How to Profit from real estate housing in Kenya

Learning from the best this article unfolds the story of a self-built man teaching on how to profit from real estate housing in Kenya.

In a conversation with Jaco Maritz, John Latham, the founder of Unity Homes, shared insights about his business journey and the real estate industry. Unity Homes, a developer of affordable housing, is based in Kenya. Latham, who hails from Britain and has been living in Kenya for almost 20 years, worked as a project manager for a construction firm in East Africa. When the company he worked for was acquired by another player, Latham received a substantial payout, which he used to launch Unity Homes.

John Latham’s interest in the housing industry was piqued when he read a World Bank report predicting a surge in urbanization and the need for housing in Kenya. He invited three of his business acquaintances to become shareholders in his new company, Unity Homes. The four partners invested their personal funds and joined the company on the same terms.

According to John Latham, the housing market in Kenya can be classified into three categories:

    • Formal: This refers to housing that is constructed by professional housing developers.
    • Semi-formal: This category typically consists of small apartment blocks developed by individuals with extra cash who are seeking additional income streams. The quality of these structures is usually not as good as formal developments, and they may not adhere to building regulations. Often, these properties lack sufficient water and sanitation infrastructure or parking space.
    • Slum dwellings: These are densely packed informal housing units of weak build quality.

 

Unity Homes is a housing development company that focuses on providing affordable housing for the lower end of the formal market. Their cheapest units are 45m2 and cost approximately $35,000. Their first development was in Eldoret, a city in western Kenya, in 2014. Being a new player in the market, the company saw Eldoret as a “safe space” to learn the ropes. However, they soon realized that people in regional towns and cities earn significantly less than those in larger urban centers, which was a downside they had not anticipated.

The Eldoret project took four years to build and sell, with 239 units completed. Although the project was not very profitable, the company learned many valuable lessons that they implemented in their next project, a 400-unit estate in Tatu City, on the outskirts of Nairobi. The development, completed in two and a half years, had better architecture, construction, and marketing, resulting in much higher profits. Unity Homes has built a vertically integrated business that includes architectural design, engineering, construction, procurement, marketing, and sales. Their core team consists of 65 employees, but they can have up to 500 contractors on site for larger developments.

The company is currently building two more estates within Tatu City, with 640 and 1,200 apartment units, respectively. They have also expanded to Nigeria, where they are constructing houses in Alaro City, in the Lekki Free Zone in Lagos State. As the development is within a free zone, the company is protected from much of the bureaucracy associated with doing business in Nigeria. Despite the challenges faced, Unity Homes is committed to providing affordable housing to the lower end of the formal market.

 

Target audience

Unity Homes cater primarily to professionals who are looking to invest in affordable housing for their retirement. These individuals purchase the company’s houses with the intention of renting them out and generating income to sustain themselves once they retire. Essentially, the company is offering an investment opportunity to its customers. Due to the lack of a mature mortgage market in Kenya, most transactions are conducted through cash or short-term payment plans.

 

Complexity and uniqueness

Warren Buffett’s concept of a business moat, which refers to a company’s ability to maintain a competitive advantage, has become widely accepted. Just like a medieval castle, the moat protects those inside the fortress from outsiders and can include factors such as cheap access to raw materials, high switching costs, or brand recognition.

For Unity Homes, complexity in a business serves as a strong moat, and the company’s ability to manage it effectively sets it apart from competitors. The company’s vertically integrated business model involves many moving parts, which may be difficult for competitors to replicate. According to Latham, “We’ve got a very complex network of humans managed correctly.”

 

Regional amenities give best returns

Latham believes that regional economic hubs, such as Nairobi in East Africa and Lagos in West Africa, offer the best potential for formal housing developments. While Unity Homes began with its first development in Eldoret, Kenya’s fifth most populous urban area, Latham notes that there is generally lower spending power in secondary cities, which can impact a project’s overall profitability. As such, he advises companies in the formal sector to focus on the capital cities or regional hubs in a country. For Unity Homes, this strategy has led them to Nairobi and Lagos, with Latham stating that “even the idea of going to Kigali or Kampala versus just going to the other side of Nairobi, just doesn’t make sense.”

 

looking for a competitive advantage

Unity Homes has been successful in maintaining a competitive advantage through the complexity of its business model. CEO Andrew Latham believes that complexity, if managed effectively, serves as a strong moat for the company. Unity’s vertically integrated business has many moving parts, which competitors may find hard to replicate. Latham believes that by managing their complex network of humans correctly, Unity Homes is able to maintain its competitive advantage.

Latham also believes that regional economic hubs offer the best potential for formal housing developments. Although there is demand for housing in secondary cities, spending power is generally much lower than in commercial capitals, which impacts the profitability of a project. Therefore, Unity Homes focuses on capital cities or regional hubs, such as Nairobi and Lagos.

Unity Homes pays close attention to cash flows and ensures its projects lock up as little capital as possible. By developing its housing estates in small phases and handing over the properties as soon as they are finished, the company can recycle its capital quickly. This is unlike some developers who complete the entire project before handing over units to buyers. This strategy also encourages prospective buyers to commit, as they can see completed units delivered to other buyers.

 

Things to prioritize

Unity Homes prioritize profitability over growth. To align its management team and employees with the broader business goals, the company shares profits over a certain threshold with a few senior team members. This initiative has been expanded to include a wider group of staff for the second Nairobi estate. Commission structures for the sales team have also been reworked to ensure they are highly incentivized.

The company also implements its philosophy of incentivization further down the organization by paying certain contractors a piece rate rather than an hourly fee. This motivates contractors to be more productive and complete work quicker, which in turn allows Unity Homes to turn over its capital more quickly.