Guest post by Samuel G. Njenga
The higher the
leverage, the higher the risk but as we saw last time the higher the profit
margin.
We all agree that in
Kenya, a developer’s world only makes a lot of sense when the concept of OPM
(Other Peoples’ Money) is utilized to the maximum. So then along the same line
of thinking, developers in Kenya are clever enough to utilize the less risky of
the OPM; off-plan sales.
The idea is of course
to sell concepts on paper and expect that potential buyers will show up, pay
deposits for yet to be built units. As the construction goes on, the buyer
injects more cash and preferably by the time the construction is over, the
buyer has fully paid for the unit. This is clever coz it essentially means the
developer utilizes the cash from the would-be buyers and makes some coins.
However, this arrangement works best when there is a show house and buyers can
see how the end product will look like. In some cases even without the show
house buyers could still trust the developer especially if they have a name…importance of a name?
The other very
important idea that developers consider is to ensure that a loan is structured
with several draw downs. Interest is normally charged on the amount drawn as
opposed to the total loan amount. After the first few draw downs. A clever
investor is able to gauge on the response from clients on the units. One can
reasonably tell whether there is interest on the units once the ground breaking
is done. Most buyers will be comfortable once they see progress on the site.
And by the way, one might be very happy to see so many would be clients
visiting the site and commenting on the good work done, but a seasoned investor
knows that a lot of demand may not translate to effective demand.
Effective
demand
is quantity of a good or service that
consumers are actually buying at the current market price.
Of course we also have
latent demand when a customer/consumer is unable to satisfy their demand, mostly due
to lack of money.
What if you already
have the loan and the sales are not forthcoming? One option would be to
re-negotiate the re-payment terms with the bank so that they extend the period
where u service the loan interest without paying the principle and whenever a
sale is done, the bank receives their cash. Kenyan banks are kinda flexible and
are also alive to the market conditions.
Developers are also keen
to change the prices as the construction continues. In other words, the buyer
who buys off plan will always get a very good offer and the one who comes in
when the unit is ready, then pays much more. Sometimes the increase would be as
much as 10-15% so it is always wiser to buy off plan or at least when the
ground is broken.
Next, let’s
look at the importance of location when investing in real estate.
