Month: July 2013

Best way to invest in Kenya’s real estate with kes 1m and below.

For a budget of kes 1m and below,the real estate investment possible is most likely located 40km and above from Nairobi CBD and over 1km from main tarmac road. Such areas include Kantafu, Isinya, Kajiado and deep within Juja.

5 to 10 years before development.

These areas will take over 5 to 10 years for development to encroach such that the areas can return good rents for construction.

Land price as advertised for sale in Kantafu, Isinya.

http://south-b.olx.co.ke/plots-for-sale-iid-528383204

A budget of kes 1m will get you a 1/4 to a 1/2 acre plot in Isinya depending on how close the plot is to the tarmac.

A budget of kes 1m will also get you a 1/4 acre or 1/2 acre plot depending on how close the land is to the main tarmac road.

http://pipeline.olx.co.ke/50-x-100-plots-for-sale-in-kantafu-near-koma-rock-hill-iid-519192958

50 km from Nairobi CBD.

Both Kantafu and Isinya are 50km from Nairobi CBD.
This means that it’s not possible to construct rental properties here.
As we speak, there are no rental properties in these areas.

No return on kes 1m investment.

This means that the kes 1m used to buy the land will lie idle for the next 5 to 10 years as we wait for these areas to grow such that its viable to develop rentals.

For a prudent investor, its wiser to invest in real estate where returns are possible within 6 months of your investment.

Location, Location, Location.

The cliché saying goes, there are 3 important factors to consider when investing in real estate.
1.location
2.location
3.location.

Kes 1m invested in real estate near Nairobi CBD.

Land near Nairobi CBD, where its possible to get good rental income, is quite expensive. These areas include Kitengela,Rongai, Syokimau, Kahawa and Kiambu.

A good plot will cost kes 2m. This is over the kes 1m budget.

Solution on how best to invest.

To circumvent this problem, a4architect.com has come up with a unique method whereby several like-minded Kenyans can meet and discuss on how to pool resources and buy the expensive plot and share the rental income.
See here for details.
a4architect.com/discuss/

Since location is the most important factor in real estate, several people can share the plot both horizontally and vertically. The plot has another 5 to 6 multiplicity if constructed vertically.

New topics by Investors on the forum.

A minimum of 12 people can meet in the forum , set up a discussion topic such as this
http://a4architect.com/discus/topic/joint-investment/

They can then decide which plot to buy and share.

Immediate Returns.

With this option, the kes 1m budget will immediately begin to return its investment at an average rate of 10% per annum. In 10 years, all the investment money will have been recouped.

On the contrary, the person who invested in land in Isinya and Kantafu will still not have began returning their investment after the 10 years.

Francis Gichuhi Kamau, Architect.
0721410684

Best way to invest in Kenya’s real estate with kes 1m and below.

For a budget of kes 1m and below,the real estate investment possible is most likely located 40km and above from Nairobi CBD and over 1km from main tarmac road. Such areas include Kantafu, Isinya, Kajiado and deep within Juja.

5 to 10 years before development.

These areas will take over 5 to 10 years for development to encroach such that the areas can return good rents for construction.

Land price as advertised for sale in Kantafu, Isinya.

http://south-b.olx.co.ke/plots-for-sale-iid-528383204

A budget of kes 1m will get you a 1/4 to a 1/2 acre plot in Isinya depending on how close the plot is to the tarmac.

A budget of kes 1m will also get you a 1/4 acre or 1/2 acre plot depending on how close the land is to the main tarmac road.

http://pipeline.olx.co.ke/50-x-100-plots-for-sale-in-kantafu-near-koma-rock-hill-iid-519192958

50 km from Nairobi CBD.

Both Kantafu and Isinya are 50km from Nairobi CBD.
This means that it’s not possible to construct rental properties here.
As we speak, there are no rental properties in these areas.

No return on kes 1m investment.

This means that the kes 1m used to buy the land will lie idle for the next 5 to 10 years as we wait for these areas to grow such that its viable to develop rentals.

For a prudent investor, its wiser to invest in real estate where returns are possible within 6 months of your investment.

Location, Location, Location.

The cliché saying goes, there are 3 important factors to consider when investing in real estate.
1.location
2.location
3.location.

Kes 1m invested in real estate near Nairobi CBD.

Land near Nairobi CBD, where its possible to get good rental income, is quite expensive. These areas include Kitengela,Rongai, Syokimau, Kahawa and Kiambu.

A good plot will cost kes 2m. This is over the kes 1m budget.

Solution on how best to invest.

To circumvent this problem, a4architect.com has come up with a unique method whereby several like-minded Kenyans can meet and discuss on how to pool resources and buy the expensive plot and share the rental income.
See here for details.
a4architect.com/discuss/

Since location is the most important factor in real estate, several people can share the plot both horizontally and vertically. The plot has another 5 to 6 multiplicity if constructed vertically.

New topics by Investors on the forum.

A minimum of 12 people can meet in the forum , set up a discussion topic such as this
http://a4architect.com/discus/topic/joint-investment/

They can then decide which plot to buy and share.

Immediate Returns.

With this option, the kes 1m budget will immediately begin to return its investment at an average rate of 10% per annum. In 10 years, all the investment money will have been recouped.

On the contrary, the person who invested in land in Isinya and Kantafu will still not have began returning their investment after the 10 years.

Francis Gichuhi Kamau, Architect.
0721410684

Build , Buy or Rent. How to decide for Residential projects in Nairobi.

To build, buy or rent a house in Nairobi requires one to make a few wise calculations .

Example. Syokimau.

Let’s take an example of A house in Syokimau, Kitengela, Rongai or Kiambu road .
Let’s assume a budget of kes 7m available in cash or mortgage from a bank.

Buy or rent.

Worldwide, the buy to rent ratio is calculated by dividing the buying price to the yearly rent.

http://www.zillowblog.com/research/2010/09/21/a-better-price-rent-ratio/

Ratio of 1 to 15 favors the buyer. Ratio of 15 and above favors the renter.
In layman’s language, this simply means that if it takes over 15 years for return on investment through rent, then its better to rent and vice versa.

BuruBuru.

A 3 bedroomed house costs 7.5m.
The same rents for kes 30k per month. This represents a buy to rent ratio of 20.
This means its better to rent than to buy for this area.

7m house in Syokimau.

Current 7m house sale adverts in Syokimau.

http://kimathi.olx.co.ke/mombasa-road-tofina-muthama-apartments-iid-525787830

http://south-c.olx.co.ke/3br-brand-new-apartments-near-syokimau-commuter-train-station-iid-513769754

http://south-c.olx.co.ke/3br-exquisite-apartments-overlooking-nairobi-national-park-iid-513767982

http://south-c.olx.co.ke/near-nation-printers-3br-upcoming-apartments-on-nbi-msa-rd-iid-510753659

From the above adverts, kes 7m will get you a 3 bedroomed apartment in Syokimau with a plinth area of between 110 to 150m2.

Current kes 40k house rent adverts in Syokimau.

http://south-c.olx.co.ke/3br-brand-new-apartments-iid-513773037

http://westlands.olx.co.ke/3b-room-aprtment-mombasa-rd-iid-505244526

Lets assume a rent of kes 40k per month.

The buy to rent ratio will be 14.5.

This is less than 15 therefore it’s a good buy. Its more prudent to buy than to rent.

Better to Buy than Rent in Syokimau.

With this, we can safely assume that with kes 7m budget for Syokimau, Rongai and Kitengela areas, its better to buy than rent.

Build vs. buy.

Lets now compare building versus buying readymade houses worth kes 7m.

In Syokimau, the 7m house is an apartment of an average of 130m2 in plinth area.

Cost of construction.

Let’s assume middle cost finishes at kes 30,000 per m2.
The Cost of building a similar sized 130m2 house is kes 30,000 x 130m2 =kes 3.9m.
The cost of a 1/8th acre of land near the road in Syokimau is kes 2m.
See land prices here

This brings the total to kes 3.9m + kes 2m =kes 5.9m.

This is is a 1.1m savings realized, a whopping 19% of savings.

This 1.1m can go into developing rental units within the same 1.8th acre.

Capital Gains.

By buying the 1/8th acre, you stand to gain from the appreciating land and property values. Currently, land appreciates at between 20 to 30% annually in Syokimau.

The apartment buyer does not have this luxury since he doesn’t own the title to the land.

Room for future expansion.

The plot buyer will have more room to develop rental units or just expand their own residence.
The apartment buyer doesn’t have this luxury since under sectional title, you can’t ammend or increase your plinth area.

Conclusion.

Its more prudent to build your own house around Nairobi for a budget of kes 7m.

www.a4architect.com can offer advisory that will enable you take the baby steps into sourcing the land, getting architectural designs and hiring a contractor to build your house.

Francis Gichuhi Kamau, Architect.
0721410684

Kenya taxation. Learning from Denmark.

According to Wikipedia, Kenya is among few Countries in the world in current discussions to introduce Land Value taxation.

http://en.wikipedia.org/wiki/Land_value_tax#Kenya

The Uhuru Kenyatta Government, if it successfully introduces this taxation system, will be acknowledged for generations to come for helping resolve Kenyan poverty.

Denmark tax regime.

In Denmark, in 1957, a small Georgist party that advocated for Land Value taxation won a few seats and power sharing within the ruling coalition.
One year later, inflation fell from 5 to 1% as investors stopped hoarding on land.
Bank interest rates fell by 1.5%.
Unemployment was drastically reduced.

Denmark vs Kenya economy comparison.

Denmark has a population of 5.6 m compared to Kenya’s 40m.
Only 13.6% of Danes live below poverty line compared to Kenya’s 50%.
Denmark’s GDP is 10 times larger than Kenya’s, at 336 B USD vs Kenya’s 33 B USD.

Denmark’s economy mostly relies on its human resource to enable this huge GDP.It has very few mineral resources.

Similarly, Kenya’s economy also relies on its human resource to enable its GDP and also has few natural resources.

Human resource.

In Denmark, use of Land Value taxation has helped its human resource to access the most important factor of production, Land.
In Kenya, poor land laws have locked out this all important factor of production, Land, from the human resource.
By the Uhuru Government supporting and implementing such a taxation system as seen in Denmark, Kenya will easily move forward in terms of productivity and within a few years, get to the level of Denmark.

IQ.

Scientists have proven that all humanity generally have the same IQ, therefore, whatever the Danes can achieve using their human resources, Kenya can also,. All Kenya needs to do is learn from the best, tweak a little bit here and there and all will be well. There is no need to reinvent the wheel all over again.

Francis Gichuhi Kamau, Architect.
0721410684

0.25 Acre plot. Invest and earn kes 985,000 per month.

Return your investment in 6.3 years.

Plots within 500m or less form tarmac near large towns such as Rongai, Kitengela, Juja, Ruiru, Kiambu , Ruai can unlock this return.

The total construction cost is estimated at kes 54m.

Land 0.25 acres has been estimated at kes 7.5m but can vary from location to location.

Francis Gichuhi Kamau, Architect.

0721410684

Analysis of how to reduce cost of Housing in Kenya.Kitengela vs South Africa.

Kenyan cost of housing is high compared to other parts of the world such as South Africa and USA.

The average cost of a 3 bedroomed 100m2 house in a middle class area such as Kitengela is kes 5.9m.

This is a house situated between 1 to 2 km from main tarmac road.

See example here

http://langata.olx.co.ke/newly-build-3-bedroom-house-for-sale-in-kitengela-iid-527243632

http://langata.olx.co.ke/house-for-sale-in-kitengela-muigai-area-iid-526041738

http://south-b.olx.co.ke/3-bedroom-bungalow-in-kitengela-near-new-valley-estate-iid-525923651

http://south-b.olx.co.ke/3-bedroom-bungalow-for-sale-in-kitengela-new-valley-area-iid-525021666

http://fedha.olx.co.ke/kitengela-3-bedroom-for-sale-iid-523676948

A similar sized house in South Africa costing kes 6m will have features as below

http://johannesburg.olx.co.za/brand-new-houses-for-sale-100-bonds-available-iid-527425896

http://pretoria.olx.co.za/affordable-houses-iid-527392047

http://johannesburg.olx.co.za/family-home-iid-527317315

http://robertson.olx.co.za/up-on-a-hillside-iid-527303698

The South African property will have more superior infrastructure compared to the Kitengela one. There will be tarmac roads, secure neighborhood, proximity to shopping centres,schools and hospitals compared to Kitengela houses.

Quality of construction.

By comparing pictures of available property for sale in South Africa and Kitengela above, it’s clear that the quality of workmanship in a similar priced South African house is higher.

This is because in South Africa, developers tend to ensure that all relevant consultants in the construction industry, i.e., architect, quantity surveyor, engineer, interior designer etc are used during construction.

In Kenya/Kitengela, the average developer will most likely only use these professionals during design to ensure the local authority approves the building. During construction, the developer will think that by not using the professionals for supervision will save money.

Eventually, the developer ends up with an overpriced house with poor workmanship.

The South African developer who ensures architects and engineers are engaged throughout the construction period ends up with cheaper housing at a more superior workmanship hence more profit.

Unique Designs.

By ensuring architects and engineers are engaged throughout the construction period, South African developers will have the benefit of better aesthetics since each house tends to be unique compared to the Kenyan middle class situation whereby all houses in Kitengela and Rongai for sale look the same.

This unique design ensures that the South African developers have better , faster and more sales hence more profit compared to the Kenyan developers with monotonous repetitive designs.

Economies of Scale.

The use of architects and engineers throughout the construction by South African developers has ensured that research gets within the countrywide construction industry.

This research has in turn enabled more specified contractors.

For example, in South Africa, all doors and windows are specified and have a unique name. Eg a 2m by 1m window will be called ND2010 for example. This means that all architects during design can specify the exact window throughout the republic. The window manufactures then produce these which can be found in every hardware shop and supermarket. This mass production in turn benefits the developers since there is less wastage and more efficient production. In Kenya, each architect specifies any window dimension which will be specifically fabricated. There are no specific standards. This results in wastage during construction and lack of benefits from economies of scale. This cost is then pushed to the consumer hence increase in cost of housing.

See roof truss contractors here
http://www.rooftrussproducts.co.za/

Cost of Finance.

The Kenyan developers have to borrow at the average market rate of 18% from local banks.

The South African benchmark interest rate is at 5%.

http://www.tradingeconomics.com/kenya/interest-rate

Kenya benchmark interest rate is at 8.5%

http://www.tradingeconomics.com/kenya/interest-rate

Standard Bank South Africa is currently giving home loans at 8.5%.

http://south-africa.deposits.org/home-loan-rates.html

Housing Finance Bank Kenya is giving the same loan at 16%, down from 18%.

http://www.housing.co.ke/

If the gurus at Ministry of Finance, Central Bank and corporate banks can sit down and come up with solutions to reduce cost of borrowing, this can go a long way in reducing construction cost.

Currently, cost of borrowing takes 10% of construction cost as shown below.

Cost of land.

In South Africa , capital gains tax has ensured that people do not land bank. Its not possible to buy land then let it sit vacant till when you decide to develop or resell at a profit. If for example you buy land then resell after a few years for a profit, the South African government will heavily tax you on the profit. This has discouraged hoarding of land , making land price stabilize . There is plenty of available land to develop compared to Kenya.

In Kitengela, for example, if you check on the Google map below

http://goo.gl/maps/ZTpGn

you will notice that there is so much idle land very close to the road.

This land has gained value due to the whole country’s tax contribution towards constructing the tarmac road.

The owners by holding on the land without developing it, are making other Kenyans in need of housing to go further off the tarmac to construct their houses. This creates an artificial demand for land, leading to over 25% annual land value increase.

Once the owner sells after several years, they keep all the profits without sharing with the tax payer who helped /contributed to the tarmac road construction. In South Africa, capital gains tax discourages this.

From the table above, land costs 25% of the total house project costs. If this can be stopped from increasing , housing costs will be lower.

Conclusion.

For Kenya to have reduced housing costs, bank interest rates, land price and construction costs need to come lower.

Bleow is a table showing reduced construction costs, interest rates and land cost.

The kes 6m houses will cost kes 4m with a 25% profit margin for the developers. This means developers will still make as much money but with more sales due to increased potential house buyers due to lower cost.

With the current situation with expensive land, high interest and high cost of construction, developer are making kes 800,000 per unit.

With lower land cost, lower interest rates and lower construction costs eg in South Africa, developers are still making the same amount of money as profit.

Francis Gichuhi Kamau, Architrect.

info@a4architect.com

0721410684