Most real estate developers have turned to off-plan financing to provide housing in the country. Even though these off-plan arrangements are not new in the country, it has never been as widely adopted as it currently is. In the most recent Kenya Homes Expo for instance, a quick survey of the properties on show would reveal the fact that more than 70% had off-plan options.
In a sense the off-plan model has provided the best of both worlds for both developers and buyers, ensuring that developers are less pressed with financing requirements and reducing the actual cost to buyers as off-plan buyers are often given a discount anywhere between 5%-20% on the total cost.
This makes sense as ordinarily, developers taking a loan would be required to service the loan in addition to the financing fees to be paid. It is an innovative way for developers given the data which shows that currently only 10 per cent of developers/investors in Kenya are able to access debt financing.
That, together with the stringent credit terms currently prevailing in the country’s financial system and the big bad name some developers have acquired in recent months among banking folks after topping the list for bad loans in most banks, is one of the reasons developers have sought an alternative route.
It’s been a gradual yet quick shift from what developers were earlier accustomed to, constructing after securing a large chunk or the total amount required for financing a development. The off-plan model is more market focused, based on securing and committing a large chunk of the buyers in advance. Although it has worked well most of the time, for the ordinary home buyer, it’s a risky trad-eoff which has seen some buyers lose their savings at the hands of rogue developers are often the makers of a well-arranged money heist.
Even in commercial property, the era of build It and they will come is a historic notion. Speaking during the recent property investment summit in Nairobi, Fusion Capital CEO Samuel Kamau said, “The market has shifted towards pre-lets and pre-leasing based on good track record.”
Off-plans work like partnerships in principle and as such it is also a game of integrity, which means building relationships is a core part of the process. Developers who have been relied on by buyers to deliver on off-plan projects within budget and on time are most likely to make the cut when pitching for investor’s money a second or third time.
The arrangement has aided many in their home ownership goals in a country where long-term mortgages (25+ years), are only now being conceptualized but at a higher risk to investors who inevitably have to get their skin in the game. Even in cases where developers manage to secure debt funding, off-plan options are still a great advantage with regard cash flow management.