Where is The Opportunity in Vacant Land?

Besides the obvious agricultural use, depending on its location, vacant land is also great for commercial and residential development. Our market loves vacant land! By sales, vacant land is the undisputed champion of real estate “investment” channels there are in this market. While they aren’t the most productive use of land, subdivision schemes for vacant land have become the most popular property investment option for the majority in the market.

Anyone who has been employed for a few years will undoubtedly have received enticing offers of vacant land for sale from the SACCO or Chama they subscribe to. Vacant land is also popular with retirements benefits funds. The large, economically diverse subscriber base that SACCOs, pension schemes, and investment clubs command make them the predominant market players in both vacant land acquisitions and sales in this market. A brief perusal of the classifieds in any local daily and realtor websites will confirm just how popular vacant land sales are.

But just why are vacant land sales so popular? Here are some reasons:

#1. Divisibility and Affordability:

As a product, vacant land has mass appeal. This is primarily because of affordability across the entire economic spectrum of the market. Which is to say, quite literally, “there is something for everyone” right from the person who only has KES 20,000 to put up right up to the one over KES 200 million to invest. In addition, by subdividing, the land becomes more affordable to a wider section of the market. The land selling companies acquire land parcels in bulk, develop subdivision schemes, and then sell on the open market the smaller, more affordable plots.

#2. Aspirations of Homeownership:

Another reason why subdivisions are wildly popular is that the market is very heavily oriented towards the “build” option for homeownership. The logical first step to making that elusive dream come true is owning a vacant piece of land.

#3. Socialization and Cultural Mindsets:

The unwritten but pervasive cultural rule is that one must own a piece of land to be counted illustrious. When children are at the age where parents start to offer financial literacy advice, it invariably comes via the words “Make sure when you start earning, you buy yourself a plot”. Owning a plot of land is the “holy grail” that declares you to be on the way to making the homeownership dream a reality. It proudly announces that you are now worth reckoning with and that you can now walk with a bounce in your step! Even in social circles among colleagues and peers, you will likely be branded an “enemy of progress” and subsequently proscribed if you are not among the ranks of plot-owners.  Anyone reading this relate to what I’m saying?

#4. Speculating For Capital Gains

Because of population growth and the resulting creation and expansion of settlements, vacant land has traditionally been a good driver of capital gains. Premised on zero input post-acquisition, many investors consider that acquiring vacant plots which can be sold years later for handsome returns is a good strategy for growing their wealth. Indeed, in true Kenyan fashion, this is what the majority think that land banking is. The promise of unprecedented returns, coupled with the fact that the investor needn’t make any improvements to increase the value of the land, has fueled the popularity of vacant land sales.

Investing in Vacant Land

So what are the opportunities in investing in vacant land? Primarily, as an investor, the prospect of generating capital gains without any constant input on your part may provide the greatest appeal. However, another investor may be keen not just on lazily waiting for capital gains to accrue on the property, but instead to gain some cash flows from it. These two investors have different individual needs and so the decision needs to be weighed against their respective needs. There is, by and large, yet a third individual in this equation (and he is in the majority).  He will acquire property only with the objective of “saving” his money and may only consider the best use case of the property at some undetermined future date, satisfied that he may even grow his savings over time.

The investor looking to generate cash flows from the land will consider some sort of economic activity that can be viably carried out on it depending on its size, location, and other factors. For instance, the economic activity maybe some sort of agricultural activity done on a scale that the property can support. If the property is located in a prime area, say fronting the main trunk road, and in a well-developed neighbourhood, then the investor can consider a myriad of choices such as developing multi-dweller units, or leasing out or undertaking a joint venture for the development of commercial space or some other economic activity such as a car yard, an entertainment resort, and so on. The rental income on the property will not only increase the investor’s cashflows but will also increase the value of the property.

Without a clear underlying investment objective, the amassing of vacant land acquisitions can be misguided and may not be the best application of resources simply because land is an illiquid asset.

In soft markets, there is also the additional risk arising from the inordinate period of time it takes to dispose of these holdings.

Hot New Frontiers for Vacant Land

Population growth, increased settlement, and infrastructure development are the three main drivers of growth in values of vacant land in this market. A good baseline for establishing growth trends in any vacant land market is its performance over the immediate 15-year period preceding a decision to invest in it. Going forward from 2018, it is important to take stock of the implementation of key national development agendas, specifically Kenya Vision 2030 and its component development programs such as LAPSSET and the current government’s Big Four Agenda; as well as the development plans of devolved government units and the attainment of the key milestones in their achievement. These infrastructure and social development plans, in tandem with the steady implementation of key infrastructure projects aligned with the country’s Vision 2030 will spur growth and open up hitherto undeveloped areas of the country creating new opportunities for those who had the insight to invest in vacant land in those areas.

In 2019, the Kenya National Bureau of Statistics, a unit of the State Department for Planning, will be conducting the  2019 Kenya Population and Housing Census, a national census which will provide meaningful insight into the demographics and social trends in the country over the last ten years. The same institution also publishes several important publications on housing and economic trends in the country. The insights to be gleaned from these publications can provide a great roadmap for following population growth and therefore determining ideal investment locations.

In Nairobi and its immediate environs, the continued expansion of programmes like Kenya Informal Settlements Improvement Programme (KISIP) and Kenya Slum Upgrading Programme (KENSUP) to include new development plans around the Nairobi Metropolitan Services Improvement Project (which covers Nairobi County and four of its neighbouring counties) will see the expansion and development of many new settlements outside of the main suburban areas of Nairobi. The Nairobi Integrated Urban Development Master Plan (NIUPLAN) shows the different development priority areas for a variety of infrastructure within the city and its surroundings in the areas of urban transport, railway, airport, power, water supply, sewerage, telecommunication and solid waste management. All these developments will impact on the real estate market within the county and its environs.

In addition to these projects, there are massive undertakings happening at the national level which are bound to create investment opportunities in the real estate market both in the short and long term. The expanded mandates for devolved government units at county level complemented by the rapid expansion of road networks, the adoption of new mass commuter transport systems and the ongoing development of new national transport corridors including LAPSSET, as well as other infrastructure projects all over the country will profoundly shape the country’s real estate market over the next few years.

These developments will portend great fortunes for the savvy investor who is informed and keenly aware of the market in which they are operating.

P.S. About Last Week’s Post

Last week I ventured to give my honest take on land-banking schemes as a real estate investment channel. I enjoyed your feedback on the subject. Many readers, however, felt that because I had offered what they deemed to be a negative slant on the subject, my time would have been better spent on discussing vacant land sales.

While I don’t deny a personal aversion to land banking schemes, I hoped to offer a balanced view. The risk associated with schemes where there is no real transfer of ownership to an investor is inordinately high and while appetites for risk vary between individuals, as long as an investor is adequately informed on the choice under consideration, they know what to look out for, and the choice is a good fit with their investment plans, then sure, they should go right ahead and make the choice. Would I advise it? The concept of land-banking is convoluted and is still relatively untested in this market. I wouldn’t advocate for investment strategies that place undue reliance on the disposition of other investors who, just like me, are attempting to carve out wealth from the market for themselves. I associate it with a lack of motivation and the fear of failure.

There is much to be gained from collaborative strategies but the level of risk needn’t be as significant as that in land banking schemes. Investors may want to consider land-banking ventures as a vendor rather than as a subscriber. Most investors may see the opportunity in buying into a land-banking scheme but few would see the greater rewards in creating one.