Centum Real Estate Limited (Centum Re) has grown into one of the key subsidiaries of Centum Investment as it continues to develop and dispose of residential units.
Centum Re Managing Director Kenneth Mbae spoke to the Business Daily about the company’s ongoing projects, holding difficult conversations with customers when projects delay, and the power of tapping debts to finance projects as pressure comes on pre-selling models.
The market is coming from an environment of high interest rates. What was the impact on your housing projects?
When the interest rates were high, many people shied from borrowing from banks because the cost of repayment went high. We saw a shift to saccos and Kenya Mortgage Refinancing Company loans.
That will be here for a while because of the long-term nature of real estate. If one makes a decision to buy, they have to go through those cycles of high and low interest.
As a real estate developer, how do you navigate through those cycles of high and low interest rates to deliver affordable and quality houses and make a profit out of it?
Our housing product is demand-driven. We start with the end user of the house, mostly a tenant. We are primarily developing in Nairobi, Vipingo and Uganda. Most of the purchasers are buying for investment. They are buying to rent out.
We usually start from the point, is it affordable for the tenant? And if it is affordable for the tenant, is it attractive for the investor? For it to qualify as attractive for the investor, we target rental yield of at least 10 percent to 11 percent. We believe that at this point, a purchaser can buy and repay using a mix of rent income and savings or debt.
The second element is how we finance our projects. We use pre-sale deposits from customers, our own equity, and project finance. With a combination of those three, we are able to navigate cycles of high and low interest rates.
There is pressure on pre-sell and build models as disposable income reduces. How are you derisking your projects from this pressure?
Our preference is 30-40 percent equity, 60-70 percent debt and the balance from pre-sales. The debt helps us fast track construction, finish and allow customers to get mortgages and pay.
Initially, we tried with customer deposits and equity alone but because of the timing mismatch in payments, projects were taking an extended period to finish. We were building at the pace of our equity and payments from customers.
Debt helps us to fast-track projects. Now we have partnered with banks to provide mortgages to customers and this helps us mitigate the risk of off-plan developments where most projects are not completed on time.
You are in an industry that has suffered reputational damage because of unfulfilled promises, especially to off-plan customers. How do you guard against losing customers' trust when projects delay as it happened with the Cascadia project?
We have demonstrated you can start a project, finance it substantially with customer deposits and finish. We have also demonstrated that we can start a project and finish.
In business, you get into problems. We have been where we finished projects ahead of time, where we finished projects on time and we have also been where projects have stalled.
You have to have that resilience and build a good trust mechanism with customers. They will be disappointed in case of delays but if they see you applying the efforts to resolve the issues, they will stick by you.
As a business, we are on a continuous learning curve. What we have learnt is that as you start, have your projects fully financed from day one. Even as you anticipate customer deposits, have debt in place. You may or may not use debt eventually but it will save you when pressure comes on the pre-sells model.
Many real estate companies are coming up as statistics point to a housing deficit. What does it take to build a housing business model that stands out from the rest?
We are not in the business of building houses; we are in the business of providing lifestyle products that make the working population productive. We are packaging these products as homes.
Looking at Kenya’s demographics, the demand for housing far exceeds supply, so people have to pay what they find. Therefore, our business has a sustainable footing. In business, the most difficult thing to do is to create a market. Today, real estate has a product, but the supply of that product is very limited.
We have to assess these demographics and find out what they want and what segment we can address. We are addressing the segment that is interested in a lifestyle because 90 percent of the time is spent in a real estate setup— be it office, home, mall, gym or bar.
You have a land bank of close to 10,000 acres. What are the plans with this land?
The huge land bank presents a huge opportunity. We want to create model cities. We have master-planned these lands and specified what should be developed in them and where. For these lands, we connect power, water and sewer and work on sports and recreational facilities. We also develop parks.
We create those common amenities and focus on a lifestyle product. After doing all these, we are inviting other developers to come in and develop houses, hospitals, malls and hotels in an organised way. This will ensure that as these model cities take shape, the value of investment does not reduce or get diluted. We will take the same approach in newer locations.
When you talk about newer ones, are you still in the market looking for new lands to acquire?
Yes, that is correct. This business will be there for many years and it is primarily focused on real estate. It may diversify to be something else but the land we hold today is finite because we are developing on it. We have to think about where else to expand based on trends.
For example, right now it is very hard to distinguish between Kiambu and Nairobi and that means we have to look beyond. Places like Nakuru are now attractive areas to go and develop. We are also seeing pockets of opportunity in Uganda and other neighbouring countries.
How do you balance quality and affordability in your projects?
Quality cannot be compromised. Everyone wants a high-quality standard. Our affordable segment is any unit priced between Sh2 million and Sh10.5 million because banks can fund it 100 percent. The mid-market unit segment is priced at between Sh11 million and Sh20 million and the luxury ones are those above Sh20 million.
The distinction is size. So we could have one bedroom apartment for, say Sh4 million, which is 50 square metres and have another one bedroom with a bigger balcony and extras and measuring over 90 square metres and the price will go as high as Sh18 million.
