Limited funding? Don’t give up on your dream of owning some real estate just yet...
Unlike many other forms of investment, real estate investments offer a unique combination of high returns and safety of your investment.
Well-executed real estate investments have been known to create wealth, which, as property values appreciate over time, has endured for generations.
For this reason, many have at some point in their lives wished that they could own some form of real estate, whether that is land or a building, however, investing in real estate requires huge amounts of capital, and while there are several products that have been established to make it possible for people to invest in this sector, very few people in the country have been able to take up these products.
Take Real Estate Investment Trusts (REITs) for instance. REITs are regulated investment vehicles that enable investors to collectively pool their funds and invest in a trust with the intention of earning profits or income from real estate, as beneficiaries of the trust.
There are three types of REITs in Kenya: Development Real Estate Investment Trusts (D-REITs), Income Real Estate Investment Trusts (I-REITs) and Islamic Real Estate Investment Trusts.
The two most popular ones are the D-REITs, where investors pool their capital together and acquire real estate through development or construction and I-REITs, where investors pool their capital together, for purposes of acquiring long-term income generating real estate such as apartments, offices, warehouses and other forms of commercial real estate.
These investment vehicles provide several advantages. They include exemption from double taxation, transparency and liquidity as they are listed and traded publicly on securities markets. They also provide stable and predictable income streams, professionalism as they are managed by people who understand the industry well, and indeed low-risk as they are regulated by the Capital Markets Authority (CMA).
But while they have several advantages, some REITs issued in the country have high minimum investment requirements that lock many out. Based on the current regulations, for instance, the minimum investment amount for a D-REIT is set at Sh5 million. That means that the only group which can invest in this type of REIT is high-net-worth individuals or institutional investors.
"To the regulator’s credit, the high capital requirements are a reflection of the risk profile of D-REITs. Investments in real estate developments are common in Kenya, but they carry higher risks than investments in existing real estate assets that are already earning income, such as income REITS. Some of these risks include procurement and logistics, which became more pronounced during the Covid-19 pandemic and we are still feeling the lingering effects of that – it takes longer to get construction materials and equipment imported into Kenya or any other country for that matter," says Alex Njage, Head of Commercial Property at Bowmans Kenya.
Njage adds that the effects of the Russia-Ukraine war have also affected the world’s macroeconomic climate, and, generally, the prices of raw materials have gone up.
When the cost of production goes up, the ultimate price to the consumer also goes up, making it difficult to lock in off-takers or a market for the units developed by the D-REIT. For these reasons, D-REITs have remained quite unpopular in the country, despite the huge housing deficit in the country which presents an opportunity for people to earn well while addressing the housing deficit in the country.
Having said that, Njage points out that there is an opportunity for lower levels of capital to be deployed in the D-REITs space, but along with that, the regulator will want to ensure a D-REIT that has deployed lower levels of capital only undertakes a project that is significantly de-risked and of a scale that can be implemented in a simple manner, therefore lower capital must go with lower risk.
I-REITs, however, are more inclusive, and currently, there is no regulatory minimum amount of investment for investors investing in unrestricted I-REITs. However, there are also those restricted I-REITs whose minimum investment requirements are quite high for most Kenyans.
Leveraging on technology, some savvy entrepreneurs have set up digital marketplaces that connect would-be developers to investors.
Another downside of REITs is that administrative overheads tend to eat into a significant amount of the profits obtained and only a small remainder gets distributed to the shareholders. The regulator, Capital Markets Authority, has in various public forums indicated that it is currently in the process of addressing a number of issues that are preventing the full uptake of REITs in the country. Meanwhile, there are numerous other ways that anyone looking to venture into real estate can invest without having plenty of money at their disposal.
Home Equity Credit
If you already own a home, and would like to undertake a commercial real estate project but do not have the cash at hand, then you can leverage the equity of your primary home to seek funding from a financial institution and develop your new property. Alternatively, you could partner up with someone who has some idle property and would be willing to buy into your idea of securing credit based on this property, and then sharing the profits once the project is realised.
Seller financing
This is where buyers who are unable to secure a loan from financial institutions may opt to seek real estate financing from sellers such as developers, property owners or other institutional investors under terms agreed to by both parties.
These terms may include, a lower down payment requirement in exchange for a higher purchase price or a shorter term on payments. Instead of taking a lump sum cash payment, sellers in this arrangement will generally finance a portion of the purchase price, and then make payments over a period of time.
Acquisition through Lease
If, for instance, you live in an apartment or operate your business on a premise that you would eventually like to own, you could strike up a conversation with your landlord or the property owner to pay monthly or annual premiums in the form of higher rental payments that could be channelled towards purchasing the property. To avoid litigation, the excess fee could be held in trust in an escrow account, or by an agreed-upon third party such as a lawyer.
Private Money Lenders
Real estate financing is hugely fragmented, and many banks continue to struggle to provide good financial products for the sector. This has created room for private money lenders, who, compared to conventional lending institutions, are more open to backing up risky real estate projects. Such money lenders often have less strict lending requirements than traditional lending institutions. Instead of focusing on the borrower’s credit history or the amount of deposit needed, for instance, they are likely to focus more on the value of the property.
Before lending, these financiers will generally evaluate the project in question by comparing the cost of construction against the projected revenue or sales. The loans provided by this group of lenders do not necessarily need to go through corporate procedures, they tend to have fewer qualification requirements, and can, therefore, be secured fast. However, they charge significantly higher interest rates and have shorter repayment grace periods, therefore if you have to apply for them, then you must ensure that you have a solid game plan on how to pay back.
Equity Partnerships
Quite often, the loans provided by private lenders are much smaller than what traditional financial institutions offer. It therefore may not be enough to cover the entire project, and the borrower may need to cover costs such as application fees, approval fees, and any other costs associated with the purchase or development of a property.
Equity partnerships are a good option if you are looking for an investor that will stick with you for the long haul. These investors are also likely to fund larger projects and are therefore very keen on their due diligence. Some of the details that they will commonly look into include the location of the project to evaluate its attractiveness for rent if it is a commercial property, or the likelihood of a sale if it is residential.
There are, however, private lending institutions willing to fully finance projects without any deposit requirements, and may instead ask for such things as equity, especially if it is a commercial project undertaking. The amount of equity surrendered will depend on what both parties agree on.
Equity partnerships are a good option if you are looking for an investor that will stick with you for the long haul. These investors are also likely to fund larger projects and are therefore very keen on their due diligence.
Some of the details that they will commonly look into include the location of the project to evaluate its attractiveness for rent if it is a commercial property, or the likelihood of a sale if it is residential. They may also look at the borrower’s experience in the industry, as well as the qualification they hold, before lending.
House flipping
If you are able to access credit and would like to maximise your earnings, instead of constructing a building from scratch, you could consider purchasing a property that is being sold cheaply perhaps because it is not in a very good condition, renovate it, and then resell it at a higher price.
This mode of investing requires a high level of sophistication to work. Engaging a reputed valuer for instance could help you avoid paying more than a property is worth. You would also need to engage an experienced contractor to help you estimate how much repairs are going to cost.
After repairs, you would also need to engage a realtor who is good at marketing to help you offload the property in a timely manner. The longer you hold onto the property, the less money you would make because you would be falling behind on your loan obligations, the interest would be increasing, and this will just eat into your profits in the long run.
Rent out a room
If you have a house that is big enough for you and your family, and there is still some room left, whose occupation by a third party would not bother you, then you could consider renting it out. This is a good way to invest directly in real estate without plenty of start-up capital. Alternatively, if you wish to receive passive rental income but do not want the hustle of dealing with a long-term tenant, then you could consider converting the additional space into an Airbnb, so that people can rent on demand.
Online investment platforms
Leveraging on technology, some savvy entrepreneurs have set up digital marketplaces that connect would-be developers to investors.
These platforms pool funds from several investors together for the purpose of investing in a project listed on the very same platform. These range widely in terms of minimum investment amounts and provide investors access to diversified real estate options. They operate almost like REITs, but without the central regulator, which is the CMA, therefore you need to do your due diligence before investing.
Developers seeking financing for a project may list the proposed projects on the platform, and indicate the amount of money needed to carry out the project, as well as what the projected returns on investment are. When a property is sold, profits are then distributed amongst the developer, and the investors depending on how much each invested. BY DAILY NATION
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