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Property owners fear children will waste fortune

REAL ESTATE
By Peter Muiruri | March 17th 2016
A section of the Indian Ocean Beach Resort in South Coast which is under the Jacaranda Hotels and owned by the former Minister Njenga Karume. Property owners fear their children will waste their  fortune when they inherit it. (PHOTO : GIDEON MAUNDU/STANDARD)

James Ogalo* considers himself a budding real estate entrepreneur. A decade ago, he purchased a piece of land in Roysambu, Nairobi and put up residential apartments with a Sacco loan.

Since he is about to retire from paid employment, he is hopeful that proceeds from the rental income will see his three children through school and beyond. His goal is to eventually let his older son run the property as he retires to his rural home in Migori.

But James, who follows developments in the real estate sector religiously, is disturbed by the findings of a new report that indicates young people are generally not so keen on perpetuating their family business.

The report, released last week by real estate management firm Knight Frank, said children are more likely to squander what their parents have worked hard for.

“My son is pursuing a degree in Information Technology and has never shown any interested in real estate. This is a concern to me since I cannot be there to look after this property forever. It is true I can sell it, but there is no guarantee that he will not misuse the cash...,” he says.

His worries are shared by some of the world's wealthiest individuals. In its 2016 World Wealth Report, Knight Frank stated that the ultra-high-net-worth (UHNWI) individuals – or those with net assets worth over $30 million (Sh3 billion) – are afraid that their children would not be encouraged to create their own wealth and are likely to fritter away the inheritance. Half of the UHNWI who responded to the Knight Frank poll said their children wouldn’t know how to handle such investments.

“Encouraging them to get involved in the family business from a younger age appears to be an obvious solution. However, as many as two thirds are generally not inspired to join the family business, preferring to pursue entrepreneurial ambitions or other professional careers,” said one respondent.

What will happen to their huge property empires is high on their priority list than even anti-money laundering initiatives, online security and privacy.

In Kenya, few property owners involve family members in their business, leaving them to their own devices later on in life when they (property owners) can no longer run the show with the same vigour of yesteryear.

This has been demonstrated through the numerous inheritance wrangles lodged in courts by heirs of the wealthy, especially in cases where written Wills are absent or wealth has not been distributed.

About two weeks ago, for instance, a curious succession case filed at the Milimani Law Courts by four daughters whose father died in 1978 made headlines in the local newspapers. The four want a piece of their father’s property worth Sh500 million that was vested in their mother and their only brother.

Apparently, the daughters did not raise any issue on the way the property was administered 38 years ago.

Properties of deceased business magnates such as Njenga Karume and Gerishon Kirima has been the subject of similar court battles.

Real estate is usually the top investment vehicle for many rich people the world over. In fact, residential property accounts for a quarter of the average UHNWI’s wealth that can be invested, while commercial property investments make up 11 per cent.

Majority of those polled said they got into real estate as an investment diversification channel as well as a safe haven for fund.

According to Anjali Harkoo, head of Wealth and Investment at CfC Stanbic Bank, lack of education in investment matters is usually at the core of such property disputes.

He says rich people ought to take their families to leadership academies where they can receive tailor-made solutions to these problems.

“We recognise that the top concern for the UHNWIs’ remains the need to ensure that their wealth successfully transfers to future generations. These academies should aim at equipping families with the necessary financial skills to ensure the successful management and transfer of wealth from one generation to another,” said Harkoo.

However, there are those who feel that lack of early exposure to the family business is a recipe to disintegration later on in life. Some property owners may fear that they will invite undue competition when their children co-run the business.

“In Kenya, we lack an apprentice programme where children get to know all about your business, say construction, from an early stage. They always seem to be outsiders and encouraged to pursue other interests.

“The polygamous nature of many families as well as mistresses create unusual situations not conducive for proper succession,” says George Awalla, Head of Programmes at VSO Jitolee, a regional volunteer organisation.

He says we ought to learn from the thriving Asian community in Kenya where young people are incorporated into the business from a tender age

Awalla, whose tour of duty took him to Nigeria, says some business people in that country will have brothers and cousins as apprentices, gaining valuable experience in the business.

“At the end of about seven or eight years, the owner would give them the amount of money they would have earned over that time.

They could thus learn the pain of acquiring the money and are, therefore, unlikely to misuse such cash,” he says.

Dr Ojiambo Oundo, principal consultant at Roack Consult, a Nairobi-based real estate firm, says we are raising a crop of young people who “just want to eat” without appreciating the value of hard work. But he acknowledges that not all can acquire the skills needed to manage a family business. The remedy? Have professionals in the industry run your business.

“Let us accept that not every person in the family can run a business. If you are a developer with a large development portfolio, put the property in the newly-introduced Real Estate Investment Trusts (REITs). This way, family members can continue being beneficiaries of the dividends just like other investors in the property,” says Dr Oundo.

It seems that without proper induction and business training, the wealthy will continue to lose billions of hard-earned cash in the hands of carefree heirs.

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