Bulk buyers: What the property market misses in turnaround plan

Behind the aggressive push fueling the construction boom under the affordable housing programme is a sustained narrative that Kenya has a shortage of two million units.

This insinuates available demand. Director of Zima Homes Etta Madete however, questions the quality of this demand? “There is this two-million deficit, the demand is there, but it is not qualified demand,” she says. “And if you don’t facilitate end user finance, it does not matter how big, fast or beautiful you build.”

As a developer, this is the problem the industry faces, she says. She opines that the lack of bulk buyers such as institutional off-takers hurts the sector, particularly developers, whose role has now extended beyond construction to unit retailers and bankers.

It is a role she believes banks are supposed to play, but are also cold on potential buyers or the cost and process it takes to prepare one to be a potential buyer.

As a result, developers have become bankers as well, holding large sums of cash in off-plan projects for their clients.

It is developers who devise payment plans, such as tenant purchase agreements, to woo people into buying houses, a role that institutional off-takers should be doing.

Madete says when developing a project, a developer wants to exit fast to free the cash for another development. A B2B transaction with an institutional off-taker would be ideal.

“And there is almost no proper institutional framework for developers to offtake. There is no fund, secondary market, pension funds are not participating, and banks are just like ‘bring us your buyers’, and developers are now doing B2C,” she said during the International Housing Solutions Affordable Housing Conference held recently in Nairobi.

Madete said the challenge developers have with banks is that the financial institutions want ready, prepped clients.

“They want us to find them, prep them and hand them over,” she says.

But even after handing them over, banks would still drag their feet in approving that mortgage or loan to facilitate purchase of the house. As such, the retail market does not have that appetite for mortgages.

“In payment plans, off-plans, we (developers) hold a lot of money on behalf of our clients,” she says.

Madete says selling units through B2C, or retail-based, is a challenge, says Madete, because a developer needs to look for that one client, prepare them, come up with a payment plan if they are not cash buyers or facilitate how they can get a loan from the banks. This has to be done for the 50 or so units the developer has put up.

Patient capital

However, if there was an institutional off-taker, such as pension fund, they would simply buy all the units at once, and since they have patient capital, they can come up with more market friendly payment plans for buyers if they seek to sell or us them as an investment which is often the case.

Such would make houses more affordable. “Affordable is somewhat of a misnomer. Always by definition, if you are buying a piece of real estate, it tends to be the most expensive asset you ever own. And in this market, if you are not financialised, these assets are not affordable to pretty much anyone,” notes Unity Homes  Executive Director Jason Horsey.

Superior Homes chief executive Shiv Arora says the bulk offtake provides the speed which developers want. He notes for the market to entertain institutional offtakers, the capital market needs to be deepened and inclined towards real estate. “I think it (capital market allocation to real estate) is less than one per cent at the moment,” he says. Once this is done, he says, there is a huge pool of capital which will start going into development and offtake.

“And it will start competing with banks because they have capital that is more patient and it could take equity risk,” he says. “We are starting to see this on the offtake side and also development side.

Arora references real estate investment trusts (Reits) that have come into the market, such as Acorn, which seems to have perfected the model of institutional capital in development and offtake through their Acorn Student Accommodation Development Reit (ASA D-Reit) and Acorn Student Accommodation Income Reit (ASA I-Reit).

“The big frustration, though, even as this institutional capital comes in, approvals and the timelines that it takes is a challenge,” he says.

Sovereign wealth funds

JP Morgan, an investment bank, lists endowment funds, foundations and sovereign wealth funds as some of the institutional real estate investors. It adds that what sets them apart, is their deep pockets and knowledge of the industry.

“Like many investors, these institutions are attracted to real estate’s potential for diversification and solid returns. But their scale and sophisticated approach to investing—based on deep knowledge and experience—set them apart,” says the investment banker in a March 2024 article.

Mi Vida is one of the developers locally who has benefited from the bulk offtake when IHS bought 200 units from its 237 Garden City project in 2023. The units comprised of 100 one-bedroom and 100 two-bedroom units. Then, they went for Sh4.2 million and Sh6.4 million respectively.

Most times, institutional buyers buy for investment. As such, there might be fears that if more institutional off-takers flood the market, retail buyers could be crowded out, as they will always be preferred by developers.

Arora thinks otherwise. He says their role in the sector exists because some do not want to buy the homes but rent. “So, they are coming in with bulk offtake of institution grade product which they can onward rent to those who are interested in just renting,” he says.

He says, such transactions provide an avenue for these products to end up in the Reits, which deepens the capital markets.

“No, institutional buyers are not necessarily blocking off (retail) buyers because there is enough demand for everyone in the economy. They are serving and providing a new space that has previously been untapped,” he says.