If you are a developer looking for financing, you will most likely first approach a bank for a commercial loan. What if you have land, a little cash and a team of professionals ready to work on your project and maybe, a small loan from your SACCO or bank – but you are still unable to develop? You have an option of getting into a joint venture with a private equity investor as we shall discuss today. We shall show you how a few developers in the residential development sector are able to execute projects using private equity funding.
Introduction to Phatisa
Phatisa is an African private equity fund manager. It operates two funds that are specific to two sectors in the sub-Saharan Africa: food and affordable housing. The fund aimed at affordable housing is called the Pan African Housing Fund (PAHF). The US$ 41.95 million fund started operations in the first quarter of the year 2013. It provides risk capital to the rapidly growing segment of middle and low income housing project developers. The private equity fund invests up to 35% of developments that meet their criteria. So far, Phatisa has concluded four housing investments with different developers in Kenya.
But before we delve into the projects financed by Phatisa, you need to understand the fact that, in property development and investment, there are three crucial ingredients: land, finances and expertise that go into a successful development.
What is Private Equity Finance?
Private equity is finance that is provided in exchange for a share or equity stake in a private company or business that is regarded to have a high potential for growth. This finance is raised from a number of sources ranging from high net worth individuals (HNWI), insurance companies, retail investors and institutional investors to pension funds. Equity finance is combined together with debt financing – such as commercial bank loans – and other input such as business and professional expertise, in order to build and invest in the companies. Ultimately, the aim of private equity financing is to drive growth and minimize inefficiencies of the mature companies that have demonstrated the high potential for growth.
How does private equity work in real estate in Kenya?
Real estate in Kenya is a high-risk and high-reward investment. This means that investors have to put in money in real estate developments in Kenya in the face of a number of risks. In return, they anticipate rewarding returns over the period of the investment. One of the investment vehicles utilized by private equity funds is joint ventures whereby private equity firms fill in the financial gap after a developer has already pooled the land, professional and business expertise and other finances. It is not uncommon to find that PE firms in real estate prefer to invest in projects where they feel they will have a better management, understanding and control of the risks associated with the development. It is no wonder that these funds are also referred to as risk capital.
In brief, PE firms have different criteria, areas/regions of operations and sub-sectors of the broad real estate spectrum where they invest. For example, some invest in affordable housing while others in middle income or high-end housing developments. Some PE funds have focussed on the commercial retail and office sectors while others have focussed on hotels, schools, hospitals or mixed-use developments. Others choose to diversify their investment portfolio in real estate. As a developers seeking such funding, you need to familiarize yourself with the finer details of the PE fund in relation to the development.
Before we jump into Phatisa, let’s talk about the origins of the Pan African Housing Fund (PAHF), “the first private equity fund focussed exclusively on housing development in Africa.”
PAHF is a real estate private equity fund that was set up in 2011 by Shelter Afrique. It was set up with the aim of providing risk capital to small and medium-sized local property developers in Africa so as to “increase the housing supply of affordable and middle income segments” in response to the biting housing shortage in the region. The other aims of the fund were to develop the technical and capabilities of the developers it worked with. The fund also sought to build “up to 7500 new homes over 10 years…[and] create an estimated 22,500 jobs.”
PAHF was to invest “primarily in middle income residential development, mining villages, hostels and mixed use [developments]” across Africa especially in the urban areas in “Kenya, Uganda, Zambia, Mozambique and Botswana.” At the end of the first round of fundraising in December 2012, made it clear that it will invest in “middle income and lower middle income residential developments and mixed use” projects.
At inception, PAHF had a target a final close of US$ 100 million by the end of 2013. At the end of the first close, it raised US$ 41.5 million. One of the six investors in the first round was The CDC Group which, in 2012, committed US$ 20 million equity to PAHF. The African Development Bank (AfDB) invested US$ 7 million equity in PAHF in September 2012. Other investors include: FMO (a Netherlands-based development finance institution), The PTA Bank, Shelter Afrique and Africa Reinsurance.
Due to land-related issues and risks, PAHF was to ensure that “thorough due diligence be carried out on land history, land title and land use.” In addition, each development under the fund is expected to cover efficient sewage treatment and recycling units within them. In terms of construction, health and safety training and equipment are to be provided by the contractors undertaking the development projects as part of ensuring “better construction practices and standards.” These and other requirements and conditions required are found in the Environmental, Social and Corporate Governance (ESG) policies and implementation procedures.
Phatisa Group is a “private equity fund management, corporate finance and advisory firm” that was identified and appointed by Shelter Afrique as the fund manager for PAHF in 2011. Phatisa is behind the fundraising activities for PAHF as well as managing the investments.
So far, Phatisa has invested in a number of projects in Kenya, with plans to invest even more in future. They have a “strict criteria” which they use to evaluate and determine which projects they will invest in. Some of the projects in Phatisa’s plans include:
Westpoint Heights – in Kikuyu
Westpoint heights is a 8-storey apartment development comprises of 66 two-bedroom apartment units in a high density development setting. The project is being undertaken by PAHF and Africa Reit Limited under a special purpose vehicle (SPV).
Westlands Place – in Nairobi
PAHF entered a joint venture with In-Time Capital, a SME developer to develop 80 residential apartments (Westlands Place) targeting young professionals in the middle income bracket. The 10-storey development comprising of one-bedroom apartments saw PAHF inject equity finance and senior debt. The exit plan for the project was 30 months after the sale of the apartments. In-Time Capital is a property development company that was formed in 2011 and it has been able to complete 5 residential projects within Nairobi and one at the coast.
Karen – Lang’ata Studio Apartments
The third investment was announced on February 25, 2015. Together with Africa Reit Limited, PAHF announced plans to acquire a 6-acre plot of land in the Karen-Lang’ata area where it intends to set up 1400 studio apartments. The development targets young professionals and students who will find the studio apartment setting attractive. The development is situated close to infrastructure such as the educational institutions, places of employment and social facilities. There are at least universities and colleges in the area. The project is estimated to cost approximately Kshs 1.8 billion upon completion. The institutions whose students are most likely to benefit from the development include: The Catholic University of Eastern Africa (CUEA), Africa Nazarene University, Multimedia University of Kenya, Kenya School of Law, Tangaza College and JKUAT Karen campus.
Nakuru – Nakuru Meadows
This is the fourth and largest investment by Phatisa in Kenya. In March, PAHF announced plans of investing between US$ 2 and 3 million in Nakuru. The fund and the property developer, Tamarind Properties, are banking on Nakuru’s untapped middle income housing segment. The Nakuru Meadows project will comprise of 140 housing units on a 10-acre piece of land in the Free Area of Nakuru town, along the Nairobi-Nakuru highway.
There are also indications that PAHF will help set up approximately 289 units in Kigali and about 300 units in Lusaka Zambia.