The real estate industry in 10 years through the eyes of a developer

Peter Muraya, the CEO of Suraya Property Group. (Photo: Jacob Otieno/Standard)

When Suraya Property Group was formed 10 years ago, the real estate market in the United States was just hitting its peak, only to bottom out a year later. It was a collapse that spread shockwaves across the world and left European markets also teetering on the edge. Back home, the situation could never have been better, and the going has been good for the last decade.

A lot has happened in that decade and one of the few people who have been in the midst of it all is Peter Muraya, the CEO of Suraya Property Group. In that time, real estate became the investment option of choice.

A lot still remains to be done, though. "We are still under-producing in terms of numbers. The government talks of a total demand of about 200,000 units annually, with only 50,000 being produced a year. In reality, the 50,000 houses include houses that you're building yourself slowly," says Muraya. But what about the growing number of developers? "You would be surprised, I don't think developers are doing more than 10,000 units per year. Very few developers can build anything close to 500 units per year. It is not easy," he says.

A lot has been said about the possibility of adopting different approaches to meet the housing shortfall, but the numbers needed to make that a reality are daunting. "How do you increase that production so as to produce thousands of houses a year?" asks Muraya.

"Neighbouring countries like Ethiopia are doing projects of even 25,000 houses. Nobody here is doing anything close to that. Not even the National Housing Corporation, which does an average of 200 or 300 units a year," he says.

Muraya's firm is one of the few that can boast of having housing projects across all the market segments – from the high-end to the lower-middle-income groups. The firm started with Rosslyn Gardens near Gigiri, Nairobi, in its formative years for the high-end market segment, then came to the upper-middle-income segment with Fourways Junction on Kiambu Road and then Encasa (off Mombasa Road) for the lower-middle-income segment.

But the support for big developments was not always enthusiastic. When Muraya approached other stakeholders with the plan for Fourways Junction, he was dismissed out of hand. "Everyone said it was impossible. When we started talking in 2009 of building 1,000 houses, everyone thought we were being crazy. I remember going to a few banks and they told me 'I know you've done 40, well done. Now let's move to 150'. When I refused, they declined to support me," says Muraya.

Working with the lower-income segments of the market also proved challenging. Muraya says one of the biggest problems with these segments is that of quality. He, however, says the firm decided to use the same products they were using in the Fourways Junction development at Encasa to maintain quality.

When they came up with Encasa, it was a conscious attempt to cater for the sub Sh3 million market. But another challenge cropped up: Transportation. "The way Nairobi has been designed, everything is at the centre, so if you are far, the person you expect to pay that Sh2 million likes the house and location and can afford the price but when he looks at bus fare and how long it would take him to get to the office, the advantage he would have is lost in the transport cost," he says.

The end result is that even when developers build away from major urban centres, they end up catering for the middle-class because they are the ones who can afford the house and the transport: "When we came up with Links, we were trying to address that problem - buy expensive land and put up a high-rise project. That has done well, we've got Lynx at Mbagathi, Ngong Road, West, Royal and Lynx Muchai ongoing. This is about 1,000 houses on average, but the cost of land pushes that house to almost double the price. When a two-bedroom house in Encase is Sh3 million, at Royal it may be Sh6 million. It is all because of land. When the land in Encasa is about Sh10 million per acre, in Mbagathi it is may be Sh80 million to Sh100 million. On Ngong Road, it is about Sh180 million."

But that does not still solve the problem.

"When you come closer to town, everyone who can afford a house has a car, so he has to have parking. When you do that in basement and upper floors, the cost of parking again is over Sh1 million plus," he says.

But what has been his experience being across the different segments of the market? "It is about timing, because each of them has done well...," he says.

Post-poll chaos and land prices

The skyrocketing cost of land has been blamed for the high construction costs. Muraya attributes the "crazy" land prices to the 2007/2008 post-election chaos. "If you look back between 2002 and 2007, land prices were not so distorted. In 2003, an acre in Kilimani was Sh23 million; it was Sh43 million in 2007; Sh60 million in 2008; and Sh200 million today," he says.

The reason for this, he says, is that in 2008, many people from other towns relocated to Nairobi and its neighbourhoods. He says the arrival of the Chinese also distorted the market: "When they came in about five years ago, they focused on Kilimani, distorting prices and this affected land prices for neighbouring areas. This extended to other suburbs."

He also blames high land prices on the entry of institutional investors like banks into the real estate business. This, he says, has led to speculation.

Looking ahead

But Muraya is optimistic that the industry will continue to grow stronger in the next few years. "There is going to be a lot of shakeup and we are going to be left only with serious developers - people whose core business is development, not people who are coming in to make quick money and get out," he says.

On recent reports that rents and prices are starting to come down in the top-end of the market, he notes: "There is correction that is happening, which is a good thing. The correction is more from speculator-developers who are going for a quick deal and messing up the whole industry."

He adds: "There is a misconception that it is an easy industry. It is a tough business and for you to make profit, you must produce cheaply and on time."

He says a lot more needs to be done to get new building technologies accepted. "Yes, they are quick, but most people are still used to brick-and-mortar, thinking it is more secure," he says.

The other problem is registration. Muraya says that the registration process might have even got worse for the last 10 years. "The government is doing well on the digitisation front but the first digitisation effort was quite misleading. What they did was the Nairobi registry, which accounts for only 15 per cent. It is now they are doing the core registry. They should do it properly so that you don't have to go there and spend two days to get a search," he says.

He is, however, full of praise for the progress made in getting approvals for developments. "The process is a bit easier, having been digitised; you can track where your application is," he says.

Biggest surprise

In all this time, Muraya's biggest surprise came when he decided to do the lower-end Encasa project. "When we did Encasa, I thought 70 per cent would be mortgage buyers. The opposite happened. Most were cash buyers. When I sought to find out why, I realised they had taken loans from Saccos to buy the houses," he says.

On what needs to happen, he says: "Build houses cheaper and faster, register them faster and give people affordable mortgages."