Thursday, December 6, 2012

The crazy world of speculators

Guest post by Samuel G. Njenga

Sometimes back in November last year I received a call from a friend called Raphael. I have in the past sold him several plots in the outskirts of Nairobi. He wanted to see me and I quickly checked my diary and confirmed availability the day after in the afternoon. When we met he was very excited and I really wanted to hear what he was up to. He produced a check book and wrote me the final check for the purchase of the last of the many plots he bought from me. I gave him a heads up on what I had then. He is the type of guy who really trusts me and sometimes he’ll just pay me deposit for a plot before even doing his due diligence. This I have seen in several clients whom we've dealt with in the past whereupon the trust is built overtime.

Then he told me of some land he had bought somewhere between Namanga and Kajiado. He loves adventure and in his many drives to Namanga he was shown several tracks of land by some broker I had referred him to. It was an interesting case of a Masaai who wanted to dispose his land due to some financial crisis and the offer was too good to resist. So he ended up buying 120 acres each at 10k. 6 months later the same broker he had dealt with when acquiring the land called him and informed him that there are rumours that a CEO of a blue chip company (name with-held) is planning to do a golf course on the land bordering Raphael’s land. The said rumours meant that the prices had immediately shot up to 50k per acre and the broker already had a serious client interested in Raphael’s land. The reason why Raphael was calling me was to hear my opinion on the matter. A quick calculation meant that his land was now worth 6M from 1.2M. Welcome to the crazy world of speculation in land.

If you were in my shoes, what would you have advised Raphael?

In Kenya, we got very interesting stories around. I once went deep inside Juja farm and the broker who was showing me the land was really insisting that the bypass will pass next to that land he was showing me. Well, if you are not careful, this is a ploy used to get you into the deal. We all agree that ignorance is very expensive. I am usually very unforgiving when am given wrong information. So I called an Engineer who works at KURA just to confirm where that Greater Eastern Bypass passes through. Of course I confronted the broker and informed him that he was distorting the truth.

Back to the Raphael’s story. Here is a guy who buys land and before he even knows what to do with it, another dude wants to pay for it at 5 times the purchase price all within 6 months. Who is clever here? Raphael never added any value to the land, the rumours did. The rumours keep persisting and Raphael keeps holding his land awaiting it to reach 100k per acre when another not so clever fellow will show up and give him that ridiculous offer.

"Speculation in land is basically buying on the basis of the future potential selling price rather than on the basis of its actual value. This results in rise of the prices over and above the underlying value of the land"

In most cases speculators take above average financial risk in anticipation of higher returns over short periods of time, resulting in upward price spirals than actual values. This normally happens when panic buying is witnessed in areas where infrastructure is being developed or expected to be developed.

Realtor's have christened the concept and called it land banking. Kitengela, Mavoko and Thika Road areas are examples of places where this concept has been applied.

Notice how this affects the economy. Whereas the prices keep getting higher by the day, disposable income cannot keep pace with the rise in property prices. The properties get less affordable with time and soon majority of the middle class will not afford these properties any more  You can imagine looking for a house worth 5M near Nairobi and its outskirts. After all for most guys, that is the mortgage they’d qualify for. Developers are seriously struggling and the biggest issue is rise of cost of land.

Do we try capital gain tax? Ideally, this would be charged on profit realized on sale of land purchased at a lower price and appreciated in value without the owner's participation in creating added value. In Rwanda they do this (30% tax on capital gain).

What about taxing vacant excessively large parcels not fully utilized?

Another interesting outlook is the fact that speculation will most likely withdraw capital from productive economic activities and transfers to unproductive assets lying idle somewhere. Is this good for the economy?

A valuer’s nightmare is when you value a property like that one Raphael bought and before the transaction is complete, the value changes drastically, you’d think the valuation is a joke. Over to the policy makers. In the meantime who will blame you if made hay while the sun shines? Seriously, I got no apologies for being a speculator. What about you?

Next we will look at the murky world of land buying companies which issue you with certificates, ballots etc. as opposed to titles. What is the implication?

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