I spent most of my twenties working in Africa for Nestlé, the large food company. My last role there was on the executive board of Nestlé Ghana in charge of the dairy business for a few West African countries.
Prior to that I was in sales and marketing for Nestlé Ice Cream in South Africa.
Not only did I travel a lot for work, but whenever I had vacations I wandered off into the continent. This led me to go on massive road-trips from South Africa to north Malawi, through Zimbabwe and down through Mozambique.
I drove all over Namibia and Botswana.
I went hiking in the amazing national parks of Madagascar and explored the (sketchy) capital city of Antinanarivo.
I visited friends doing business in Congo who showed me all their operations.
I took local transport throughout Ethiopia and backpacked in Somaliland.
I traveled to many more countries on the continent.
Most importantly, I learned about operations in true frontier markets through my everyday work.
I also experienced how dynamic, flawed, and full of potential the continent is, and how different the various jurisdictions are from each other.
For a while I even had a company that exported Ukrainian processed food into West Africa.
So I didn’t just buy real estate in Nairobi because “omg I fell in love with Africa” like some Peace Corps volunteer. It also isn’t my first real estate investment on the continent.
So why did I buy real estate in Nairobi?
- Low price per m2 for relatively high-end project with indoor heated swimming pool, gym, sauna, all amenities, etc in super prime location.
- Booming demographics (Nairobi’s population is set to nearly double in the next 25 years).
- Local talent available for property management
- Decent rental yields
- Decent prospects for capital gains
- 2.5 year payment plan fixed in Kenyan Shillings (free short on the currency)
- Well-connected, easy to get to
- Great diversification
- Pre-construction prices
- Decent liquidity for emerging market standards
What are the risks of buying into such a project?
- Risk of bankruptcy by the developer, in spite of over a decade of track record of completed projects
- Currency risk partially covered through payment plan fixed in Kenyan Shillings
- Dealing with the ambiguous tax situation
- Potential oversupply if developers continue building a lot (mitigated by buying super prime location)
- Potential debt crisis leading to devaluation (mitigated through payment plan) and capital controls (might be tough to get rental income out through traditional means – though mitigated through availability of crypto and Hawala)
- Current injunction on the project, which could lead to minimal loss of capital, but also an opportunity as prices are currently low
- Long term maintenance of the building
- Typical emerging market political risk, etc
Overall, for about $1,200 per net m2 (~$110 per net ft2) for such prime real estate in a booming city, I feel that I am getting an amazing deal.
I initially bought one apartment when I recorded the video. The next day, I bought two more. A close relative of mine also bought one.
In this video I met with my friend Sascha, my realtor Pratik, and Alex the Chinese developer to go over the thesis and the project.
If you’re interested in finding out more about this project, feel free to get in touch with my Nairobi realtor Pratik. He can also help you find other developments that might be better suited for your particular investment objectives.
But please, understand that this is absolutely not an invitation to invest. I invested myself and you are welcome to contact the realtor who introduced me to this project.
If you are the type of person that cannot stomach volatility, or that gets nervous when things change / when a situation is ambiguous, please do not invest in this. You’ll be miserable.
Seriously, this is not just some legal disclaimer. I mean it.
To a World of Opportunities,
The Wandering Investor.
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Transcript of “I bought 3 apartments in Nairobi, Kenya”
LADISLAS MAURICE: Hello, Ladislas Maurice from thewanderinginvestor.com, today, in beautiful Nairobi in Kenya. And I bought an apartment here in Nairobi, my first apartment in Kenya, together with my friend, Sascha, who also bought an apartment in the same development. I’ve known Sascha for, what, like, 13–
SASCHA: Thirteen, fourteen years, yeah.
LADISLAS MAURICE: 13, 14 years. We used to live in West Africa. We used to work there together. And he’s been based here in Nairobi for a very long time. And so we went around. Pratik here is my agent, and he took us around to look at a bunch of developments all over Nairobi. And then we ended up zeroing on this one.
Why buy real estate in Westlands, Nairobi
LADISLAS MAURICE: One of the main reasons being, apart from the usual price value, the way the units look, etc., is this specific neighborhood that we’re in, in Westlands, in Rhapta, so Sascha, you’ve been living here for a few years, so this essentially takes location risk away from my investments.
Because it’s always a bit of an issue when you go somewhere, you make an investment, you’re not too sure, you think you know the neighborhoods but, sometimes, you’re missing out on some angle. But here, I mean, Sascha lives here. So tell us a bit about this neighborhood and why you’ve been personally living here for a few years.
SASCHA: I’ve been here for a few years because I like the area. It’s very green, you can walk, it’s got nice sidewalks. It’s got a few nice cafes, supermarkets. It’s got a nice padel court. Nairobi has been taken over by a padel craze, so we’re all playing padel. It’s a really nice location. It’s also really close to the malls, it’s close to the highway, and the area is still green, you’ve got nice views, and it’s relatively quiet. I’ve always been in this area, and now that this development came up, I thought it’s a good time to buy.
Potential debt crisis in Kenya
LADISLAS MAURICE: Cool. Look, I understand that Kenya has its fair amount of challenges, the biggest one being the debt to GDP ratio, which is close to 80%, which is really high for an emerging market. The Kenyan government spends over 30% of government revenues on interest payments. This means that at some point in the future, in the next few years, it’s highly likely that Kenya will have some sort of debt crisis of some sort. I’m going into this investment understanding this.
Booming demographics in Nairobi
LADISLAS MAURICE: Now, on the flip side of this, what I see is an economy that has amazing demographics. Unlike Europe, or East Asia, Latin America, North America, even increasingly South Asia, the demographics are very, very attractive. I like having this sort of property diversification in my portfolio.
Nairobi as a business, economic, and manufacturing hub
LADISLAS MAURICE: And people must also understand that Kenya, and specifically, Nairobi is a true hub in East Africa. Whenever international business seeks to expand in East Africa, the first place they go to is Nairobi. They send their first expats here. They recruit, locally, local Kenyan talent, they bring in regional talent as well, and then they just operate from here. Nairobi is really an international hub in many ways, which makes it very resilient. In spite of anything that can happen, it’s very resilient, especially in terms of finding tenants. There’s a lot of urbanization, a lot of expats, the place is very dynamic. And the economy in Kenya is also a lot more diversified than other economies in Africa. It’s not just agriculture, and just like petrol, like a lot of, like, or commodities, there’s a lot of agriculture, there’s a big services sector as well, remittances are big, tourism is big, and increasingly, manufacturing as well, because Nairobi is becoming a manufacturing hub.
We’re seeing a lot of infrastructure development happening in Kenya as a whole. And even in East Africa, we’re seeing these train lines that are gradually being put in place with a lot of Chinese investments. We’ve seen the train between Nairobi and Mombasa, and Tanzania they’re opening up train lines as well. In Uganda, they’re looking at it, Rwanda, and everything will gradually link up. A lot of the debt, sure, was wasted, but you can actually see that a lot of the debt was actually spent on infrastructure that really increased the capacity of the economy. Personally, when I see this, I like the macro picture, understanding the typical emerging market risks, which I plan on speculating, thanks to the payment plans that Alex and his company offer. Alex is the developer.
Value for money in Nairobi real estate
LADISLAS MAURICE: At the end of the day, it’s really about seeing the macro picture and then what valuations am I buying, real estate? And then you’ll see here, I mean, we’re just buying, and a relative of mine as well, we’re all just buying these one-bedroom plus study for $70,000 per unit with payment plans over two-and-a-half years. We’re looking, in net square meters, probably around, roughly, $1,200 a square meter for prime, prime new real estate in a capital city. Overall, I’m very comfortable. I know issues are coming this way, but I’m fine with it.
Where is the FDI into Kenya coming from?
LADISLAS MAURICE: Pratik, you’ve seen, because, I mean, you’ve been in the industry for quite a while here in Nairobi, in real estate, you see a lot of foreign investments, and not just from the typical places that people think of, which is investments coming from China, and investments coming from Western Europe, and America. What do you see on the ground? Where’s the money really coming from?
PRATIK: Especially in Kenya, I think it’s coming from everywhere. We spoke a bit before about the different types of developers in the country. It’s not just Chinese, it’s not just local Kenyans. There’s Egyptians, Turkish, Eritreans, Singaporeans, all different kinds of developers that are coming to Kenya.
LADISLAS MAURICE: Yeah. It’s when you come here, and it’s very different from going to Southern Africa, going to West Africa, here, the source of FDI coming into Kenya is much, much more diversified, which I feel makes Kenya more resilient in many ways.
Developer background
LADISLAS MAURICE: Alex, you’ve been a developer here for how many years?
ALEX: Actually, we have been here more than 10 years. Even myself, I’ve been here more than 10 years. The company, I think, even longer.
LADISLAS MAURICE: Even longer, right?
ALEX: Yeah.
LADISLAS MAURICE: How many developments have you completed here in Nairobi?
ALEX: We have done five projects after I come.
LADISLAS MAURICE: Where are most of your investors from? So people buying into your apartments, where are they mostly from?
ALEX: Actually, most investors, they are still Kenyan, or maybe some other countries nearby. But we also have Chinese investors, European investments, also some from Middle East, from India, from America.
Are people investing remotely in Kenya?
LADISLAS MAURICE: And the foreigners that are investing here, do they come here personally to go look at the project, or are they just buying remotely?
ALEX: Most of them, they don’t come. I think many of them they are coming because of their friends. They have local friends here, they recommend our project, or maybe some professional agency which is reliable, so they come here to do the investment.
Background of different developers in Kenya
LADISLAS MAURICE: Fascinating. What’s interesting to understand about, and we’ve had a lot of conversations about this, when you come to Nairobi and you look at developments, people say, “Oh, this is a Chinese developer, this is an Indian developer, this is a Somali developer.” And just by the ethnic group of the developer, there’s a whole bunch of–
PRATIK: Preconceptions
LADISLAS MAURICE: [laughs] preconceptions. Alex, when you look at Chinese developers as a whole, and I know each developer is a little different, what do you feel is the value proposition of Chinese developers now in the Nairobi real estate market?
ALEX: I think the biggest advantage of Chinese developer is their speed. You see, as an investor, what they care about is when can I get my return back? According to me, all the Chinese developer I know, most developer they can complete a project within two-and-a-half years. So it gives a lot of confidence to the clients, so they don’t worry that, okay, I put the money somewhere, then I have to wait for 5 years, 10 years, to get my return back. Or, maybe you see, there are also some development in Nairobi just stopped in the halfway. But according to me, I did not see any Chinese developer they do like this. That’s why we also have many loyal customer people following with us. They continue support with us because we give them enough return on time, which is very important.
LADISLAS MAURICE: Yeah, that’s one of the things that’s important. I mean, when you’re in emerging markets, the risk of bankruptcy is always higher than in other countries. With Chinese developers, they have a reputation for not going bankrupt and finishing their projects, so this is really a big one.
Overview of this new development in Nairobi
LADISLAS MAURICE: Alex, can you tell us a little bit more about the project, just 30 seconds. Then after, we’re going to go check out the lot. We’re going to go see the neighbors, where I’m going to explain why it’s important to have a look at the neighbors when you buy here in Nairobi. And we’ll do all the ROI numbers in terms of how much rental income we expect, in detail, to get to net ROI figures, taking into account all the expenses.
Alex, can you just give us a 30-second rundown on the project?
ALEX: Yeah, sure, of course. This is our new project, which is just like one kilometers away from this office. It’s along St Michael’s Road. We have three blocks, Block A, B, and C. In Block A, which is facing the road, we have the one-bedroom or one-bedroom plus study room. They are all in Block A with independent entrance. Then in Block B, we have two-bedroom plus studio. Then in Block C, you see which is totally separated, and we leave around 18 meters between the two buildings, so it also have its independent entrance. Then it’s all three-bedroom with DSQ and four-bedroom with DSQ. For this three-bedroom, because it’s more for the occupiers, we plan to provide the extra security to protect their privacy, and we are going to provide better service, customized service.
Then for these two blocks, Block A, as I mentioned, one-bedroom or one-bedroom plus study, I think most this kind of product is for investors. They are going to buy then rent out. For Block B, it’s like it’s a balance between the investors and owners. This, we call it two plus studio because we noticed, first, with studio currently in this market, it’s going to get more, like, a higher rent. I mean, the return is faster than the bigger apartments, so it’s very popular in the market. Then the two-bedroom actually has the biggest rental market in Nairobi, so we combine them.
LADISLAS MAURICE: This is an example, the two-bedroom plus a separate studio. Two-bedroom, two-bathroom with a separate studio that you can rent out on a single title deed. This is really for investors.
ALEX: Yeah. Not only investors. As I mentioned, it’s a balanced product. Even for the family clients, the family buyers or tenant, they can also use it as a three-bedroom. But for investor, they can rent two-bedroom, they can also rent the studio, which can give them a higher return.
LADISLAS MAURICE: Cool. This is really unique. I haven’t seen this in a lot of markets. This is really interesting. Okay. And the amenities, we’re talking swimming pool, gym, just everything, right?
ALEX: Yeah. We also, of course, this is a high-end product, so we will provide a lot of common facilities such as swimming pool. And the swimming pool is indoor-heated. We’re going to have a gym, which will be fully equipped it, except that we also going to equip with sauna. Then you can see we have some water features in the middle. We have the green area, recreation area. In the future, we also plan to have established a members club. Maybe it will be an indoor golf training area or a spa, but this is not finalized, but we plan to have it just to provide more value to the investors.
LADISLAS MAURICE: Interesting. I didn’t know this. I bought this without knowing this, so nice added bonus. Look, I think it’s important for people to understand the market, because you’re selling a bunch of four bedrooms, four bathrooms, plus DSQ.
What is a DSQ in Kenya?
LADISLAS MAURICE: What is DSQ? DSQ is essentially serving quarters, so when people have a maid, a nanny, they can live there. They have, like, a little room with their own bathroom. So four bedrooms, four bathroom, plus the little separate quarters.
Difference between gross and net size in Kenyan real estate
LADISLAS MAURICE: These apartments are massive, massive, massive, with nice views, everything prime area. And I mean, they’re, what, 240 square meters gross?
ALEX: Yeah.
LADISLAS MAURICE: So net, I don’t know, it’s always a little hard here, probably like 190, 200 square meters net, roughly, for approximately $200,000. You’re looking at a $1,000 a square meter for massive apartments right in the best neighborhoods of Nairobi, brand new with all the amenities. Look, in terms of value, it’s hard to find this in many other markets.
Drive through the neighbourhood
LADISLAS MAURICE: I’ve been staying at Sascha’s place for the past two weeks. And I really like this neighborhood. You can see it’s very walkable, people walk around. It’s green, there are trees. A lot of areas in Nairobi are a bit like concrete jungles, but not here. And we’re just literally, down the road here, five minutes away is the core center of Nairobi, the business center. Then you have these cute, like, little malls here. This one’s called Rhapta Square. This is where Sascha hangs out. Artcaffé, it’s this nice restaurant. There’s some food options, supermarket. And Sascha, you hang out at the next one a lot, right?
SASCHA: Yeah, so I come here for the cafe. There’s two supermarkets, there’s a vegetable and fruit store as well, and then there’s a nice padel court here, so it’s quite convenient. And I can walk from my house as well.
LADISLAS MAURICE: And you could walk from those apartments we’re buying. And the fruit here in Kenya is amazing. The fruit and the vegetables, Kenya is a big exporter of, because if you travel around Africa, like, there’s often just buying fresh fruit and vegetables is a problem. There’s not that much local production, but in Kenya it’s very different. There are a lot of different options, and then the quality is really good. A lot of it just gets exported straight to Europe. And here, they’re building a new mall, a little mall. And there’s a Carrefour. Carrefour has, like, all the European food you would want, so this just shows how premium an area it is.
And just right around the corner from the new Carrefour, literally, a three-minute walk away is that development. For finding tenants, etc., I was really considering getting the four-bedroom apartment, because that would be typically targeting a family, either locals, or expats, or people from East Africa. And the husband typically works, the wife is at home, and she would absolutely love an area like this, where she can, here, you can see this one here just jogging, right, just she can go jogging, she can just walk to the supermarket, she doesn’t need to take an Uber each time or to take the car. This area is really safe as well. For people who want to invest in a larger unit here in Nairobi, this is a really interesting option.
Cool. Pratik, in your company, you do a lot of property management as well. Let’s say, Sascha and I just hand over the one-bedroom plus study over to you and say, “Find a tenant.” How quickly could you find a tenant?
How easy is it to find tenants in Nairobi?
PRATIK: As we discussed previously, quite easily we could find a tenant. There’s many expats here. There’s many local people as well looking for homes, so it would be quite easy, or relatively easy for us to find a tenant.
LADISLAS MAURICE: Can you quantify the “quite” or “relatively easy”, like, how many months or weeks or days?
PRATIK: We’re talking about weeks, probably one or two weeks, as long as we put it into the market and it’s ready and available to go.
LADISLAS MAURICE: Okay. What about the larger units, like, three bedrooms, four bedrooms?
PRATIK: There are always families looking to move to these areas, because there’s a lot of companies that are not too far away from here, so even that is relatively easy. Within a month or so, we could find a tenant.
LADISLAS MAURICE: Cool. Sascha, we were talking to one of our mutual friends recently, and she bought an apartment down the road, actually, on Rhapta Road, the one with all the little malls. And the entire block got rented by the Red Cross. Correct?
SASCHA: Yeah, that’s correct. This area is quite close to the highway, and then it’s also quite close to Gigiri, so it’s got access to the road that goes to Gigiri, which is where the UN is. It’s quite a popular area for a lot of expats. Again, it’s close to work for the UN people, and it’s also close to the center, so it’s a good area for expats.
LADISLAS MAURICE: Look, Sascha, you’ve been living here for a few years. So why didn’t you buy earlier? What was holding you back?
SASCHA: Honestly, I wish I would have bought earlier. I always thought it’s a bubble that’s waiting to burst. But I kept kicking myself year after year because the developments kept coming up in Nairobi. I saw a lot of people get good ROI, and it just kept going and going. I, finally, decided to pull the trigger. I also live in Kenya, it’s my home, I see a future here. Both from an investment perspective and from a lifestyle, I decided to, finally, pull the trigger. And obviously, this is a good development in a good area, and that’s what I wanted to do.
LADISLAS MAURICE: He needed me to come over and kick his butt and tell him that $1,200 a square meter for brand new buildings, pretty luxurious, it’s not a bubble. [laughs]
SASCHA: [laughs] It’s unheard of at the moment, exactly.
LADISLAS MAURICE: Cool. Alex, how big is this land?
ALEX: This land is 0.93 acre, so almost one acre.
Making to shift from middle class developer to high-end developer
LADISLAS MAURICE: Cool. Look, your previous developments were in more middle-class areas. Now you’re going into premium area. How do you plan on managing that transition from making middle-class buildings to what is supposed to be an upmarket offering?
ALEX: Thank you for the question, it’s a good question. We also notice Westlands area is a more prime area compared to the other place. In this project, we also adjust our design. We plan to design the bigger floor apartments, like, three and four, which is more than 200 square meters for the high-end clients. In regards of this kind of project, we are going to use better materials, we’re going to provide more facilities, such as we provide the sauna. We’re going to expand the size of the swimming pool. We’re going to expand the size of gym with more equipment, and also create more recreation area for the clients. In regards of the service, because the service is also important for this kind of high-end clients, we’re going to have extra security for the bigger apartments. We’re also going to provide more customized service.
The quality of Chinese property developments in Africa
LADISLAS MAURICE: Look, from my experience or just from most people’s experience with anything Chinese, things start off, just think of cars. I think cars are the best example. When the Chinese first started making cars, everyone said, “Oh, they’re horrible.” They were laughing at Chinese cars. It’s, like, “Don’t take them seriously.” And guess what? Now everyone wants to drive a Chinese EV. What I’m seeing in terms of developers here is, and sometimes, it’s quite clear, because some of your competition, they literally bought three or four plots next to each other. They’ll develop one, sell it, then they’ll start building the next one, then the next one, then the next one. And you can see the four generations of buildings side by side, and the improvement in design and quality is extremely visible.
From what I can see, and I don’t know if you have anything to add on this, Pratik, it would just appear that Chinese developers it’s just incremental improvements each time.
PRATIK: Yeah, like, is everything probably with the Chinese, they adapt quickly, they learn quickly, and they may have also been viewing other developments that are coming up and seeing that this is probably what we need to provide as well. So, yes, heading in the right direction.
Analysis of neighbours of the development
LADISLAS MAURICE: Cool. Alex, can you tell us a bit about the neighbors? Because this is really important to understand, when you invest in Nairobi, it’s always who’s the neighbor? What’s the story? Tell us the neighbors on this side, that side, this side, what’s their story, and how likely are they to sell and then we see a new building pop up that’s blocking the views?
ALEX: As you see, this land is touching St Michael’s Road. This area is a very prime area, very peaceful, good for living. We have three side neighbors. This side is an eye clinic. It has been here for many years.
LADISLAS MAURICE: Is it a government eye clinic or is it a private eye clinic?
ALEX: It’s a private eye clinic. Then this side actually is the same landlord of this land. Actually, we negotiated with them, we want to buy together, but they did not agree. Actually, that one they are saying they are using as their own office. Then behind side is old apartment also have been built here for several years. I don’t think it’s going to be demolished.
LADISLAS MAURICE: Cool. In terms of risk, I see bit of risk around there, the guy who sold the land, because if he sold land, he might sell more land later on. He just made enough money from you guys, so he’s good for a bit. [laughs]
ALEX: Actually, he did not mention that. We talked to him, he doesn’t want to sell.
LADISLAS MAURICE: He doesn’t want to sell.
ALEX: Yeah, he said he doesn’t–
PRATIK: How big is his land?
ALEX: I think that one is a similar like this one. He emphasized that one he wants to use himself as an office.
LADISLAS MAURICE: Okay. I mean, hard to tell, some risk. The eye clinic, when we do drone footage above, it looks really old, so I don’t know how long that eye clinic will stay there. Could be potentially an issue. On this side, part of the guy there, his offices, some of the homes, they’re actually quite nice, so maybe he won’t really try to destroy them. He already got an offer, he refused. Some of these homes are quite nice, so I think there’s less likelihood of something happening here than here, but I don’t know. At the back, yeah, they’re not going to destroy this. So the four-bedroom units, the three-bedroom units with DSQ, those are completely safe in terms of views. And the views are really nice, they’re actually similar to Sascha’s apartment. You have a view of, like, it’s very green.
Rental income taxes as a non-resident in Kenya
LADISLAS MAURICE: We’re going to move on to the ROI figures. Can you tell us two words about taxes here as a nonresident?
PRATIK: As a nonresident, there are some taxes applicable. However, if you consult with us, we can see how to work around it and what is possible and not possible around taxes here.
LADISLAS MAURICE: Generally, if you buy as an individual, there’s a gross withholding tax of 30%, which is really high. I haven’t seen this deter anyone from investing here. And you speak to different accountants, and they come up with different ways of trying to work around it. But effectively, I’m, personally, not too worried about it. I’m investing in spite of the tax regime.
PRATIK: And there are also the agreements with other countries that do benefit investors in Kenya.
ROI and rental yield analysis of apartments of various sizes in Nairobi
LADISLAS MAURICE: Cool. Yeah, there’s some double tax treaty agreements which could help in some cases. Cool. Let’s do the numbers, right? A model one-bedroom, prices here in Kenya, as you go up, become more expensive depending on the floors. Model one-bedroom is approximately, on average, 8 million KES, which is about $62,000 for a one-bedroom. The closing costs in total are between 6% and 6.5%. What would be the rental income that you would expect on a one-bedroom apartment here?
PRATIK: It could range possibly between 65,000 KES to 85,000 KES, just depending on what has been built, and what the amenities are, and you know what’s being provided in the apartments.
LADISLAS MAURICE: Cool. Alex, in your previous development, which is in an area in Kilimani, which is not as nice as here, with the finishings that are less nice than what should be here, how much are you renting out your one-bedrooms for?
ALEX: We have a project which is completed like five months ago. We have actually one-bedroom plus study. Most of them are rented at between 80,000 KES to 85,000 KES.
LADISLAS MAURICE: Cool. Okay. We’re going to use a figure of 80,000 KES to be conservative, with an occupancy rate of 95% because it’s easy to find tenants, etc. What is your fee, Pratik, for finding tenants?
PRATIK: The fee is usually one-month’s commission, so one month’s rent as commission.
LADISLAS MAURICE: And on average, people stay how long?
PRATIK: Close to about one-and-a-half years, so 18 months.
Property management in Nairobi
LADISLAS MAURICE: Cool. Look, we’re going to keep 18 months for all the units, but objectively, the three bedrooms, four bedrooms, people typically stay a bit longer. And you’ll also be offering property management services, right?
PRATIK: Yeah, we have a professional management team. Of course, there are some extra cost. They charge like 5%. If you are not in Kenya, you don’t have to worry. You can give this job to the management team who is professional to handle it. Then you just pay them 5% of the monthly rent you own.
LADISLAS MAURICE: Cool. And then the tenant finders fees. Essentially, you have two options. You can go with Pratik, you can go with the property management company of the developer. Those are options. What are the service charges or HOA per month for one-bedroom?
ALEX: One-bedroom, the roughly charges around 7,000 KES per month.
LADISLAS MAURICE: 7,000 KES, so you’re looking at $60 a month of HOA for a luxury building with swimming pool, gym, blah, blah, blah, including property tax in there. It’s really not too extravagant. Then we put a bit of money for maintenance, if there are any issues, and then we get to a net yield pre income tax of almost 8%. And these numbers are quite conservative. Look, I see a lot of supply coming in Nairobi, there’s a lot of building that’s going on, but there’s so much urbanization happening and so many people are moving here that I don’t think filling up these buildings will be too hard. Maybe there’ll be a cap on the rents. Maybe they won’t increase that much, but I’m banking on capital appreciation with this investment, not just yield, but really capital appreciation.
We did these numbers as well for the two-bedroom plus studio. We had roughly a 7.5% net rental yield. And then we did as well for the three bedrooms plus serving quarters and four bedrooms plus serving quarters, those are a bit low, around 6%, but I think these units are more unique, so there could be a stronger capital appreciation play with the larger units. Alex, can you elaborate on the payment plan?
Payment plan
ALEX: Okay, at this moment, because we have not yet officially start, we are requesting a commitment fee. For one-bedroom, we are asking for 500,000 KES, two-bedroom plus studio, 800,000 KES, and the three, four-bedroom, 1 million KES deposit.
LADISLAS MAURICE: Yeah, so between $3,000 and $10,000 booking fee. What about the payment plan, over how many years can people pay?
ALEX: We have a flexible payment plan. The standard one is, when we officially start, you top up to 20%, then every quarter, you pay 10%, because the construction will take around two-and-a-half years, so when we complete the project, then you also complete the payment plan. But there’s also some other flexible we can discuss with a client, which we think maybe can suit their needs.
LADISLAS MAURICE: Cool. It’s good thing about doing business with the Chinese, you can always discuss and find a mutually beneficial solution.
ALEX: Always we want a win-win situation.
LADISLAS MAURICE: Exactly. Look, I like the fact that it’s a two-and-a-half year payment plan in Kenyan shillings, because, as I said, I think that there’s going to be a debt crisis in the future, and if there’s a devaluation in the next two-and-a-half years, my last payments will be a lot lower, significantly lower. The Kenyan shilling currently is at approximately 130 to the dollar. It sank down to 160 to the dollar back in February. I don’t see why, in the next year or two, it wouldn’t go back to 160 and beyond. Look, I’m not basing my financials on this, but in my mind, there’s a relatively high likelihood it’s a free call option that there could be a devaluation, which would be good. But then again, you’re investing in Kenya, it comes with emerging market currency risk, so your rent will be a bit lower down the line, but yeah. So just you need to understand that you’re investing in Kenyan shillings.
In this area, specifically in the core center of Nairobi, it’s more of a dollarized economy. If the Kenyan shilling were to crash, you would see the price of real estate, even in Kenyan shillings, just revalue itself, as well as some of the rents. A lot of the rents are actually in dollars in this area, maybe 10% to 15% of leases in this area are actually in dollars and not in Kenyan shillings. Last point is construction has stopped because there’s an injunction in the whole neighborhood. So welcome to investing in Africa, there are always random challenges. Can you tell us about the injunction, which is why no one is working here?
Current injunction on project
ALEX: Yes, actually, there’s an injunction. But this injunction is not to a particular single project, actually, it affects all the areas. I think, more than 15 projects. Actually, it’s a neighborhood, the Association of Rhapta Road Residency, they want the County Government and other related department to sort out the issue of the infrastructure. Because now you see with more development, the population is increasing. As a developer, so we are trying to cooperate with government, with the neighborhood, but also all the lawyers, all the parties’ lawyers, we are actively communicating with each other, so we hope to sort out this issue as soon as possible.
LADISLAS MAURICE: Cool. Let’s say you lose the court case, and I deposited, whatever, $5,000 with you as the booking fee, what happens?
ALEX: Actually, we have got all the legal approval from the government, including the county approval, the NEMA approval, the NCA construction approval. Now, because we have not officially start, that’s why we request a booking fee of that 500,000 KES or to 1 million KES. For the client to book now you get an earlier chance to secure a unit, maybe a high floor which you may like. But there are also some thing I have to be honest with our client. If you decide to cancel the deal before we start, because we also cost a lot of labor or energy or time, so you will lose 10% of the commitment fee you paid. That will be, like, 50,000 KES to 100,000 KES. Then if you want to cancel the deal after we officially start, that time which means the court case is sorted out, then you have to lost 10% of the total purchase price.
LADISLAS MAURICE: Okay, that’s fair. I mean, that’s fair. And what if the injunction results in you having to lower the amount of apartments. I’m buying on the 15th floor, let’s say, the injunction comes and they say, “Oh, you can only build 14.” What happens to my booking fee, do I get it all, or do I also lose 10%?
ALEX: I don’t think it will happen, actually. [laughs]
LADISLAS MAURICE: [laughs] We’re doing worst-case scenario here, we’re trying to prepare people.
ALEX: If the approval to be amended, maybe a lower floor, of course, for the high floor, the client take, we have to return the money. But for the lower floor, which is not affected, I don’t think. [laughs]
LADISLAS MAURICE: Cool. Fair enough. Okay, fantastic. Look, if you’re interested in finding out more about this project, this development, about real estate here in Nairobi, there’s a link below. And then you can get in touch directly with the team and ask all your questions regarding everything from A to Z buying here in Kenya, taxes, the purchasing process, all the units, the prices, everything you want to know. Great. All right. Gentlemen, thank you very much for your time.
ALEX: Thank you.
LADISLAS MAURICE: Really appreciate it.
PRATIK: Thank you.
