The danger of mushrooming real estate companies

The rapid increase in the number of real estate companies, many unregulated, poses a huge risk to investors. [iStockphoto]

A trending video on social media a few weeks ago showed an elderly woman asking well-wishers to help her fend off relatives who were intent on grabbing her piece of land.

In her lamentations, she claimed that the ladies who were threatening her dismissed her registration of the title deed document as a mere piece of paper.

Two principles that govern the application of registration of title documents - the mirror and the curtain principles - trash any claims that the document could be just a piece of paper.

The mirror principle indicates that the document must reflect all the significant details that a purchaser must know before buying the land.

The curtain principle states that an interested person "does not have to investigate the underlying contract or former contracts to be sure about the transferable rights," according to the Law Insider dictionary, and therefore one should not have to "look behind the curtain" to get more clarifications.

But in the face of a daily emergence of rogue land sellers, fake registration of title documents suffuses, and the uncertainty around land transactions increases.

They hold the real estate sector by the scruff of its neck, operating with impunity and running the reputation of an industry otherwise governed by very solid regulations.

The mushrooming of small real estate companies selling "prime land" everywhere has caused worry for some of the most established real estate companies, alongside customers who, although happy they have options to run to and thus cheaper deals, are at the risk of falling into the hands of cons and fraudsters.

Sarah Wahogo, the chief executive of Safaricom Investment Company, is uneasy at the rapidly multiplying unregulated real estate companies, most of them already luring rather ignorant investors.

With beautifully done ads and well-crafted messages promoting the parcels of land they are selling, and with prices of property on a hectic race to the bottom, these companies easily trap buyers and soon sell out plots of land.

Rewarding investment

Investors are at their mercy and for those not aware of the extent of due diligence that needs to be put into this venture, money easily goes down the drain.

"Many people now think that land is the new black gold, the fastest rewarding investment. You only need to have land and subdivide it, and then sell it. For an investor, you are buying the land because you are certain it is going to appreciate, and there is no other way this could go," she says.

They do not always do their due diligence. They are in rushed deals that they want to soon close. They do not check the company's profile, including how and when it was formed.

They do not bother to check if the company has a physical office, which most con companies avoid having.

They do not check the directors of the company and their profiles. They do not check if the company has employees and if so, who they are and in what capacity they are hired by such companies.

"So then such investors may end up losing money, and then they become coy and may not want to invest in real estate. This affects the industry in a big way, including hurting reputable, honest real estate companies because customers withdraw," she says.

The investors opt for other investment opportunities, shunning real estate and reducing its share of contribution to the economy. Recovering is always an uphill task and would only happen if rogue companies were weeded out to return investor confidence. The reversal of such a situation could take a long time.

Ms Wahogo claims that SIC was the first company to sell land in Nanyuki in a recent wave of selling activity in the Mt Kenya town, near Ol Pejeta Conservancy, land which sold at a record speed.

The company was targeting a market for local tourists who, after Mombasa and Naivasha, next favoured Nanyuki as a holiday destination.

The town boasts Lolldaiga Hills, Ol Pejeta Conservancy, Ol Jogi Wildlife Conservancy, Lewa Wildlife Conservancy (in Isiolo) and Mt Kenya National Park. It is also currently the main airfield (airbase) of the Kenya Air Force.

The British Army Training Unit Kenya (BATUK) has a base at Nyati Barracks and conducts infantry exercises in Laikipia County and on Kenyan Ministry of Defense land at Archer's Post, in Samburu County.

"Many other companies started selling in the area after we had gotten in, taking advantage of the market opportunities we had opened up and the demand that was now high after our initial, successful, sale," she says.

The same happened with the company's forays into Kisumu after which numerous land-selling companies pitched camp in the lakeside city to sell land.

Once a big, reliable real estate company makes inroads in an area, many smaller sellers sprout and try to continue tapping into enthusiastic investors budding in an area, she says.

The creation of county government in the 2010 Constitution has also decentralised economic activity and development, creating opportunities for investors to make their way into some of the hitherto quiet areas and launch business activities.

This has also increased the demand for land. County governments have ensured that infrastructure and other amenities can be accessed easily in the towns in the counties. Devolution, Ms Wahogo says, creates diversification and development, and boosts the value of the land.

Infrastructural development

Samuel Macharia, a property consultant with Miliki Space Properties, a real estate company in Nairobi which recently sold out 80 eighth-acre (50 feet by 100 feet) plots in Nanyuki in three weeks, says that the company considered Nanyuki as a viable place for business because the county government of Laikipia was keen on investing in infrastructural development.

"It is always important to invest where the government is investing," Macharia told Real Estate. "The government has pumped Sh1.16 billion into Laikipia County for infrastructural development. There will be so many developments coming up - water, roads, electricity - all the facilities that these developers need."

It also helps that when new infrastructural projects are mooted, speculation leads to a hike in land too often unimaginable levels, and this is always a promising business opportunity for potential land sellers.

Some of the people rushing to buy do so intending to sell soon after at a profit, and they barely do due diligence.

Ms Wahogo notes that the assumption that land will always appreciate is wrong and misleading.

It has always led to the prices of land rising, and many get into the business hoping to make a killing, often without properly understanding the market.

"It always depends on the location of the piece of land. It has to be served well by infrastructure and other necessary amenities if it has to appreciate," she says. "Otherwise you could find a parcel appreciating at a negative rate."

The rapid increase in the number of real estate companies, many unregulated, poses a huge risk to investors.

While many of the companies could be genuinely in business, cases abound of customers being perennially shortchanged, their naivety and desire for quick returns taken advantage of time and again.

"These real estate companies are unregulated. That can be a bad gamble; inappropriate transactions by some of them could spoil the fortunes of the genuine ones. The Ministry of Land and Housing should register and regulate them so that they can go through rigorous onboarding so we have no fakes in the market," she says.