The developer
Rohan Patel, director of corporate development, Grenadier
One of the biggest developers in Kenya, Grenadier was the group behind the development of the Sankara Nairobi hotel, one of the biggest and best-known in the city – the first of three planned phases of development – and has a £60m pipeline in the city. Rohan Patel lived in the UK for seven years before returning to east Africa in 1998 to work with KPMG. He took on his role heading Grenadier’s property development arm in 2006.
“It is true that working in the African property market is a completely different world compared with operating in the UK and other parts of the world. One of the key issues here is project execution and it can make people who are not used to the market quite nervous. But we are increasingly looking to form jvs with institutions on our upcoming schemes and we would absolutely consider working with UK and overseas groups.
“And while I am not saying that Nairobi is comparable with say, South Africa, it is probably one of the most mature markets in sub-Saharan Africa. It won’t be for everyone, but some of the nervousness is starting to lift a bit.
“Our focus over the next five to 10 years is to develop mixed-use schemes in Nairobi, using anchor hotels to attract business and high-end guests. This is basically to replicate what is happening in commercial real estate here as, over the past decade, the city has become the main business hub for east Africa. The problem has been that the urban business hotel scene was very limited before we opened The Sankara four years ago. We closed last year at 78% occupancy which, in a year when we had a major terrorist attack within 1km of the hotel, was a good result.
“The planned mixed-use schemes we are working on now will focus mainly on office and retail – with the hotel anchor mentioned above. We will be looking to attract major international tenants such as Google so are looking at prelets for the first time. Until now this is something that just has not been done in Nairobi. But times are changing so quickly.
“And these are big projects – the biggest we have done to date. The Grove is a 4m sq ft scheme in the north of the city. We are anticipating a 24-month period until completion and are looking for rents of $15 per sq ft. Then this year we are planning to start an office-led project on a 7.5-acre site which, given the scale, we will probably have to deliver in phases and co-develop with a partner – probably an institution.
“At the moment it tends to be the South African funds, such as R&B West Port or Atterbury we are looking to work with. But that is mainly down to the fact that they have an appetite. It certainly doesn’t have to be one of those firms and, as I said before, there is no question that we would partner with a UK or other overseas group. I really don’t see a problem with doing that at all – even with companies that don’t have a track record of operating in the market here, because we are already on the ground.
“Now is an extremely exciting time for Nairobi. Our third project is a bit further down the line and very ambitious, but it would potentially deliver 1m sq ft of commercial office space. Considering that office take-up in Nairobi is currently around 1.2m sq ft a year in total, that should give an indication of the potential growth here in the city.”
The investor
Koome Gikunda, investment principal, Actis
Actis is a British emerging markets private equity fund managing roughly $6bn. Koome Gikunda joined in 2007 from JP Morgan in New York to execute and manage Actis’ private equity real estate investments in East Africa.
“As a British fund we are evidence that Kenya is open to foreign investment; people are pretty pragmatic here. If you deliver on time, quality and budget then it is not an issue. And there is already a lot of British expertise here – especially in architecture and among the consultants. We saw a huge move of professionals and investors from the UK and the Gulf post-Lehman, when people lost their jobs and relocated.
“But being on the ground in this market is crucial. And it is the same in Nigeria for west Africa. If you go it alone like us, without a local development partner, then you need fit-for-purpose teams, full of local people who know the market. In west Africa, for example, we have brought in a guy from Hines who has moved to Accra to manage our real estate portfolio from there. It means we, as the investors, can take a bit of a step back, though we are still very involved in the real estate and heavy lifting; certainly much more than we would be in the UK.
“Actis is the biggest private equity real estate fund on the continent, if you exclude South Africa. Property is the smallest of the three asset classes we cover, after corporate private equity and infrastructure. We have 120 investors from all over the world, including high-net-worths, endowments, family offices and pension funds. We set up our first fund specifically focusing on African real estate in 2006 and we are now in exit mode. Before we came along things were done fairly ad hoc. Ours was one of the first professional investments into these sorts of assets and from that initial fund we have developed a portfolio across Nigeria, Ghana, Mauritius, Dar es Salaam and, of course, Nairobi.
“There is a huge appetite for real estate development across Africa. Take the Palms in Lagos. This was the first proper shopping mall in a city with a population of 16m. It became a tourist attraction. People would come from all over the country just to see it. To see a mall. We did the same with a mall in Accra.
“We have also invested in office developments in Niarobi and Tanzania, which are the first of their kind in terms of design and parking ratios – crucial for attracting multinational tenants.
“Our second fund launched in 2012 and is just under $300m. We are looking to do more in Nairobi. Specifically, we will be following the infrastructure to build a pipeline that anticipates where the city is likely to grow over the next five to 10 years. At the moment, there is a lot of expansion east because the two-lane road leaving the city in that direction is being turned into a 12-lane highway.”
Top five tips for emerging market entrants
Nigel Read, partner, Hogan Lovells International
1. Hire a good legal counsel
Sounds obvious, but in emerging market deals (where time is often short and the potential for high returns can be intoxicating) the temptation is to cut corners. A good local counsel will balance the need for speed and your appetite for risk. Make sure they have a solid track record in advising international clients on local deals.
2. Undertake comprehensive due diligence
Make sure you will acquire a good and marketable title to your property. It may not be straightforward in jurisdictions with no comprehensive system of registered title. Satisfy yourself that the information you receive from the seller is reliable. Cross check it against official records. Scope your due diligence exercise so that it informs you not only about the legal assets and liabilities you are assuming but also the wider business environment in which they operate and the key employees in management.
3. Understand the implications and costs of local law and regulation
Regulation in emerging markets is developing rapidly. Are you aware of potential liabilities and the full costs of compliance? Beware of hidden charges, such as the licence fee payable to an official in order to obtain a change of control consent or the registration fee required to participate in a government-sponsored tender.
4. Consider how to structure the investment
What is the preferred way of holding your investment? Do you need to establish a local company and what does that entail? Are you required to have a local partner, or would that be sensible given their knowledge of the market? Do you need third party finance to fund the purchase price and does it make sense to obtain this from a local bank? Make sure you get specialist advice on the local tax regime and the most tax-efficient structure for your investment.
5. Know the local business landscape
You will need a deep insight into the way business operates and local customs and practices. Do you know the key decision makers (customers, suppliers, government officials)? Is there scope for political interference and is it likely that a key piece of legislation will be altered on a whim or a licence unilaterally revoked? The balance between risk and reward in emerging market deals requires fine judgment.
