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‘Off-plan purchase is a worthy risk’ during construction

By Peter Muiruri | January 14th 2016
Isaac Mukhwana

You have been in the real estate business for 12 years. What has been your experience so far?

While heading a company with countrywide representation in diverse areas such as Mombasa, Kisumu, Nakuru, Eldoret, Kajiado and Bungoma, we have witnessed tremendous growth in the sector.

You are a great proponent of off-plan buying. Why does it make business sense?

Off-plan buying has great advantages both to the buyer and developer. To the developer, it saves them a great deal from borrowing expensively to finance the projects. Ideally, buyers are literally financing the project for the developer.

Developers leverage the cost of high interest rates by subsidising the cost of the project through off-plan sales. This way, buyers are able to buy houses in the project at almost 60 per cent of the cost of a completed unit.

Additionally, buyers are able to negotiate with developers and alter interior finishing to their taste. For, example, one may opt for an open-plan kitchen instead of closed or even change fittings to match their taste.

Some say off-plan purchases are cheaper, but the end product may be inferior to what was previously advertised...

This might be true for interior finishing because you are basically buying a product on paper without a full guarantee on the eventual quality. It is a risk since the probability of the project stalling still remains.

However, one would argue that if you are saving up to 40 per cent, you may use some of those savings to make the finished house to your taste. Property developers tend to come up with standard products and it is incumbent on the buyer to customise them.

We encourage our clients to buy off-plan after we have ensured that a developer has what it takes to complete the project.

Why are lenders reluctant to offer mortgages to off-plan buyers?

The risks to lenders for off-plan sales are enormous. Where a mortgage is offered, it is highly unlikely that the full amount shall be disbursed in one tranche.

More often, it will be disbursed in phases as the project progresses or disbursed in full upon project completion and issuance of certificate of occupation. This is largely a risk management measure as the probability of the project stalling due to financial, political or other regulatory factors cannot be accurately determined.

You state in your property management portfolio that you provide above-average returns to your clients. How do you manage this in a harsh business environment?

With competition in real estate property management, we have to come up with innovative ways that are beneficial to both parties.

One way we have managed this is to segment our market, largely as a penetration strategy by offering different product options to different market segments.

For example, for the low- and middle-income segments, we make payouts to clients on the basis of occupancy and not payments actually received. Thus, clients are able to plan around their funds given the certainty with which the money shall be received.

You set up shop in Karen with an eye on high-end property in the area. What are the main challenges in dealing with such property?

First, there are peculiar demands from potential buyers and tenants. Given house prices around Karen, one would expect the highest level of workmanship, but this is not always the case.

Second, there are infrastructural challenges in terms narrow roads and a poor road network that turn away some people due to traffic congestion.

Finally, there is the lack of supporting institutions within Karen that has hindered massive investments and uptake of property.

The rates of return remain low compared to similar suburbs like Gigiri and Runda which have United Nations agencies driving up the demand for housing and yielding higher returns.

Some unscrupulous agents have been known to put billboards stating that almost 80-90 per cent of the units have been sold when actually the contrary is true. What are the effects of such marketing gimmicks on prospective buyers?

I wouldn’t call them unscrupulous. It is their marketing strategy. Many people don’t like to be the first ones to take a risk. You can be sure that if they put a billboard that only states “one per cent let or sold”, then they can as well forget about letting or selling. Prospective clients take refuge in the fact that some people already believe in the project. However, we place a high premium on full disclosure of all facts.

Kenya has been stuck with expensive cash purchases and few mortgages for so long. Will there ever be other financing options that will allow the masses to own homes?

Yes, there are other options available, but which are largely unexploited. Very few Kenyans know that you can explore the option of leasing or renting with an option to buy.

Basically, you pay a substantial deposit for a property and subsequently commit part or a proportion of the monthly rental towards purchase of the house until fully paid.

The challenge is that most sellers are in a hurry to receive their full payment within a short period.

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