Land in Syokimau. Check. Very posh apartments. Check. Valid dreams consisting of the soaring apartments resting on the land. Check. What about money to build? It dawns on you that the money you require is not available or is inadequate to finance the development of the apartments or gated community that you desire.

You will go knocking on the doors of different bank managers. When the doors open, you will be presented with a list of requirements and a loan facility with a high interest rate. After numerous trips that lead to frustration, you walk out of the bank into your SACCO’s office. You forget that SACCO loan is still a loan, however low the lending rates are – you will still have to pay back the money. Your friends tell you banks are better for one reason or the other.

The topic of real estate property development financing is a complex one.

Why are these Kenyan banks so strict on lending me money for the project? You ask yourself at what seems to be the deathbed of your dreams. What makes them take too long to process the loan? Where did I go so wrong that I didn’t get the funding? What are they doubting?

Why should you seek funding?

If you are a new property developer in Kenya, sourcing for project financing is one of the biggest hurdles you will have to face. It will, perhaps, give you solace to know that even the seasoned property developers in Kenya have also borne the brunt of lacking adequate funds to finance their property development. Both new and experienced property developers seek financing for their real estate projects for a number of reasons. For example, in the year 2012, Serene Valley Properties, the youthful developers of the Kshs 350 million Sigona Valley, were turned away by 12 different commercial banks before they secured a Kshs 185 million funding from Shelter Afrique.

First, real estate development projects are very capital-intensive. Only a handful of developers in Kenya have the capacity to fully finance their projects entirely out of their pockets. Most times, you will find that even investment clubs pool funds for their projects before they supplement external funds such as loans from banks.

Secondly, property developers need money to finish their development within the shortest time possible in order to start realizing the economic benefits of the development. A project that stalls midway or delays serves no economic purpose. On the other hand, a project that is completed within good time is an asset that generates its cash flows.

“We approached 12 separate banks, all of which refused to support the project. They focused on our own early-stage career profiles, and the assets we had already accumulated, rather than the project itself…But we didn’t give up, not even with the 12th bank. We only tried a different approach, moving on to the funds with development funding for private sector real estate..” – Kimiti Wanjaria, Sigona Valley

Why banks lend developers money

Banks and other property development financing institutions in Kenya are in the business of making money. That said, your bank will advance you a loan if the property you are putting up promises them financial gain that meets their objectives. No bank is willing to sink in money in a project that will generate losses or you will fail to complete based on their assessment.

Secondly, banks have owners and shareholders who have invested in them. These investors have investments of varying scopes: short-term, middle-term and long-term investments. As an institution, a bank perceives real estate assets as a long-term investment that they can depend on. It is out of these investments that bank owners desire to make returns.

Third, banks lend property developers because real estate assets make good financial security. That is why banks charge property, complete with their name included in the titles until the project is completed. If you as a developer fail to pay the loan, the bank will dispose the property and recoup their costs. Also, when the property is charged, no transaction can be done on that property until it is discharged. This explains why some developers end up wrestling with banks over property financed through loans.

Fourth, in unique circumstances, banks may express confidence in a project by injecting equity funding in a project. This is in addition to the loan facility advanced to you.

Last but not least, banks consider property to be an asset. Unlike other assets, banks regard property highly due to the immense potential for property to grow in terms of value or even rental income that arises from a property.

Therefore, banks have every reason to fund different property development projects in Kenya including yours. But there are terms and conditions that go with the likelihood of you getting the funds you badly need.

“As you can see, we do not have the typical developer profile, with two of us still 28 years and none of us yet 40. Two of us are grounded in ICT, one a biochemist and one a quantity surveyor.” – Kimiti Wanjaria

What makes a bank interested in your project?

Banks are institutions owned and run by people who are driven by interests and objectives. Financiers, in general, are in the best position to know how stiff the competition for property development financing is among developers in Kenya. The main reason is that funds are limited when you consider the risks associated with the property market. Despite that, banks are interested in some critical things about you and your property, among them these three:

First, location is everything. Banks are interested to know where your property is situated. This will inform them on how accessible it is before, during and after construction. The location of the property will determine if it will attract the people who will occupy the development upon completion. Additionally, the location of your site will inform financiers on how well serviced your property is and if there are any disputes arising from compliance with regulations or other concerns. How close it is to a good road network, water, power and sewer lines makes a big difference. I believe banks further evaluate projects based on their settings: Is it located in the countryside or is it in an urban setting? 

Secondly, banks look at the quality of the building. Quality is a broad term that can be viewed in different ways. In terms of income, banks will evaluate the nature and steadiness of rental income in the case of rental property. Financiers express confidence in properties whose flow of income is steady. They, at the same time, avoid lending to developers putting up properties whose income flow is volatile. If you are putting up a hotel in an area prone to terrorism, income flows are likely to be volatile. When we look at quality, financiers look at the specifications of the building and how structurally sound it is. Some financiers may demand audited structural reports. No bank is willing to risk lending money to a property developer who is not adhering to set standards.

Lastly, banks are similarly keen on the people you are targeting for your property. They ask questions such as: Can the future tenants or occupiers of this property afford the rents or prices? Is the property appealing to them? If you are in some parts of Kenya, for argument’s sake, apartment developments can be an attractive development for rental purposes for a particular segment of residents. The same apartment may not appeal to someone who is seeking to buy property within the same locality. Perhaps, developers in the area have realized that most of the people willing to buy property are moving away from the apartments in the city suburbs and they are looking for standalone houses in a gated community of a particular standard.

So what do you do as a developer?

Property developers are required to present a business case for their projects alongside other documents required by financiers. A business case is a document that captures to the best extent possible, the borrower’s understanding of the real estate project they intend to venture in. In Kenya, construction consultants, especially quantity surveyors and construction project managers, are the ones who can help you work on a solid, logical and professional business case.

As we indicated earlier, both the borrower and lender have certain objectives that they seek to achieve from a project. It would be prudent for you to know and capture clearly the objectives of the financiers in your business case. Furthermore, it is important to articulate clearly the objectives of the future or potential buyers or tenants of the development when it is completed. You can express this through addressing the following concerns:

First, the viability of the project. You will have to demonstrate to the bank that the development is not speculative in nature. In Kenya, many people are buying land based on speculation rather than on solid facts. A financier will pull back if they feel that the project, even when completed, will have a high vacancy rate. In some cases, projects can be sold at a loss, or, they can remain unsold altogether. That said, banks evaluate every borrower in two main ways: your credit rating and your experience. Developers with good ratings and an impressive track record of successfully implementing projects are more likely to receive funding for their next project than those with the contrary. Banks are often unwilling to lend to high-risk borrowers.

Secondly, cash flows matter. Cash flows communicate the success or failure of your development as an income-generating asset. Financiers study the cash flow projections in detail in order to determine both the success of the project and your understanding of the market. If you are putting up a commercial office building, banks may be interested in knowing how well you can communicate the issue of vacancy rates and how they affect cash flow. Same applies to residential property for rent or sale. Since you are borrowing funds at an interest, it is prudent for you to envisage the best scenario and the worst scenario. For example, how would the property work in a market where interest rates sky-rocket and rents in the market drop? What about in a situation where interest rates drop and rents go up? What will happen if the cost of construction went up by 25%? All these are subject to the prevailing economic conditions.

Thirdly, as a developer, you should demonstrate your understanding of the overall real estate and property market. Additionally, you are expected to know the functioning of the specific sub-market: if you are putting up apartments in Nakuru, do you know how the construction costs vary from time to time and from place to place? How well you know the demand and supply of apartments in Nakuru – and how these in turn affect the rents? If you are setting up an office development along Ngong’ Road, how is the Nairobi office market doing? How will you price your development? Essentially, you should answer all the questions, backing them up with current, reliable and credible market data and forecasts.

These are but a few things that financiers consider during the evaluation process. Risks are the driving force that makes banks and financiers conduct due diligence to the finest detail.

“From the outset, we took the high road on business planning, in our choice of site, which as you can see is truly a spectacular location…even once we had pieced together the finest options we could find in land, home designs, project specifications and target market, finance was a challenge.” – Kimiti

In Summary…

Each bank has its own internal criteria for evaluating borrowers before either accepting or rejecting a loan. It is standard practice for banks to obtain the borrower’s credit rating. Most financiers, in the same way, assess your ability to deliver on the project within the terms negotiated for the loan facility. You should, in addition, be ready, willing and able to provide the financier the guarantees demanded by the bank. It may be interesting for you to learn that banks may not be in a position to accept your loan application due to circumstances where they have inadequate funds.

As a developer, it is important to know that banks hardly provide 100% financing for your project. Usually they provide up to or about 70% of the total development cost. Having the land alone does not count as sufficient contribution to the success of your development. There are numerous risks that have to be taken into consideration by banks during the evaluation process.

“These funders more concerned with the fundamentals of the project and its viability and with our first development funding application we won 60 per cent project funding, with the requirement that we cater for 40 per cent.” – K. Wanjaria

Over time, property developers create relationships with banks, with room to negotiate the terms of the loans on the account of trust and relationship with the financier.

So, the next time you go to your bank to ask about property development financing, ask more questions that give answers that banks never print on brochures.

“For us, the most exciting aspect of this groundbreaking is to be able to say, and to show, that “it can be done”. Developments can be conceived, financed, managed, completed and sold, with only seriousness of purpose, professionalism and the tenacity to find solutions when everything doesn’t fall into place at the first try.” – Kimiti Wanjaria