Global firms find opportunities where local investors burn their fingers

The new Mi Vida homes launched on 3/7/2019.
Does the name Shapoorji Pallonji ring a bell? Perhaps not in the minds of many Kenyans. Pallonji is one of the world’s largest investment firms, with 16 companies whose interests range from oil and gas to engineering and construction, and financial services.

With more than 69,000 employees and projects across 70 nations, the India-based firm has built mega-structures and iconic landmarks, including the imposing palace of the Sultan of Oman that ranks as one of the biggest tourist attractions in Oman.

In Africa, the group completed the construction of the prestigious seat of governance and presidential palace in Accra, Ghana.

Last week, Venkatesh Gopalkrishnan, the CEO of the group’s real estate arm, was in Nairobi, not to survey the market but to launch a Sh12 billion joint venture project between his group and another investment firm, Actis.

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The venture will see the construction of 2,000 residential units.

The Indian firm joins a growing list of international investors who are putting their money in Kenya’s real estate despite the dwindling fortunes, especially among local investors.

Recently, local media reported the entry of Grand Towers Property Fund, a South African firm seeking to invest Sh3.5 billion in mixed-use development in Nairobi.

Sh20 billion outlay

Xterra Capital Advisors, an equity fund based in Mauritania, wants a piece of Kenya’s real estate as well. It has committed Sh20 billion in retail, office, hospitality and industrial properties. Chinese and Middle East multinationals are also waiting in the wings to join the fray.

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How, though, are such global firms finding opportunities where local investors continue to burn their fingers?

“It all depends on how one chooses to exploit available opportunities,” says Gopalkrishnan. “By the year 2040, Africa will be home to the largest workforce anywhere in the world. This will create unimaginable opportunities for real estate investors. As an investment firm, we choose a country where we know we can move ahead.”

In other words, the Indian investor puts money only where returns are guaranteed.

That is not a fleeting statement for a company with a 22 per cent annual revenue growth. 

Last year, 40 per cent of its revenues or Sh700 billion was realised from external markets. Key to their success is partnering with experienced investors such as Actis and taking a long-term view of investments in real estate.

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“Although we are interested in making returns as soon as we can, we normally have a 20-year strategic vision. In Africa, we took three years just to study the market and get it right. Our conclusion is there is untapped potential in areas not yet saturated,” he says.

Real estate analyst Johnson Denge says the current market outlook favours such investors who know how to analyse the cyclical nature of real estate investments. In addition, he says the cash crunch being experienced by local developers means any foreign investor with a strong financial muscle can plan, develop and complete a project with ease.

“The fundamentals that make real estate attractive still exist. These include rapid urbanisation, population growth, and demand for Grade A offices and warehousing. Other factors that favour foreign investors include their experience in sustainable building practices that attract a global clientele,” says Denge.

Lee Karuri, the chairman of Resorts and Cities whose portfolio includes Longonot Gate in Naivasha and Makuyu Ridge in Murang’a, says the current dip in the country’s real estate ought to be viewed as a temporary setback. He says the foreign investors would not sink their cash in unpromising markets with a bleak outlook.

Critical hub

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“Kenya is now emerging as a critical business hub and a strategic entry point into the East African market. Current challenges are not a major consideration in future plans for such investors,” says Karuri.

George Wachiuri, CEO of Optiven Limited, says the growing population and expanding infrastructure herald good tidings for investors in real estate. In addition, he says, the large number of people living informally also attracts international investors.

“About 61 per cent of Nairobi population lives in informal settlements. Global investors are aware of this and will cash in on the opportunity,” he says.

How, though, do some of these newcomers intend to navigate the tricky financing hurdle that puts off prospective buyers?

Gopalkrishnan says developers ought to come up with a tight financing model that would make financial institutions give mortgages to buyers.

“The mortgage market in Kenya is yet to mature. We intend to craft a watertight business model that would make financiers look into opening their purses to prospective home owners,” he says.

Acknowledging that foreign investors have higher financial capability to help them venture into risky investments, officials from the Kenya Property Developers Association (KPDA) say navigating the local market remains a tricky affair.

KPDA chairman Palkesh Shah says apart from major project costs, a developer later realises that there are more costs associated with a project than what was planned for initially.

“Some of these investors can access cheaper financing from overseas. However, they do not factor in the hidden project costs and they will eventually realise that it is not as rosy as it looks,” says Shah.

Challenges or not, people like Gopalkrishnan remain hopeful that with time, the immense investments their firms have sunk in the country will bear fruits.  

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