One of the major challenges experienced by real estate developers is shortage of working capital, which becomes more precarious if the land being developed is not fully paid for.
To overcome this, developers should consider involving underwriting partners willing to pay the balance of the land purchase price and/or buy all unsold completed units.
This will allow developers to focus their energy and resources on developing properties without worries of foreclosure by impatient original land sellers, unpaid suppliers, financiers or hesitant buyers.
The underwriters should be moneyed individuals or institutions ready to take a long-term position (such as to hedge their wealth, speculate or boost their balance sheets); which means developers can seamless enter and exit projects.
Developers who get bogged down in slow-moving projects are likely to face cost overruns due to inflation, accruing loan interest, including potential upward revision of the price of land by unpaid landowners.
Bridging finance (BF), where financial institutions fund up to 80 per cent of project cost upfront, is a mode of financing that works better where there are ready unit buyers.
Bridging finances are tightly time-bound contracts with limited project moratorium period, by which time developers should have completed the project and sold sufficient units to offset the financier.
The unrealistic assumption here is that the project will be a turnkey!
Alternatively, developers can dispose of the first batch of completed units at discount prices to quickly mobilise resources for the remainder of the project.
A good track record, attractive project location and professionalism play a role in attracting investors and buyers, which explains why certain developers have booked and sometimes fully paid units before breaking ground.
Lastly, regulatory authorities should work with professional bodies such as those of architects and quantity surveyors in developing a framework of vetting and licensing developers and setting a minimum capital and competence criteria.
Just because individuals own land or have charismatic personality to mobilise gullible property buyers does not give them a licence to be real estate developers.
Official statistics have revealed that the country suffers a housing deficit of over two million units. Over half — 61 per cent — of urban dwellers live in slums.
The housing crisis is worsening with UN Habitat saying two-thirds of the world’s population will live in cities by 2050.
The government should come up with well-planned cities to facilitate economic growth and sustainable low-emission development before the issuance of the first phase of affordable houses to Kenyans in September.