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Ever wish you had one of those magical crystal balls that would help you see deep into the future? Or perhaps, like in one of those fast-motion camera sequences, a video that could magically transport you across a long timeline in just a matter of seconds revealing just how things will unravel, say ten to fifteen years into the future? I feel you! I wish I did too. I don’t know what you’d use yours for, perhaps find yourself that elusive knight in shining armour, or buy the winning numbers to secure a tidy windfall in a lottery or betting scheme. I’d probably use mine to do a little more. Like to anticipate markets so that I could create me some generational wealth! OK, I’m indulging in some wishful thinking here, but you get the point! Except for a magical crystal ball, how else can you actually foresee where the markets are going; where the opportunities are to actually secure phenomenal capital growth in the property market?

How To Secure Phenomenal Capital Growth In The Property Market

 

One of the fundamental premises of investing in real estate, indeed investing in any asset class, is obviously the opportunity to secure capital gains– the appreciation of capital that often happens over the time an asset is held. Sure there are other goals for which investments are made, like the emotional security they provide. However, it is important to understand that all other goals for investing derive from the financial security they create.

Secure Phenomenal Capital Growth in the Property Market

For almost thirty years (between 1985 and 2014), capital gains on real estate and other investments in Kenya were untaxed. This gave investors the opportunity to create substantial wealth from investments in real estate and such other qualifying investments. The overall bullish market trend over that period of time in both urban centres and emerging towns allowed many investors to profit handsomely from their real estate investments; securing generational wealth that they could comfortably retire on and even pass on to their families.

So how exactly did they do it? Were they merely speculative in their approach, or possibly just lucky? For those that did it with great success, were the methods they used replicable?

Is Capital Growth Assured?

It is generally considered in this market that capital growth is assured if you hold an asset long enough. But is it sufficient to simply acquire property, even speculatively, because of this presumption? That same presumption has ensured that the “plot” culture in this country is firmly rooted. Like the social pressure that everyone the unmarried over 25 who must be familiar with, every gainfully-employed or otherwise productive individual in Kenya is at some point expected, by the standards and norms of this nation, to at the very least own a plot (or even plots); at the bare minimum, that spit of land commonly referred to as an eighth (a.k.a. 50 by 100). Otherwise, you are just good for being ridiculed.

Aware of this, land sellers have capitalized on pushing plots at exorbitant prices to herding, lazy investors. And they’re all in on the game; the cooperative SACCOs we all faithful save up with, property developers and even the wildly popular “chamas“.

Even though most vacant land buyers might not be able to afford to build homes on their acquisitions, the tendency is to perpetually confine those acquisitions to their “rainy-day” funds because they are presumed to appreciate. The mere possibility of marginal growth and the security associated with those assets may not be sufficient.

Understandably, part of the vacant land culture is based on the valid, yet elusive dream of home ownership. But alas, the question is, how can you make phenomenal capital gains; not just good capital gains, but phenomenal gains?

Case Study: A Tale of Three Nairobi Suburbs

Sixteen years ago circa 2003, a friend offered to sell me a quarter acre of land in Kahawa Sukari, a suburb of Nairobi located in Kiambu County. Even though he was offering a substantial discount on the sale because he was a highly motivated seller, I passed on the opportunity because of some prejudicial thoughts I had at the time (my parents lived in the neighbourhood and I wasn’t inclined to live next door). The fair market value of the property at the time was actually KES 600,000. Today, that same parcel of land is selling at KES 12M. The market contrived to award those who made the investment with an X20+ growth.

Around the same time, a friend who was leaving the country to study abroad was faced with two investment prospects:

  1. Buy a new flat in the swanky Milimani neighbourhood of Riara by depositing KES 2M and taking a mortgage of KES 3M payable over 15 years; or
  2. Buy two 5-acre blocks of land at KES 1.8M in Syokimau, some nondescript place off Mombasa Road that was unknown at the time and then place the balance of her funds in some fixed deposit to earn interest or use the same balance to pay for the subdivision of the land into eighth-acre plots.

She made the seemingly less-popular of the two decisions electing to buy land in the “bundus”. Syokimau, a neighbourhood at the border between Nairobi and Machakos counties, was at the time just barren land with nothing notable to speak of on it. The property, as subdivided, would comfortably fetch a whopping KES 320M by 2019 market prices! That’s right. 320 million.

Comparing the three separate investors, these would have been the results:

Comparative analysis of land growth rates in three Nairobi suburbs.

Comparative analysis of land growth rates in three Nairobi suburbs.

In 2003, if you lived in Nairobi and wanted to live in a classy neighbourhood with all the cushy lifestyle trappings, Kahawa Sukari, would not have been on your radar. And certainly not Syokimau! They simply would not have made any apparent sense. None at all. Quite literally, Syokimau wasn’t even a neighbourhood at that time. Certainly not one on the minds of home buyers or property developers in the city. It was a desolate bush. Security would have been a concern. It was not the place to be. No roads. No shopping areas or malls. No schools. Nothing apparently progressive was happening yet.

Kahawa Sukari was just coming into its own. At least, it had some signs of development. It was rugged and coarse but there was some settlement. Between it and Syokimau (from a lifestyle perspective), Kahawa Sukari would have been preferable – several times over at least.

The Milimani suburbs on the other hand….now that was a happening place. New malls were sprouting (Prestige and The Junction had just come up around then). It had an extensive, well-maintained road network, all tarmacked. There were good schools, well-established homes. Hospitals within earshot. It was a mature neighbourhood even at the time. If you were looking for a superb address, there were already several here.

What takeaways can we then draw from this case study?

#1. The Safest “Investments” Aren’t Always the Most Lucrative

Of the three choices, while the decision to have acquired a flat in Kilimani may have made the most sense (especially to the “urbanites”) being that it carried the least risk, the result would have been the lowest capital gains (even if one could easily boast of owning property in one of Nairobi’s finest). And while the one that seemingly made the least sense and would have been viewed as the riskiest – Syokimau – was the only one that yielded incomparable gains, when pitted against the other two likely decisions.

Indeed, from this example, while the safest choices are “superficially” the most attractive; they are clearly the least financially attractive!

#2. Return on Investment Makes the World of Difference

A critical factor when comparing investment options is their trend of growth. It aids the investor to determine whether a neighbourhood is comparatively better to invest in than others. In this case, we will only compare the choice between Kahawa Sukari and Syokimau because they were relatively more comparable neighbourhoods at the time.

Compounded growth rate for two comparable suburbs of Nairobi.

Compounded growth rate for two comparable suburbs of Nairobi.

The sustained, annual growth for the period, while not markedly different (only 16%) produces a world of difference in the results. It is not applicable consistently over the initial years that an investment is held but can also be observed in the growth of development in the respective neighbourhoods. The annualized/compounded growth rate doesn’t follow a linear progression but instead follows a curved rate of growth.

#3. Diversification is Key To Managing Risk & Optimizing Results

Investors look to manage risk in such a way that maximizes returns. Another preferable approach may not necessarily be the maximization of returns but the optimization of results – diversifying investments to spread risk by seeking to secure the most optimal return on the full range of investment options available. Following this strategy, none of the three options above, taken exclusively on their own, is “the best”. The generally accepted rule for optimal returns is diversification which allows for aggregation of risk across investments with different rates of returns. Obviously, there is no way to know right at the point of investing which investments will perform well or poorly. The easiest way to explain this using the case study cited is as below:

Diversified portfolio with optimized investment results.

Diversified portfolio with optimized investment results.

This approach assumes that the investor has the capital or ability to invest in all the options available which would rarely be the case. Some investors also apply a weighted average method which puts higher volumes of capital to riskier classes of investments so that their average growth can be significantly higher. However, each individual investor has their own unique risk profile and it would be prudent to establish where your individual appetite for risk lies and match that to the specific investments you are willing to undertake.

In the case study, no investor lost money but their results were worlds apart. It cannot be discounted in the case study that some investors would be happy to merely own a home in an upmarket neighbourhood because of the security (low risk) it provides and will feel that an X4 growth is comfortable for them. It isn’t sufficient though. A good rule of thumb is to establish whether the rate of growth has allowed the investor to beat the cumulative growth in inflation over the period of time the investment has been held.

#4. Observing and Understanding the Market and Trends

The three neighbourhoods in the example above are fairly comparable. They’re all upper-middle-class neighbourhoods. All dominated by owner-occupied status (at least in 2003, Milimani was even though that seems to be changing now as more and more multi-dweller and commercial spaces are developed). They all had standards for controlled development. The trajectory of their growth is therefore bound to follow a similar path. For this reason, an investor could easily then observe similar markets and find opportunities in which the success of past investors is replicable.

The property values in these neighbourhoods grew to a large extent because of increased settlement (population growth), the expansion of road networks, public transport and other public infrastructure and services, improved access to mains services (water, electricity, sewerage), security and other basic amenities, improved access to public facilities and increased private investment (establishment of public administration offices, access to shopping areas, financial services, markets, health facilities, schools and so on).

While the growth is slow and only happens organically and is not always quickly discernible, investors with a keen eye will observe the trends and will see the opportunity portended in that growth. Over time, it is possible to discern patterns across different market segments, for instance between owner-occupied markets and renters markets; or between low-cost urban housing and upmarket housing. But it requires a disciplined level of commitment to follow the market and understand the trends through research.

#5. Create a Blueprint for Your Real Estate Investments

It’s OK to invest ad hoc. Investing works a lot better if you have an informed plan guiding your effort. There are ideas to be borrowed from the case study above. But it isn’t enough to attempt to replicate it.

Each individual might only be able to take up investments based on their own unique financial constraints, their incomes, expenditure and lifestyles; varying appetites for risk, emotional and situational needs, tastes and preferences.

These factors necessitate that investors’ map out their own investment blueprints with clear goals; an entry and exit plan. Gregarious strategies (herding) are great but they often fail because of a lack of congruence in individuals’ ideals, philosophy and expectations. Many of us plan around others in order to “keep up” or find acceptance in particular social circles. Maintaining focus on our goals is best achieved when they are documented and planned for so that even in the face of emotional turbulence and market uncertainty we don’t lose track. A blueprint is desirable in helping us identify our individual path to reaching our goals; achieving peace of mind and attaining financial freedom.

#6. Be Bold. Be an Outlier.

None but the brave deserve the fair. That may be an expression you’ve heard. It is nowhere more true that in the world of real estate investing. Conventional thinking will only get you so far. And calculated risk needn’t be overthought, just calculated. To get phenomenal, you’re going to have to make some bold moves and do some fringe thinking.

It is the outliers who make change happen. They go in early. Lead from the front. Swim against the tide. Reap big!

If you’re driven by the fear of missing out, you’re already going on convention and merely riding the crest of all the wrong emotions that should spur investment decisions. Discipline. Counsel. Research. These are the attitudes and practices of winners!

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