Why Kenya's developers struggle to recoup capital

Director of Zima Homes Etta Madete has a guiding mantra on real estate development: When you build, the buyers will come, but they will come slowly.

It is the belief that fuels her patience in the business.

But with the advent of new construction technologies such as formwork, which quickens the speed at which projects are completed while also cutting costs, the slowness of buyers in the Kenyan market is a problem for developers.

It is the reason why they are pushing for institutional buyers, the deep-pocketed investors who can buy units in bulk.

The slower the buyers come, the slower you get to recoup your capital and invest in the next new project.

Additionally, some buyers are still sceptical about how ‘strong’ this new technology is.

Superior Homes’ Chief Executive Shiv Aroa has experienced such, citing times when buyers would walk around the unit, hitting the walls to determine how strong it is.

It is a cultural challenge that he says will soon be enlightened as education progresses.

This is despite technologies such as formwork being neater and quicker, reducing the need for plaster, and one can even tile right away.

“Your costs are known from the start,” he says. He insists that anything that helps the industry become efficient and further helps the developer manage their costs better, as well as ensures a speedy delivery of projects, is welcomed.

Cultural perception shift

“There is a conception that ‘it is not stone, or concrete’. The truth of the matter is, it is probably as durable, if not more durable than what we are used to before,” he says.

But beyond the cultural perceptions, return on investment is a key issue for developers. It is a concern that the Chief Executive of Mi Vida Homes, Sam Kariuki, has faced in his developments.

He raises a critical question: If you complete your project faster, does it translate to clients also paying at the same pace?

In his projects, the typical payment period is 24 months. Yet, he notes, through experience, the 24-month instalment period is never enough for some buyers.

By the time units are being handed over after 24 months, there is a portion of customers who would still need 12 to 24 months to pay.

“I have always wondered, if you complete your building 12 months earlier, does it necessarily translate to faster collections? That mismatch, I suppose, is where we have been concerned about adoption of formwork specifically,” he said during a panel at the recently held International Housing Solutions (HIS) Affordable Housing Conference.

 Risk Lead SIC Investment Co-operative John Paul Kimanzi, however, notes that there are positives when such new technologies are adopted.

He says investing in aluminium formwork modular technology has demonstrated high returns.

“The technology not only reduces project timelines by up to 33 per cent, but also generates significant cost savings, estimated at 20 per cent, while ensuring superior structural durability and reduced maintenance expenses over time,” he says in an opinion shared with Real Estate.

His thoughts marry with Arora’s, who argues that the aluminium formwork modular technology designs ensure superior finishes, minimise post-construction costs, and facilitate easy integration of electrical and plumbing systems through hollow structures.

He points out how this technology provides a width of 150mm (millimetre) for exterior walls and 100mm for interior walls, compared to 200mm for machine-cut stone walls.

Likewise, the technology reduces the size of beams from 450mm by 200mm in conventional machine-cut stones to 200mm by 200mm.

Technology vs buyers

“This reduction in size leads to a decrease in materials requirement,” he says.

Kimanzi agrees that adopting formwork technology in the country has its culturally related challenges that would require training and stakeholder coordination.

Formwork, as described by Max Group, an Indian based firm known for construction technologies, is the use of pre-engineered panels to create moulds or forms for concrete structures.

These panels are made of timber, steel or plastic with specified measurements related to the project.

These panels are used in erecting walls, columns, beams, floors and slabs.

They are key in aiding developers to adhere to the specified drawings of the architect, especially for high-rise buildings, where it is tedious to ensure the columns and walls are straight.

Unity Homes Executive Director Jason Horsey, however, holds a different opinion on this particular technology versus slow-paying buyers debate; even as he maintains that he is an advocate.

“Technology is not a silver bullet,” Jason says. “It is not going to solve the affordable housing problem. People always focus on the wrong thing when looking at technology.” 

The devil’s detail, he says, is in finishing. It consumes 50-60 per cent of the build cost.

“This is where the cost is, and if you speak to any developer, finishing is the really difficult part,” he says.

Cost of housing

Horsey says if the focus is on the mismatch between faster paying clients and technology adoption in the construction of what is just a shell of the building, then the point has been missed.

“I think that is not going to bring down the cost of housing significantly. We need more innovations in finishing the construction,” he says.

Until then, the solution now lies in how developers can build at the same pace buyers are paying, especially for off-plan projects, while still utilising this technology, as Arora opines.

“It comes back to how the contract is structured: What can the people afford? How do they plan their payments? Are you building at the pace people are paying, especially in today’s economic climate? What are the mismatches that all developers are currently facing?” he says.