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.