How to obtain financing for Real Estate Projects in Kenya.
There are 3 options.
Option 1. Joint Venture.
1. Joint venture.
This method as advantages in that you will not require to put any monetary input apart from the land and consultancy fees.
The disadvantage is that the JV partner will take in a huge amount of profit compared to the amount of money they put in. This depends on how adept your negotiations with the JV partner is.
For example, if the JV partner puts in kes 150m, and the profit is kes 350m, the JV partner will try to squeeze in a 49% profit sharing of KES 175m depending on how thorough your negotiating skills are.
With good negotiating skills, the JV partners can be compensated in a % commensurate with their contribution. Assuming they contribute 15% of total project cost, then the % gain in profit can be pushed/negotiated to 15% of total profit=kes 50m.
Option 2. Phasing the Project in smaller sized chunks.
The total project can be phased in chunks that are commensurate with your 15% of contribution. For example, if the 15% of your contribution is say kes 5m, this translates to kes 33m for a complete phase. Assuming the project costs kes 1 Billion, these represents 30 phases. The number of phases can be adjusted depending on the % contribution as per negotiations between the Bank and land owner.
Usually, once the first phase commences, potential buyers are able to gauge the quality of construction and gain the required confidence whereby they can begin to put in deposit of between 10 to 20% of purchase price.
Assuming a purchase price of kes 18.5m for the 190m2 houses within the 1/8th acre, this translates to kes 1.8 to 3.6m.
The actual construction cost for this unit is kes 40,000 per m2 x 190m2 =kes 7.6m.
This translates to 25 to 50% of the total cost of construction.
Therefore, if you manage to squeeze in a considerable amount of pre sales, this means the construction is funded at between 25 to 50% by the potential buyer and the balance will be borrowed by the bank.
This method has a disadvantage in terms of time. It takes a long time to attract pre sales and the number of presales will determine the number of units constructed concurrently.
This method is the best and most secure since the number of new units to be constructed will be directly proportional to the number of presales.
To achieve this, the design will need to be very unique and the marketing strategy needs to be well funded to afford billboards, promotional expos, tv, radio, newspaper and magazine ads and such advertising media on a very regular basis.
Option 3. Sectional Land sales.
In this method, the land owner will enure the land is subdivided into small portions for resale. The minimum subdivision size for issuance of title is 1/8th acre. For plots smaller than 1/8th acre, the architectural plans needs to be approved then the land owner applies for sectional land title ownership which can be resold as a gated community concept.
This method requires unique architectural designs and 3 D walkthrough and flythrough models so as to allow potential buyers visualise the finished look after houses are constructed since they will buy vacant land.
The disadvantage of this method is that the total profits will be reduced since there is no construction.
The advantage of this method is that the land owner only needs architectural services to come up with the architectural plans for subdivisions and 3D reality images and videos.
Francis Gichuhi kamau, Architect.