore best for high value goods or human transportation.
Among Nairobi, Lokichogio, Juba, Kampala, Arusha, Goma, Addis, Lumbumbashi and Mombasa, there is enough commerce to support a low cost carrier. Competitive pricing can further encourage people to take flights rather than spend hours on end on the road.
Challenges for a low cost carrier include expensive jet fuel, access to the said jet fuel in some airports/airstrips, licencing, maintenance of the aircraft with spares not being locally available and proper flight monitoring and financial management.
Subsectors of the air transport include charter helicopter services and small charter carriers. These are especially useful for politicians for charter helicopters. The tourism industry, Aid agencies and horticultural farms are ideal clients for charter flights. One popular airplane is the Cessna Grand Caravan. With capacity for 13 passangers, 7 hr endurance, relatively accessible maintenance expertise and spares and a short runway capability, the airplane is a suitable candidate for the charter plane space. In addition, there are plenty of pilots with hours and rating for this plane.
Pilot availability, experience and reliability is a key factor in the industry. With a pilot training schools at Wilson Airport, plenty of young, smart well educated Kenyans and access to practice planes and landing strips, there are enough pilots to go around.
A well managed cessna grand caravan doing 120hrs a month can gross $65 to $70k with net margins in the 10% to 12% range. This assumes an operation with only one aircraft. Multiple aircraft operations have economies of scale and can net better margins.
Key success factors include competitive fuel pricing, access to maintenance facilities, ability to network with NGOs and Government organizations to generate business and proper financial and operational management.
As the economies in this part of the world grow, population increases and per capita income grows, it is expected that more people will seek to fly rather than drive. This creates opportunities for further growth.
In addition, there is tremendous potential to further increase the price competitiveness of air transport with current R&D on biofuels. Fuel cost is about 30% of operating cost and any savings their could positively impact the bottom line.
While the above discusses the grand caravan in greater detail, I believe that an overall growth in air transport in this region could positively impact the overall economy. This is because the region benefits primarily from horticulture and tourism. Two industries that stand to reap exponential gains should fast, efficient transport means be accessible and affordable.
Google.org seeks to fuel the growth of SMEs in East Africa. One way to do that would be to buy cargo space at wholesale and contract pricing for airlines flying to Europe and Dubai and through technology, work with smaller farmers and horticultural produce exporters to resell that space to them at cost. This would greatly improve the margins of these SMEs. This is because for small and media size exporters, air transport cost of their fresh produce constitutes 50% of their CIF costs.
This provides an overview. I am always happy to provide further details or answer questions. If I don't know the answer, I bet I can find someone who does.
Air transport offers speed and cost savings from vehicle maintenance. It comes at a much higher cost and is therefore best for high value goods or human transportation.
Among Nairobi, Lokichogio, Juba, Kampala, Arusha, Goma, Addis, Lumbumbashi and Mombasa, there is enough commerce to support a low cost carrier. Competitive pricing can further encourage people to take flights rather than spend hours on end on the road.
Challenges for a low cost carrier include expensive jet fuel, access to the said jet fuel in some airports/airstrips, licencing, maintenance of the aircraft with spares not being locally available and proper flight monitoring and financial management.
Subsectors of the air transport include charter helicopter services and small charter carriers. These are especially useful for politicians for charter helicopters. The tourism industry, Aid agencies and horticultural farms are ideal clients for charter flights. One popular airplane is the Cessna Grand Caravan. With capacity for 13 passangers, 7 hr endurance, relatively accessible maintenance expertise and spares and a short runway capability, the airplane is a suitable candidate for the charter plane space. In addition, there are plenty of pilots with hours and rating for this plane.
Pilot availability, experience and reliability is a key factor in the industry. With a pilot training schools at Wilson Airport, plenty of young, smart well educated Kenyans and access to practice planes and landing strips, there are enough pilots to go around.
A well managed cessna grand caravan doing 120hrs a month can gross $65 to $70k with net margins in the 10% to 12% range. This assumes an operation with only one aircraft. Multiple aircraft operations have economies of scale and can net better margins.
Key success factors include competitive fuel pricing, access to maintenance facilities, ability to network with NGOs and Government organizations to generate business and proper financial and operational management.
As the economies in this part of the world grow, population increases and per capita income grows, it is expected that more people will seek to fly rather than drive. This creates opportunities for further growth.
In addition, there is tremendous potential to further increase the price competitiveness of air transport with current R&D on biofuels. Fuel cost is about 30% of operating cost and any savings their could positively impact the bottom line.
While the above discusses the grand caravan in greater detail, I believe that an overall growth in air transport in this region could positively impact the overall economy. This is because the region benefits primarily from horticulture and tourism. Two industries that stand to reap exponential gains should fast, efficient transport means be accessible and affordable.
Google.org seeks to fuel the growth of SMEs in East Africa. One way to do that would be to buy cargo space at wholesale and contract pricing for airlines flying to Europe and Dubai and through technology, work with smaller farmers and horticultural produce exporters to resell that space to them at cost. This would greatly improve the margins of these SMEs. This is because for small and media size exporters, air transport cost of their fresh produce constitutes 50% of their CIF costs.
This provides an overview. I am always happy to provide further details or answer questions. If I don't know the answer, I bet I can find someone who does.
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