Property Financing: The Future of Real Estate Funding in Kenya
KEY POINTS
Real estate funding in Kenya continues to be hampered by various factors including non-performing loans, lack of enough information for the private sector, and intensive capital amounts for projects.
Real estate funding in Kenya remains a fickle topic. It continues to be hampered by various factors including non-performing loans, lack of enough information for the private sector, and intensive capital amounts for real estate projects.
According to Cytonn Investments, lack of information especially for the informal sector players to warrant proper risk assessment for loan provisions is another factor hindering the success of real estate funding in Kenya.
This is coupled with a lack of knowledge especially on structured products and Public-Private Partnerships (PPPs) modes of real estate funding.
The sector can, however, be salvaged through various modes of real estate funding such as:
- Government funding
The government is a significant financier of real estate projects ranging from buildings and infrastructure such as roads and railways. This type of funding can be done through Public-Private Partnerships. This warrants that developers eyeing funding through this means, the government must partner with the private sector through PPPs to deliver on major projects.
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Of course, these partnerships can be done through solicited PPPs where a private developer is able to initiate a proposal to undertake a project in response to a request from the government, and unsolicited PPPs where a private developer makes a proposal to undertake a project at their own initiative by submitting a proposal to the government.
Another way to guarantee government financing of the real estate sector is through equitable share funding. Here, the national government, through the national treasury, can disburse funds to the county governments to boost development including real estate development. The counties would then draft their budgets as per their own developmental agendas and fund their real estate projects, and,
Consequently, government funding can happen through County Governments’ own funding. County governments have their own sources of finances such as revenue collections, investments, and grants from which they undertake devolved projects such as roads and affordable housing.
- Debt
Debt financing involves getting capital from a financier and paying it back at a fixed rate regardless of whether the investments yield returns or not. Due to the capital-intensive nature of the real estate, debt financing is the typical way of real estate funding and can be done in two ways; private debt and senior debt.
In private debts, funding is advanced by individuals or organizations interested in returns and are neither institutionalized nor licensed as money lenders, most commonly the non-banking financing institutions. This method does not raise a lot of capital, and the terms of the agreement differ from one lender to the other.
On the other hand, in senior debt, the developer obtains funds from the bank or an institutionalized lender. The interest rates are usually determined by the market and regulated by the relevant authorities such as the Central Bank. Senior debt requires collaterals, and the debt must be paid first in case of liquidation.
- Equity
Equity refers to owners’ contributions towards the development of a real estate project. It includes;
- Traditional Equity Financing: This is where a developer, whether an individual or institution, purchases land and develops the desired real estate project, which they later sell or rent out,
- Joint venture Financing: This refers to an arrangement between two or more parties to undertake a project after which they share the returns as pre-agreed. Mostly, they couple real estate developer expertise and financing capability with the landowners’ contributions of land, and,
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