9 Challenges to worry about while investing in real estate in Kenya
The Real estate sector in Kenya is growing and many players are gearing up to expand, while others are out to venture into it , with hopes of a high rate of return on investment. As one prepares to venture into this sector, it's important to have the following information in mind:
- Escalating land prices: The price of land in Kenya is rising every day.This has led to developers putting up high-rise buildings to compensate for the cost of the land. A very good example is seen in Upper Hill, Nairobi, where an acre of land is Ksh. 0.6Billion and developers have resorted to building over 30 floored houses. For any profitable development, the price of land should ideally be between 15-20% of the cost of the project.
- Inadequate Infrastructure: Kenya's infrastructure is concentrated on the capital city. A majority of the remaining 46 counties have poor infrastructure. It's thus important for the government to develop infrastructure or give incentives to private developers who develop their own infrastructure.
- Unethical Practices: There have been allegations of collusion between developers, land dealers and government officials to produce fake titles. This has led to developers spending time in court to prove the authenticity of title deeds. Associations like Kenya Private Developers Association are working with the government to ensure digitization, adherence to ethical standards and accountability among the developers. The government is also seemingly doing its bit as the Ministry of Landsand the National Land Commission have fronted the digitization of the land registries in Kenya.
- Inefficient land governing Institution: Land administration in Kenya has been in shambles for many years, until the new constitution was effected. 67% of Kenyan land is said to be untitled, with 33% with title deeds, but still in severe chaos. In 2016, the Ministry of Lands disbanded the local land boards allegedly famed for corrupt dealings and bureaucracy, replacing them with new ones. It's hoped that the new ones will be more efficient.
- Bureaucracy: Buying property in Kenya takes a long period of time. One has to process a lot of documentation and the legal process is extremely long. A transaction that should ideally take only 14 to 30 days, could take one between 90-120 days. This process can be shortened, by making the whole process an online transaction. The government should also have a one-stop shop for property developers where all licenses and approvals can be issued. The county governments also pose a challenge to developers, as all manner of levies and taxes are charged to developers as they undertake value-addition. Fortunately, associations like Kenya Private Developers Association (KPDA) provide a forum for developers to engage the county governments.
- Corruption: This is a leading issue that real estate developers grapple with. Developers at times find themselves dealing with corrupt officials at different levels and this poses a real threat to the sector. Steps by the government to digitize the land registryare expected to go along way towards reducing cases of corruption in these dealings.
- Unclear planning and zoning: Developers don't seem to know which areas areset aside for industrial, residential or commercial purposes. This has resulted in areas that are primarily residential being used for other purposes. Meanwhile, facilities like roads, water and sewer systems are not being expanded to meet the needs.
- Lack of incentives: The demand for housing in Kenya is over 200,000 housing units per year. Currently, only 40,000 housing units are developed a year. This is due to lack of government incentives to private developers. The government made an attempt at this by giving developers doing 1,000 units per year 10% corporate tax off. This later changed to 400 units. However, very few developers have the capacity to build 400 units within a year. The government should therefore consider lowering the number of units further to 50 units a year and give 20% off corporate tax.
- Challenges of catering to low-income earners: The government hasn't sufficiently supported low-income earners. While government officials are able to access mortgages at rates as low as 3 %, no special provisions have been made for low-income earners. The government should therefore seriously consider offering low-income earners a 4% rate, to enable them access homes.
Thoughts generated by: George Wachiuri, Real Estate Mogul, Entrepreneur and CEO at Optiven Group (www.optiven.co.ke)