Construction activities require a lot of capital to execute. Financial resources have to be utilized by all property developers to meet various costs even before the project begins. As a developer, one has to plan effectively in securing funding for development. One of the most critical steps in planning for construction is identifying the most suitable source of funding for construction development. Real estate development financing in Kenya is provided by several sources.
Commercial Banks are the most preferred source of construction development funding in Kenya through their lending facilities. According to the Central Bank of Kenya, there are 43 licensed commercial banks and one mortgage finance company in the country. These institutions advance funds depending on the ability of the developer to pay the interest charges within the prescribed time limit. It’s important to note that a relationship between a bank and a developer plays a big role in securing finance from commercial banks.
Private Equity Funds have also dominated the headlines since 2010. Private equity in real estate development is a co-development arrangement in which investors fund a project using unsecured funds in return for a stake in the development. Equity is usually provided in the form of either shareholder loans or as a share capital investment. The most notable equity fund participating in real estate development in Kenya is Actis. The UK-based equity fund has invested billions of shillings in projects such as Garden City which is valued at Ksh 12.6 Billion. Another major player, Centum had at least $100 million in private equity assets as of March 2012.
Pension Funds are another source of real estate financing in Kenya. These funds hold money on behalf of their members. They, in turn, invest the money in different sectors, including real estate development. Proceeds from sales or rental income are then used to pay their members upon retirement. The law dictates that pension funds should not hold more than 30% of their assets in property. The most common funds include the Kenya Railways Staff Retirement Benefits Scheme that has plans to dispose property assets of up to Sh 21 Billion. The University of Nairobi Staff Pension Scheme recently bought part of the 20-storey Delta Towers in Westlands.
Bonds have recently been issued in Kenya to finance real estate development projects. Shelter-Afrique floated bonds six times at the Nairobi Securities Exchange to finance its development projects, with the most recent one valued at Ksh 3.5 billion. Usually, institutional investors, insurance companies and banks subscribe to these bonds. Through the bond, Shelter Afrique has plans to invest in residential projects to the tune of Ksh 9 Billion.
Investment Clubs/Chamas are a major source of financing for real estate development. According to the Kenya Association of Investment Groups (KAIG), an investment group is ‘a collection of individuals who periodically contribute monies for investment purposes’. Whereas most have focussed heavily on land buying activities, others have successfully marshalled their funds and provided housing solutions. KAIG estimates that there are at least 300,000 groups in Kenya with assets worth Ksh 300 Billion. The Norwich Union Properties Limited’s story best describes the journey. Other investment clubs that have grown rapidly include Home Afrika, Mhasibu Investment Company and TransCentury Limited.
What are the other sources of real estate development financing do you know?