New funding options for real estate

The caution by Central Bank last week to financial institutions against high exposure as a result of lending more to the real estate sector, is an alert that should cause developers to start thinking about substitute financing routes.

Kenya, like its Asian counterpart India, views banks as the quickest and most effective lender as developers in the two countries continue to troop to banking halls for credit.

Among the reason experts give for preference on bank lending by developers is the interest banks have always had on the sector.

Almost every bank tries to outdo the others with friendly products to home buyers. Developers too, benefit from these offers by banks by borrowing millions to set up multi-million projects.

But even as developers view this as the best option to access credit, the Central Bank is getting increasingly concerned.

The lender of last resort forecasts that the high exposure by banks to the sector may cause instability for commercial banks should there be a price degeneration and wide default rate.

Divert loans

The Kenya Financial Sector Stability Report launched last week by the regulator, shows that real estate accounted for Sh194.9 billion of the Sh1.45 trillion in gross loans and advances made by banks.

However, the Central Bank results ranks construction and building and personal or household loans differently.

But given that individuals divert personal loans to developments, the country could be looking at Sh267 billion, several billions more going to the real estate sector.

This kind of situation is what may have prompted regulators in India to tighten the lending spree by introducing some regulations.

Reserve Bank of India has prescribed regulatory limit on banks’ exposure to individual and group borrowers in India.

These exposure limits are 15 per cent and 40 per cent of banks’ capital funds for single borrowers and borrower groups respectively. RBI also advises banks to fix limits on their exposure to specific industry in order to avoid concentration risks.

Real estate industry is thus subjected to both individual/group borrowers’ exposure limit and industry specific limit,” reads the report by Salvus Strategic Advisors JLT on the approach of real estate.

So far the CBK has not mentioned anything specific on the issue. But what are other financing options that developers should consider in case banks heed the CBK alert and limits lending to this sector?

Great returns

Real Estate Investment Trusts (REITs) for now remains the highly anticipated alternative financing source for developers.

REITs offer developers the possibility to raise funds from the public and later pay it back with interest. The public, in this case, will be investors, earning returns on shares bought.

Home Afrika is one of the real estate companies keen to seize this opportunity.

The company is planning set up two REITs at the Nairobi Securities Exchange (NSE). These may just be the alternative avenues to provide answers to developers looking for tonnes of money to actualize their dreams of mega projects.

The pooled funds, act in the developers favour in a win-win situation.

If the property market remains lucrative, then shareholders stand to gain more in dividends.

For those not keen on REITs, the capital markets still has more on offer for developers. It provides a number of ways for raising funds. The most common option is bonds. 

Most institutions are familiar with this mode of sourcing for funds. Centum is among entities that have floated bonds in the market.  In 2012, it floated a Sh3.2 billion bond with a five year tenure. Most of the proceeds from the bonds will go to real estate.

Mortgage lenders like Shelter Afrique are other financing options that developers can opt for as an alternative to credit from the bank. The Pan African institution enjoys a shareholding from 40 African governments.

Shelter Afrique finances both private and public institutions undertaking housing and related infrastructure projects. Serene Property limited is among its beneficiary.

Serene were given Sh200 million for the Sigona Valley Project - a multi-million investment on Waiyaki Way, 20km from the Nairobi City Centre.

Shelter Afrique raises its fund from the capital markets too. Last month, it revealed plans to raise the first tranche of a Sh8 billion bond.

The final alternative which developers can consider is investment groups. The idea of bringing people with similar goals together and pooling resources has proved to be a workable effort. Most successful investment groups started this way.

Investment group

The Fountain Enterprise Programme (FEP), a multi-million investment group is an example of sourcing for funds through group effort. Though it was difficult for the group to convince the public to join in, people slowly bought the idea and agreed to make contributions towards the vision.

In January this year, FEP investments stood at Sh1.6 billion from a zero capital base in 2007. New members joining part with Sh300,000 for a share of the pie.

The group is projecting a total investment of Sh100 billion in the next five years. It has over 3,000 investors. The foundation has interest in education, media, real estate, hospitality and banking among other investments.

FEP is currently selling Kisima gardens and Kisima Park in Lukenya and Mill Gardens on Kiambu-Kamiti road.