The dos and don’ts of mega projects

The Kamuthi project, which was launched in 2012, was to be completed in three years, and began on very high note, However, the society was  hit by unforeseen challenges. PHOTO | FILE

What you need to know:

  • Also worth learning from is Migaa Estate, a multibillion gated community by Home Afrika Ltd in Kiambu, which is now taking shape after dragging on for about four years due to, among other challenges, financial constraints and the market.
  • Fear among potential investors that the project might not succeed was also a factor in the delay of the 775-acre venture, which the developers had announced would be completed by this year.
  • Kamuthi operates on a socio-economic model whereby, after buying land, members are allocated half of it at lower-than-market rates while the rest is floated on the market for the public at the prevailing market rates. 

When an investor embarks on a big real estate venture, they do everything they can to ensure that the project runs smoothl y so that they can start benefiting from their investment after a specific period.

In an effort to ensure that this is how things pan out, most developers work on the project’s designs and models, fix prices and set the timeline for completing  each activity, which they announce before, during or shortly after the launch.    

But in many instances, mega projects are never completed within the scheduled period due to unforeseen challenges, which force them to go beyond the scheduled time, or even stall them altogether. 

This is, of course, bad for business, since it drastically affect customers’ interest in projects, particularly if they have made some down payment.

The result is a cash crunch for  developers, which can be so serious that they cannot  proceed with the  project, and if they do, it is at a pace that’s much slower than planned.  Many investors have learnt this the hard way, even though some have recovered and managed to complete their projects while others have been hard hit by unforeseen hurdles, which has seen their projects become white elephants. 

The case of Kamuthi Housing Cooperative Society, which had to review its initial plans, after unforeseen developments almost killed its dream of setting up a Sh4.5 billion gated community offers some valuable lessons.

KEY ELEMENTS

The project, known as Buffalo Hills and Golf Village, is in Kilimambogo, a dry, dusty area in Thika, Kiambu County. Upon completion, it will have about 6,000 homes and commercial facilities built on quarter and half-acre plots within Golf Village, and on one-eighth acre plots outside Golf Village.

It will also feature a nine-hole golf course covering 108 acres; a clubhouse next to a man-made dam covering 9.5 acres within the Golf Village with a swimming pool, game rooms, sauna, gym and spa among others.

Migaa Estate, a multibillion gated community by Home Afrika Ltd in Kiambu, is now taking shape after dragging on for about four years. PHOTO | FILE

Also worth learning from is Migaa Estate, a multibillion gated community by Home Afrika Ltd in Kiambu, which is now taking shape after dragging on for about four years due to, among other challenges, financial constraints and the market.

The Kamuthi project, which was launched in 2012, was to be completed in three years, and began on very high note, However, the society was  hit by unforeseen challenges, which the secretary, Mr Eliud Njoroge, said  cast a cloud of  uncertainty over the future of the project, especially after they were unable to pay their debtors.

Mr Njoroge says their initial plans, which did not take “key” elements — some of which were beyond their control — into consideration, were partly to blame. However, after months of struggling, the society, which has about 7,000 members and more than 4,000 non-member clients, overcame the challenges, which almost placed its properties under the auctioneer’s hammer.

So, what are the factors the society failed to consider, and which investors planning to undertake such projects should take into consideration to ensure that their projects run according to plan? 

1. Financing

Most real estate projects require a lot of money, which many investors do not readily have, so they seek bank loans to top up what they have raised so that they can carry out their projects.

And it is in regard that Kamuthi Housing Society officials say lies a very important lesson as far as implementing a mega project is concerned.

Due to their well-thought plan, they were able to easily secure a huge loan from Sidian Bank (previously K-Rep bank), and later, from the Cooperative Bank of Kenya to undertake the project.

But  it was after most of their clients developed cold feet due to the difficulty in reaching the project site, and which drastically affected their cash flow, that Mr Njoroge says they learnt that you should not seek financial support from just any bank, but from one that believes in the your vision.

Kamuthi operates on a socio-economic model whereby, after buying land, members are allocated half of it at lower-than-market rates while the rest is floated on the market for the public at the prevailing market rates. PHOTO | FILE

POTENTIAL INVESTORS

He asserts that, as an investor, you should take time to shop around for a bank that will walk with you in good times as well as bad times.

When the society was in financial dire straits in 2016, it owed the Sidian Bank and Coop Bank close to Sh700 million, which it was supposed to service to the tune of Sh13million a month, but could not due to lack of funds, so it began defaulting

“Were it not for the fact that the banks we owed believed in us, they would probably have attached our properties even before we could embark on a recovery strategy,” Mr Njoroge told DN2.

In the case of the Mitini Scapes  Project in Migaa, also in Kiambu County,  the chairman of the  project, Mr Boniface Kamau, said during an event at the project site last year that initially, they could not raise the necessary funds

He said financial institutions were not willing to give them loans, and few people had purchased the houses off-plan due to a number of factors, among them the general perception, that the area is  a crime belt.

Fear among potential investors that the project might not succeed was also a factor in the delay of the 775-acre venture, which the developers had announced would be completed by this year.

But they later recovered and last year, they completed their first  phase of the project known as Mitini Scapes, and  resumed work  on the other phases, which include an 18-hole golf course.

2. Pricing and cash flow

During the planning stages of a project, a budget is drawn up, indicating the  prices of the materials to be used.

However, as often happens, with time the prices of some materials go up, so if no provision was made for such an eventuality, the materials end up being under priced, which of course, affects the project since additional money has to be sought to make up for the shortfall.

This can cause delays in the project’s implementation

Indeed, this was one of the factors that nearly killed Kamuthi’s dreams, after the Sh100,000 price they had charged for 50ft x100ft plots exclusively  for members despite the market value being more than Sh600,000, turn out to be too little to sustain their operations.

Kamuthi operates on a socio-economic model whereby, after buying land, members are allocated half of it at lower-than-market rates while the rest is floated on the market for the public at the prevailing market rates. 

Since is seemed like a good deal, all members were quick to make the Sh100,000 payment in full and immediately began demanding their title deeds.

But with cash constraints, the society’s chair, Mr Kung’u says, it became well-nigh impossible for them to proceed with the project, which was also grappling with other constraints since non-member clients had already abandoned them.

This saw the firm review the land prices, and after intense lobbying, members reluctantly resolved to contribute an additional Sh80,000 to bail the society out.

“Nobody wants to be asked for an additional payment even when buying commodities in a shop but luckily, our members trusted us. It’s very important to research on the costs because in a project that will take a long time and which requires a lot of finances, cash flow is more important that the profits, in the initial stages,” Mr Kung’u says.

In some instances, developers have been accused of over pricing, something that discourages people from investing in their products.

3. Accessibility

According to Mr Njoroge, one of the key factors investors should consider whenthinking of a real estate venture is its accessibility.

This, he says, does not necessarily mean that you should invest only in areas that are already developed.  However, if you want to build, say homes in an area that is not close to the road, you should ensure that there is a good road network that makes in easy to access.

A look at Kamuthi’s Golf Village is a case in point.  Access to the development, which is less than 7.5 kilometres from the Thika Super Highway, was hampered by the lack a good road network. To access it, one had to travel  through rough terrain, which greatly discouraged potential clients.

“In the beginning, it did not occur to us that the poor road network would have serious effects on the project, considering that it took off well after many people embraced it. But as time went, clients started complaining and before we knew it, sales were slackening,” Mr Njoroge says.

“There is always a traffic snarl-up in Thika and whenever we took potential buyers on  a site visit, it took them more than two hours to leave the town. Besides, the access road from the main road to the project was horrible, and this discouraged them from investing with us. But the construction of  two roads facilitating access to the area has largely sorted out the problem,”  Mr  Kung’u, adds.

It was not until the government announced the tarmacking of a link road between Garissa Road and the Thika Superhighway, which passes near the project, and the Mangu-Komo Road that links the Thika Superhighway to the proposed Greater Eastern Bypass through the project that clients began to see some prospects.

Kamuthi  also had to invest some of its funds to rehabilitate part of a rocky road from Garissa Road to the project.  

4. Timeliness

Timeliness is another value that developers should observe in order to sustain customer confidence.

For instance, Mr Njoroge says, although the hurdles they ran into was unexpected, they were not surprised when their clients’ enthusiasm in the  project begun to dwindle, especially after the timeline they had set lapsed, when the project was still at the foundation stage.

“It is better to set a long period for the implementation of a project, however small it might be, than to set a short one and fail meet it because clients will stop believing in you, and they will think that it’s  a result of your  incompetence, even when the challenges involved are beyond your control. Convincing them otherwise will be an uphill task,” he says.

5. Availability of title deeds

Even if a project is completed on time and as designed, clients will remain insecure until they get a title deed for their investment.

Mr Njoroge says this is one of the reasons that makes clients develop a negative attitude towards a developer because they become suspicious, since in most cases, they mistakenly equate a delay in the processing of title deeds with fraud.

In Kamuthi’s case, for example, some of the clients completed paying for their plots, but due to the financial constraints and delays on the government’s side, they were unable to process title deeds in good time, a situation that almost earned the society a bad name.

However, after resuming activities on the projects and reviewing their plans, the society adapted a strategy that will see each client obtain their title deed upon completion of the payment for their plots, regardless of whether or not the other members have paid.

“The deal will ensure that if a client pays for his or her plot in full, it will be possible for us to process and issue them with a title deed, such that a delay by other members in making their payments will not affect those who have paid in anyway,” said Mr Njoroge.