How developers can cut building costs amid costly materials, taxes

Wherever you journey around major urban centres, and beyond, you are met with an equal measure of the beautiful Tower of Babel type of buildings, and run-down walls of Jerusalem before they were rebuilt by Nehemiah kind of structures.

The menace of incomplete developments in the country is not new, with a sizeable number of these buildings being state-funded.

However, with the economic turbulence, which has caused an increase in the cost of development through direct and indirect surges in taxes and the cost of commodities, incomplete buildings are some of the challenges that developers and financiers must grapple with.

Do you alter the architectural design to fit the remaining budget or do you abandon the whole development and count your losses?

Is it possible to tweak the design and create something new just to fit the budget? Does this new thing have a market?  Will the bank understand that the money advanced is no longer enough to complete the project?

Safaricom Investment Co-operative Housing Unit Manager Daniella Nyakuraya notes that while the country’s real estate sector has continued to grow in the past years, spurred by expanding infrastructure and the ICT sector, the Russia-Ukraine war that saw oil prices go up, volatile forex and increase in domestic taxes have been disadvantageous.

“These circumstances have pushed up the price of materials and the cost of doing business resulting in higher construction prices. The taxes have also increased the cost of conveyancing like stamp duty, making it more expensive to transfer property," she says.

She notes that the first reaction, a go-to by many developers, has been to increase the selling price of their projects to protect their profit margins.

However, increasing prices also means making these projects unaffordable, particularly housing, amid the government’s incessant push for affordable housing.

Ms Nyakuraya notes that developers have to protect their business to safeguard their profits and any value to be generated from the development.

She says there are several cushions that developers can adopt to ensure they stick to the intended expenses. “One of these cushions is an adequate contingency amount in the Bills of Quantities. This amount is used to absorb any unexpected costs during the development of the project,” she says.

She states that the developer can also plan which of the project costs they want to expend first to ensure that they stretch their coin for maximum return.

“For instance, when doing a large estate, the developer can phase it to ensure that they are able to deliver a fully complete smaller segment than spreading their money over their whole estate but not being able to fully deliver

Ms Nyakuraya calls for the prioritisation of costs that go directly into the development than those towards supporting infrastructure. For example, when building a housing estate with limited resources, one should focus on the houses as compared to other aspects like the gardens.

“A developer can also cushion themselves by securing off-take before they are too deep in the project. This will not only alleviate their cash constraints but also give them easier access to financing,” she says.

According to the Construction Input Price Indices by the Kenya National Bureau of Statistics (KNBS) released at the beginning of the year, fuel prices contributed largely to the increased cost of building last year.

“The Building Cost Indices increased by 1.55 per cent from 114.74 in quarter three of 2023 to 116.52 in quarter four of 2023. This was mainly due to increases in the indices of cement, hardcore, BRC wire mesh, paving blocks and steel reinforcement bars,” read the release from KNBS prepared by Director General Macdonald Obudho.

In a statement, Absa Bank Kenya Mortgage Department explained to Real Estate that certain margins have to be included when considering extending finance to a project. Calculations are done per square metre, including the cost of materials to ensure the loan advance can complete the project.

“For example, during the Russia-Ukraine war, the cost of construction materials, such as metal, increased. Consequently, we adjusted the cost per square metre to account for these changes,” said Absa Bank.

Absa Bank says it proactively assesses the project and when necessary, increases funding to accommodate price adjustments that may result from taxation policy or macro-economic conditions.

“In cases where repayment ability is limited, we work with our customers to make strategic adjustments, such as modifying certain aspects like furnishings, to ensure the successful and timely completion of the project,” the financier added.

Real Estate also sought to know if, during financing, architectural re-designs can be allowed to cater for budget constraints and to what extent this can be done.

“Architectural adjustments are considered only in very rare and extreme cases. However, since mortgages are very personal and unique projects. We work closely with our customers on a case-by-case basis,” said Absa Bank.

“This collaborative approach ensures that we find a solution that works best for both the customer and the bank, creating a win-win situation for all.”

One of the most feared outcomes, whenever a developer finds it difficult to complete a project, is bankruptcy, which Ms Nyakuraya says is a major risk they face because once the huge amounts of capital have been sunk, it is almost impossible to recover.

“Ballooning development costs can sometimes push the developer to compromise on the quality and size of the delivered project. Buyers then complain publicly that they did not get what they paid for, or the building collapses leaving the developer in a huge brand exposure risk,” she says.