“You tell them – You tell them there’s a cost…Every decision we make in life, there’s always a cost”~Brad Meltzer
Cost: The outlay or expenditure made to achieve an objective.
The construction process is a capital-intensive endeavour. Money and time have to be invested heavily before we realize the building solutions designed to meet our purposes. There are a number of costs that have to be met by a developer in Kenya before, during and after the construction process. In order to succeed as a developer in Kenya, it is important that you familiarize yourself with property development costs that you will incur.
LAND ACQUISITION COSTS
Land is one of the most basic factors in property development. It determines the location of the project. Quite a lot has been written about land available for sale: within the city, its environs and in far-flung places with prospects of future growth and development. However, land acquisition is the initial financial commitment undertaken in property development.
The price of the land deemed suitable to a property developer can be negotiated between the developer and owner. Alternatively, the price of the land will be the amount the owner of the land is seeking. Land in Kenya is usually bought either in cash or through a loan.
It is important to note that in addition to paying for the land, there are legal fees that are paid to the advocates involved in the land transaction for the conveyancing services. The legal fee is a percentage of the price of land. The land agent involved also charges a percentage of the price of the land. Finally, there’s the stamp duty that must be paid to the Kenya Revenue Authority.
An informal survey carried out by the African Development Bank in 2012 among the developers in Kenya indicated that land takes up approximately 10% of costs involved in formal housing structure in Kenya.
The cost of building is determined by the quantity surveyor (QS). In the survey mentioned above, AfDB estimated that building costs in Kenya are roughly 60% of the total cost of building a formal housing structure. 70% of this cost is in materials and 30% is in the labour involved.
The quantity surveyor usually provides cost information and estimates at different stages of the project in order to ensure that the expectations of the construction project are met within the stipulated budget. In collaboration with the developer and other professionals, the QS also ensures that standards related to quality and safety are observed at the cost.
Usually, the building cost is expressed as the cost per square metre of the building. The breakdown of the building cost is usually provided in the form of a document known as the Bill of Quantities.
Construction in Kenya is evolving so rapidly that a property developer cannot succeed without the input of professionals in the construction industry. Architects and structural engineers are involved in design of the structure to ensure it has the desired aesthetic appeal that goes hand in hand with structural soundness. A quantity surveyor provides cost estimations and control services and is at the centre of the procurement processes in construction. Service engineers provide mechanical and electrical design services. The project manager serves as the coordinator of the professional team’s activities and roles during the life of the development.
These are but a few of the professionals involved. The nature and size of the development project will determine the involvement of these and other professionals.
It is important to note that each of these professionals has a prescribed scale that is used in calculating their payment. Alternatively, some developers either negotiate these fees or have the professionals’ fees fixed.
In Kenya, the professional fees is approximately 11% of the entire cost of putting up a formal housing structure.
SITE DEVELOPMENT FEES
After the land has been acquired and the services of the professionals engaged, the site has to be prepared. In cases where there are existing buildings or structures, demolition may be necessary. The demolition costs are incurred in the process.
Surveying costs are also incurred where the services of a land surveyor are put to use. These services include land subdivision, placing of beacons and determining land boundaries among other services that will ensure that the development complies with the planning regulations and the laws governing land use.
In addition, there are infrastructure costs. These are costs associated with providing access roads and amenities essential for the property to be constructed. Some developers in Kenya usually seek land that requires lower infrastructural costs in order to maximize on their profit margins.
In Kenya, the cost of infrastructure is approximately between 9% and 10% of the total cost of putting up a formal housing structure.
Before developing the acquired land in Kenya, one must familiarize themselves with the planning regulations. It is important that one obtains land that has met the stipulated planning and development regulations. Previously, this used to be under the Local Governments but are currently handled by the respective county governments’ Departments of Planning.
In order to get permission to build, the developer must pay the permit costs associated with the planning regulations of the area they intend to build. This is also determined by the nature of development. Planning costs may in some cases include building regulations costs.
It is important that one incurs these costs lest they risk having their development demolished or facing severe penalties from the authorities.
PROJECT FUNDING AND FINANCING COSTS
There are different modes of financing construction projects in Kenya. Most projects use loans, equity or a combination of the two. In cases where commercial bank loans have been undertaken, the costs incurred include the legal fees for the advocates involved in securing the financing. There are also professional fees paid to the professionals involved in the transactions. Some banks charge an arrangement fee.
The nature of relationship between the developer and the financial institution forms the basis of debt financing. Therefore, the fees can be negotiated.
Moreover, the amount of money extended for the development purposes earns an interest. These financial charges are determined by the prevailing economic conditions that determine the rates of interest on loans.
In Kenya, the costs associated with project financing are estimated to be approximately 5% of the total cost of putting up a formal housing structure. It is important to note that there are different arrangements for different sector investments. For example, residential development financing models are not the same as those for development of a shopping mall.
Farhana Hassanali–Hashmani in an interview with How We Made it In Africa mentioned that developers targeting the lower and middle income market have to be creative in making profits since those segments are to a large extent affected by the interest rates.
Property developers are in business to make a profit. However, the proportion of the total cost that end up as profit is not arbitrarily arrived upon. The percentage is calculated based on the level of risk involved in the development.
The Kenya Revenue Authority charges a tax on the net profit earned by a real estate developer. According to the KRA, these expenses include the professional fees, cost of building materials, labour, marketing and promotion of the development.
According to HassConsult’s Hassanali, developers targeting the middle and lower income levels have to be creative in making profits since the margins are not as high as the upper market segment. Some developers maximize on profits by developing relatively cheaper land and develop property that attracts the big volume of the market.
[Image Credit: Elite GreenHome]