The pitfalls of real estate in Kenya

| October 13, 2016 | 0 Comments
Property developers who build more than 1,000 houses a year, will receive tax concessions reducing their corporate tax from 30 to 20 per cent. This was later reduced to 400 units in the final financial Act. PHOTO | FILE

Property developers who build more than 1,000 houses a year, will receive tax concessions reducing their corporate tax from 30 to 20 per cent. This was later reduced to 400 units in the final financial Act. PHOTO | FILE

Investing in real estate is considered a good investment by individuals and firms looking for stable, long-term returns.

“The high rate of urbanisation, coupled with the ever-ballooning middle-class, has ensured that the real estate sector continues to make a significant contribution to the country’s GDP,” says Mr Mucai Kunyiha, the chairperson of the Kenya Property Developers Association (KPDA).

However, it is not all rosy for property developers. Mr Daniel Ojijo, the Managing Director of Villa Care Kenya and a big player in real estate, says developers have to deal with a host of challenges, ranging from corruption at inefficient government offices to poor infrastructure such as roads.

Below are some of the hurdles one can expect to encounter in the sector:

  1. Runaway land prices

“It goes without saying that developers need land in order to create new wealth and infrastructure,” Mr Kunyiha says. However, land prices in Kenya’s urban areas are skyrocketing at rates that cannot be sustained by the economy for long.

“In most circumstances, for a developer to make profit, they have to ensure that the cost of land accounts for 15-20 per cent of the total construction cost. For example, if a developer buys a piece of land at Sh50 million, they have to ensure that they put up a development whose value is above Sh300 million. This forces developers to put up high-rise buildings even in locations previously designated low-density residential areas,” Mr Kunyiha says.

Even then, it takes many years for proprietors to recoup their investments.

“The government should come up with measures to control land prices in urban areas to ease the pressure on property developers,” suggests Mr Ojijo. He further proposes that county governments consider giving land either for free or at subsidised rates to developers to stimulate development .

  1. Inadequate infrastructure

Infrastructure such as access roads, electricity, as well as the availability of water, do a lot to help bring down construction costs, says Mr Ojijo.

However, Mr Gikonyo Gitonga, a director at KPDA, observes that there’s a shortage of properly serviced land in the country, especially in the counties.

“Developers usually end up installing such services themselves. If one factors in the money used to build an access road to the final cost of building an apartment, the consumers will ultimately pay for the building through the nose,” Mr Gitonga offers.

He says that is why many people shy away from setting up meaningful developments in rural areas. In contrast, investors are elbowing each other for expensive pieces of land in urban areas such as Nairobi because of the existing supporting infrastructure that brings down the cost of construction.

  1. Unethical practices

The term “private developer” tends to evoke rather negative feelings among the public. This is because in many cases, private developers have been associated with unethical practices such as land-grabbing, building on riparian land and cutting costs at the expense of quality during construction.

The situation is exacerbated by the occasional collapse of high-rise buildings around the country, which often lead to multiple deaths.

“When such an isolated incident occurs, it only serves to give the entire development industry a bad name,” Mr Mucai acknowledges. “When KPDA was formed, one of the first items on our agenda was to come up with, and promote, tougher building standards and regulations for our members. We have worked with the National Construction Authority (NCA) to maintain building standards in the country high and ensure that developers are held accountable for their mistakes,” he adds.

There’s a shortage of properly serviced land in the country, especially in the counties. Developers usually end up installing such services themselves. If one factors in the money used to build an access road to the final cost of building an apartment, the consumers will ultimately pay for the building through the nose. PHOTO | NATION

  1. Inefficient land governing bodies

Land administration in Kenya has always been chaotic, Mr Gitonga laments. “For close to two decades, we did not enact any significant land laws and this led to the chaos that is still plaguing the sector. The passing of the new Land Act in 2012 brought a semblance of sanity to the industry, but the way many systems run is still archaic and deplorable,” says the KPDA director.

Mr Gitonga lauds the  move by Land Cabinet Secretary Jacob Kaimenyi that saw him disband and then re-appoint all land control boards representing 57 registries. “The former land control boards were a monument to laxity and high levels of corruption; it was clearly time for reforms,” he says.

But KPDA regrets that even now, the inefficiencies that have plagued the Ministry of Land, the National Land Commission and the land control boards continue to haunt developers. Unscrupulous Kenyans have taken advantage of the inefficiencies of our systems to sell land with dubious title deeds, often in collusion with officials from the land ministry.

“It is painful for an aspiring developer to invest millions of shillings in a piece of land, only to spend years in court arguing about the validity of its title deed,” Mr Gitonga says.

  1. Bureaucracy

Selling land in Kenya, Mr Ojijo complains, can take up to six months or even longer. He attributes this to  the complicated legal requirements that make  transactions drag on needlessly. He says ideally, a simple land transaction should take between 14 to 30 days.

County governments do not help matters when it comes to fast-tracking land processes, with a simple matter like obtaining a land-rate clearance certificate taking up to two months.

When it comes to construction , Mr Ojijo says,  sometimes builders have to seek similar permits from their county authorities and national bodies such as the National Environment Management Authority (NEMA) and the National Construction Authority (NCA).

Some approvals can take up to two years, and both the country and developers lose money during this period, when no meaningful development is taking place.

To get rid of bureaucracy, Mr Ojijo suggests that the government immediately establish  a national housing authority, which should be given the mandate to issue all construction-related permits. With such a body, he says, a developer might be able to get all the necessary permits in 14 to 30 days.

  1. Corruption

The other side of the bureaucracy coin is corruption, which is pervasive in  every sector of the property industry, according to Mr Kunyiha. “Officials of several government bodies usually entice developers to pay bribes with  promises to help them cut corners and save time,” he says.

“One step towards eliminating corruption and speeding up development is automating the operations. We need to do things electronically at the approval offices because the less human interaction there is between developers and government officials, the lower the opportunities for demanding or  offering bribes,” Mr Kuhinya adds. He  commends the Nairobi County Council for  automating  construction permit processes in Nairobi, adding that other counties should follow suit  to reduce corruption and delays.

  1. Unclear zoning regulations

Developers are increasingly being accused of flouting zoning regulations, especially those who set up high-density commercial establishments in areas designated low-density residential areas. Mr Gitonga blames the situation on weak zoning regulations.

“In many areas, the zoning rules allow different interpretations, and this makes them open to abuse. As such, developers often find themselves in court seeking a magistrate’s opinion on the rules. As KPDA, we are constantly vouching for transparent, open and predictable rules,” Mr Gitonga says. He also blames corruption at the approvals’ office for the propagation of this vice.

However, he warns that as more people move to urban areas, most of the zoning regulations will cease to make sense. “With increased urbanisation, the economy of an area is usually forced to expand. This pressure on the economy, coupled with reduced building space in towns, will force developers to put up high-rise apartments and more commercial establishments to cater for the increased population and economic expansion respectively,” he explains.

In cases where disputes arise between the neighbouring community and a developer, the KPDA encourages the developers to settle their differences out of court by engaging in dialogue with them.

“We try to educate community members on the benefits that such a development could eventually bring to their area,” says Mr Kunyiha.

  1. Insufficient government incentives

The country’s housing requirement is estimated at 200,000 units a year, with an annual deficit of 150,000 units.

While delivering the Budget in June this year, Treasury Cabinet Secretary  Henry Rotich proposed tax concessions for property developers who build more than 1,000 houses a year, reducing their corporate tax from 30 to 20 per cent. This was later reduced to 400 units in the final financial Act.

This measure is aimed at encouraging developers to build more houses  in order to reduce the deficit.

Mr Ojijo, however, doubts that the measure will have any significant benefits since very few developers have the capacity to build 400 units  a year. The policy, Mr Ojijo argues, would make more sense if the threshold were lowered to 50 units.

“If the government is serious about its mandate of providing affordable housing, then it needs to set up a special committee that will come up with incentives that benefit even small-time developers,” he says.

  1. Obstacles to catering for low-income groups

“The government should declare housing as a national crisis for the low-income groups,” asserts Mr Ojijo. “Due to the high cost of land and insufficient government incentives, developers are giving a cold shoulder to low-income earners and concentrating on developing houses for the middle and upper classes because these are the niches in which they can make a profit,” he adds.

He says low-income earners, need alternative modes of financing to enable them to afford decent housing. “If the government can provide mortgages to civil servants at an interest rate of 3 per cent per annum, why can’t it make it possible for low-income earners to access mortgages at say, 6per cent?” he wonders.

Developers are increasingly being accused of flouting zoning regulations, especially those who set up high-density commercial establishments in areas designated low-density residential areas. Mr Gitonga blames the situation on weak zoning regulations. PHOTO | FILE

Developers’ association counts gains as it turns 10

Although they contribute significantly to the country’s economy, for a long time property developers lacked a  platform they could use to collectively address the problems in the sector.

“When a developer wanted to engage the government on tax concessions, for instance, it was tough because they had to do so as individuals,” recalls Mr Daniel  Ojijo, the Managing Director of Villa Care Kenya, a local real estate firm.

So together with his fellow developers, Mr Ojijo formed the Kenya Property Developers Association (KPDA) in 2006, and was elected its first chairperson.

“At the time, the Nairobi City Council had banned multi-dwelling developments in prime areas. This was an insensitive policy as it did not take into account the city’s growing population. One of our first achievements as KPDA was to engage the county council and have the ban lifted. This brought a lot of quality development to prime areas around the city,” Mr Ojijo says.

The current KPDA chair, Mr Mucai Kunyiha, recalls a time when the Nairobi County Government increased building levies.

“Together with the Architectural Association of Kenya (AAK), we approached the Governor, Dr Evans Kidero, and were able to get a reprieve after he agreed to reduce the levies.

The association, which has 110 members, boasts of being an important voice in the construction sector as it has been able to engage bodies such as the National Construction Authority (NCA) andas well as the  the Ministry of Land, Housing and Urban Development in the formulation of the National Housing Policy.

Despite these gains, however, the association not been able to rope in small-time private developers who set up single projects, mostly their own homes. This group of property one-timers still lacks a collective body to advocate for their needs.

“Our members are companies that engage in multiple developments at a go because we are looking into solving recurrent problems in the industry. We are trying our best to get more people to go into construction as a business,” says Mr Kunyiha.

-nation.co.ke

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Category: KENYA NEWS 2015, NEWS

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