Paul Kavuma: Catalyst Principal Partners founder on the opportunities he sees in real estate

Catalyst chief executive officer Paul Kavuma during an interview at his office.

Photo credit: File | Nation Media Group

Paul Kavuma has spent about three decades in private equity, management consulting and investment banking. As founder and CEO of Catalyst Principal Partners, he led the raising and managing of about $300 million in diverse sectors in East Africa.

Kavuma was previously at Actis Capital, where he served as director and head of East Africa. He founded Construkt Africa, which focuses on the real estate sector.

He discusses why the decision to set up Construkt, how he tweaked the strategy when Covid struck just months after the company started and the opportunities he sees in the real estate sector.

You were at the heart of raising about $300 million private equity under Catalyst Principal Partners and investing it in diverse sectors including real estate. Why did you set up Construkt Africa for real estate investment instead of using Catalyst for the same?

I was in the investment banking industry but then saw an opportunity to break out and do something different because at the time, East Africa wasn't featuring in the private equity space to a large degree. It was considered to be an SME space. It was sort of venture funds and various other things.

At the time when Catalyst was born, we raised some good capital. I think this stimulated the development of other players. So now we have a number of other regional players that have emerged in that market.

About five years ago, we decided to set up Construkt as a separate structure. And at the time, Construkt was intended to focus entirely on real estate as a new asset class.

My interest is always to try to explore opportunities for innovation,differentiation and for opening up new opportunities for institutional capital to flow.

Real estate is a big asset class, which Catalyst was exclusively not doing. Under Catalyst, we focused more on mid-market growth capital for industries, industrial services and consumer industries to the exclusion of real estate.

With some new legislation in Kenya, we saw an opportunity to be at the front end of a new and emerging industry. That was the genesis and why Construkt was established.

You set up Construkt Africa and then Covid-19 struck. What did it have to do with your strategy, given the massive disruptions that followed?

Initially, our intention was to go to the market and raise capital. But literally, within six months of us establishing the firm, Covid-19 struck.

So instead, what we have been doing is offering strategic advisory and asset management work in Construkt for the last four or five years.

We have been partnering with large scale institutional investors and private investors. Our team went into a reposition to look at tenant mixes, yields, performance and basically turn around a portfolio of institutional grade real estate on a Pan African platform. More recently, we have been very actively advising on a large portfolio in DRC.

Our strategy in Kenya has been around the real estate investment trust (Reit) strategy...our focus has been on a Reit strategy. Future Construkt, which is the Kenyan operation, recently secured a Reit licence. This will allow us to move the market towards products which are more larger scale and require institutional capital to deliver.

When you look at the years that you spent in the private equity space, first fundraising for different sectors, and now narrowing down to real estate, what advantage does it throw your way?

I have been in the capital markets space for about three decades now and fundraising for multiple sectors including manufacturing, telecommunications and banking.

The distinction is that we have always played at an institutional level and engaged with both international and regional investors...The overarching capability is asset management. When I look at the market opportunity for real estate, the big change in this market is the developed Reit legislation.

With the Reit licence in your hands, what is in the store for Construkt?

Within Reits, the first thing we are focusing on is an area of affordable housing. We are building a strategy to develop affordable housing.

Over the last two years, some units have been developed through government already but we see some opportunities in affordable housing that can move the needle much faster.

We have taken a view that we can position ourselves slightly differently. Our primary interest is to make this a private sector-led initiative by leveraging all of the government policy frameworks that have been put in place.

We are going to be focused on urban centres, which means we are not going to do big projects. We want to focus on central areas with access to infrastructure, services and opportunities.

Targeting locations near Nairobi Central Business District means the price of land will be high. How do you deliver affordable units on steeply priced land?

The magic solution to that is scale. The scale of the projects we are looking at are at an order of magnitude larger than what we have seen.

In our first project, we are trying to deliver 10,000 units on strategic land assets which are held in the hands of private investors.

And as private investors, that will mean either partnering or acquiring those assets in strategic locations which have got connectivity nodes, where we can do mixed use concepts there.

We will make the affordability easier by actually doing tenant purchase agreements and rent to own models. We are going to develop the units and transfer the D-Reits into I-Reits. In that way, we have the power to hold and allow people to rent to buy for say 20 years.

Affordability is not just the price. Affordability is the term. Price is a factor of affordability. Terms is the primary factor of affordability. Give one enough time, they will pay.

The market has a history of unfulfilled promises that have reduced the confidence of buyers and investors. How do you intend to overcome this?

This is why we are institutionalising it. This market has traditionally been a pre-sale market. So if I am a developer, I only need say 10 percent of the capital, do the master plan, do a model home for marketing and then I start pre-selling. And this pre-sales is what funds the project.

This model has proved that if the market faces issues such as Covid-19 or very high interest rates, the pre-sales slowdown. Then the project slows down and disappoints buyers whose money is tied up in that project.

But as an institutional developer, we make sure that we are fully funded before we start a project. This way, you materially derisk the end user. Because we are regulated, it means everything will be public. Our funding solutions will be known upfront.

How is the environment now in terms of mobilising money for real estate investments?

There has been more capital deployed into infrastructure bonds and other government papers, because of attractive yields on sovereign debt. What is happening is that interest rates are beginning to come off.

We expect that to continue and make institutional investors begin to diversify more into equities and other alternatives. We expect institutional investors to develop more interest in the alternative asset classes, including Reits since it provides a yield and diversification opportunities.

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