CHAPTER ONE

INTRODUCTION

1.1 Background Information

According to Panek and Sobotova (2015), they argue that a gated community is a private

residential or estate houses containing entirely controlled doors for walkers, bikes, and cars and

are regularly described by perimeter walls and fences. Similarly, Milanovic (2011) agrees that

gated communities are neighborhoods with confined gates intended to privatize open spaces.

They are security advancements with assigned borders, normally dividers or fences, and

controlled doorways that are proposed to avoid entry by non-occupants. Panek and Sobotova

(2015) further point out that during the colonial time, estates, in Nairobi were unmistakably

outlined along racial lines, i.e., Europeans, Asians, and Africans. Access to the European

quarters was limited to local African laborers. Harris (2013) argues that old estates such as

Buruburu and Umoja started in comparable route with controlled conditions. However, things

began changing after the original proprietors sold and left houses to new proprietors not bound

by the set of accepted rules.

When asked about the idea of gated communities different people evoke diverse responses on the

planet, with reports that post-apartheid South Africa has seen the ascent of such estates generally

determined by security needs. In Argentina, the professional class which lives outside, see those

in gated communities as rich and ridiculing their riches. They allude to these gifts as "nations" or

private neighborhoods. Even though empirical data demonstrates that gated and walled urban

areas are as old as a human residence, researchers concur that the idea of current gated

community homes originates from first world countries. For example, in Germany with the

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fundamental reason being the yearning to make support between the individual and the general

public as individuals scan for means by which to shield themselves from vulnerability hastened

by heightening instances of wrongdoing.

Development funding in Kenya is carried out by the government, commercial banks, specialized

housing finance institutions, insurance companies, parastatals of which the National Housing Co-

operation (NHC) is a significant player. Examples of gated community developers include Race

Course Gardens Limited, Greenspan Housing, Scheme Developers Limited, Kamuthi Housing

Co-operative Society Limited, Superior Homes Kenya Limited, Suraya Group Limited,

Rendeavour Developers, Diamond Property Merchants, The Othaya Group and Kenya Homes.

Usually, financiers offer both long term and short-term debts to developers with the hope that the

developers will pay the principal amount and the interest accrued over time. The developers of

the gated community were usually lured into developing gated community projects to make a

return on the amount invested. Gated communities are lucrative to many private and public

investors who wish to own those properties to reap multiple benefits associated with them such

as security, amenities within the developments, social prestige among other objectives.

Therefore, in practice developers are expected to make a return in the shortest time possible and

repay any mortgage that might have been facilitated to them. It does not always happen because

developers are faced with a myriad of challenges which range from breaking ground of the

developments to the selling of the units, this consequently affects the financiers in recouping

their principal amount and expected interests within the expected timelines. It is imperative to

point out that in spite of all the glamorous and attractive aura associated with gated communities,

there are untold agonies and challenges that developers and financiers alike are entangled in.

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This is what has motivated this study to be undertaken to determine these challenges and propose

the best practices.

1.2 Statement of the Problem

After a thorough examination of the existing literature, it has been revealed that there is massive

deficiency of information regarding the challenges behind the non - performance of some gated

communities. The main goal of this research is to identify the challenges faced by financiers

when financing developers and establishing the reasons as to why the developers are unable to

roll out their gated community projects as expected to realize the projected returns within the

stipulated timelines, and in return repay their respective financiers. These challenges are not

articulately known to either the financiers or developers hence the need to carry out the

investigation.

1.3 Objectives

The priority objective is to establish challenges facing financiers and developers when investing

in gated communities in Nairobi, Kenya.

The auxiliary objectives are as follows:

i. To investigate the mode of financing and minimum threshold requirements needed by

financiers when facilitating loans on gated community projects.

ii. To determine the time frame period for various projects and the payment plans adopted

by developers when selling the properties.

iii. To determine the challenges faced both by financiers on giving loans and developers on

rolling out the projects from inception up to selling out of the properties.

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 iv. To recommend the best ways forward to both the financiers and developers in giving out

loans and development of gated communities respectively.

1.4 Research Questions

The generated research questions are as follows:

i. What are the modes of financing and minimum threshold requirements needed by

financiers before facilitating any loan on gated community projects?

ii. What is the time frame period for various gated projects? What is the mode of payment

adopted in selling gated properties?

iii. What are the challenges faced by the financiers in funding gated community projects and

developers on rolling out the projects from inception up to selling out of the properties

respectively?

iv. What are the appropriate mechanisms to be adopted by both the financiers and developers

in giving out loans and development of gated properties respectively?

1.5 Importance of the Study

It will go a long way in reviewing and widening the existing literature on the challenges facing

investment in gated communities. It will specifically assist the financiers on how best to screen

the developers who apply for funding from them by providing a thoughtful insight on how best

to qualify the projects the developers want to undertake to determine the right amount of

finances to offer them and at what time intervals. The developers on their side will understand

how to balance equity and debt in the financing of their projects and how to draw up realistic

project management within appropriate timelines.

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1.6 Areas of the Research

The study mainly emphasized on a sample of four gated communities. The research in coming up

with the four case study areas it applied specific case studies and has adopted three gated

communities from the middle-income earners, i.e., Lapfund Gardens, Fourways Junction Estate

and Crystal Rivers. The remaining gated community is from the upmarket earners, and that is

Rosslyn Springs.

The content of this research includes; mode of financing and minimum threshold requirements

needed by financiers before facilitating loans on gated properties. The time frame period of

various projects, payment plans adopted by developers when selling these units, challenges faced

by developers and financiers when investing in gated communities, and finally a

recommendation on the best ways forward to be adopted both by the financiers and developers

when investing in gated communities.

1.7 Study organization;

The research is categorized into five chapters each having a specific section of the study.

Chapter One; Contains the background information, statement of the problem, objectives,

research questions, importance of the study and areas of the research.

Chapter Two; discusses literature reviewed and theoretical model.

Chapter Three; provides the characteristics of the study, the samples, sampling procedure, data

collection tools and data analysis to be used.

Chapter Four; presents the responses, analysis of various respondents to whom questionnaires

were administered as well as oral interviews conducted and problems encountered in carrying

out the research.

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Chapter Five; contains the summary, conclusion, recommendations and proposed areas of

further research.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter involves the theoretical concept of finance, traditional theories about optimal capital

structure, world review of gated communities, challenges encountered in gated community

investments and a theoretical model towards the best development practices when investing in

gated communities.

2.2 Theoretical Concept of Finance

Usually, there are two types of finance available to the developer, i.e., Equity and Debt. Equity is

the developers' contribution to the development process and has no maturity date while debt is an

external financing process which has a maturity date. Equity can only be used in small projects

contrary to the gated communities which involve massive costs and expenses making it be a

stochastic investment in nature. If equity entirely finances development, it gives the developer

autonomous control over it contrary to debt-financed projects which are subject to scrutiny by

the external financiers.

Therefore, a balance needs to be found when determining equity – debt ratios for different

projects to avoid a scenario of relying too much on either of them. Capital structure heavily

depends on debt financing as a critical element in a firms choice. They generate revenues that

can only be availed by additional external funding, this funding help in increasing the firms'

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value which usually is the ultimate goal of any business. It has become obvious that various

taxation ways, business cost agency costs, access to capital, and many other ways do not

determine the kind of finance a firm chooses to realize its goals. For the past 50 years in the

corporate finance literature, it has been found that the capital structure is key and needs to be

looked into. The choice between debt and equity are well articulated and further established, but

it is not clear on the various effects of debt sources of the firm's performance and its value

(Denis, 2014).

2.3 Empirical Review of Gated Communities in Different Countries

Urban dwellers have greatly benefited from the introduction of the dynamic modern

communities that have greatly supported the economy, increasing the productivity and providing

easy access to opportunities hence increasing the population distribution making developers to

construct more gated communities. Improving efficient delivery of gated communities'

development can be a hugely expensive task involving hundreds of millions and even billions of

dollars. If completed the returns are equally appealing to the development of neighborhoods.

Poor planning cannot achieve the specified goal of the investment since the project usually

entails substantial financing which runs into a lot of millions of dollars. With a high demand to

improve infrastructure by financiers and developers hence gated communities are the options to

be undertaken by various countries, but there are still things to be learned to enhance

transparency of perfect delivery of the target objectives to avoid unexpected outcomes. Some of

these reviews globally include;

i. China

Due to the high demand of separate form of housing for expatriates that has been experienced in

Beijing, there has been the establishment of gated communities. The foreign house is being

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constructed into gated communities to curb the high demand for expatriate housing in China. The

concept has drawn its arguments from concerns of security, whereby security in this place entails

protection against institutions rather than security against crime. Economic globalization has

been proven to cause an increased demand for high-quality housing in developing economies

(Fulong and Klaire, 2004).

A study done by Panek and Sobotova (2015) showed that due to the nature of real estate

illiquidity in Hong Kong it was discovered that financiers were not ready to offer funds to the

gated community developers. It was discovered that 60% - 85% capital used by developers in

China when developing gated communities was borrowed from commercial banks and housing

financing institutions and in some instances actually developers’ used 90% debt. Another

research by China Business Association in 2006 concurred with this proposition by revealing

that development of gated communities used more than 80% debt mainly from commercial

banks.

ii. United States of America (USA)

In the USA a lot of research has been done to discuss the gated communities. This research

entails the following points of interest; can they be able to cope up in the market for the long-

term period, what motivates the development of these expensive ventures and finally sales

analysis of these gated communities. Profits generated from these projects usually forms the core

reason for the development of these kind of projects globally although it is not the kind of

housing in the USA, but as expanded and is being practiced by developers (Coy and Pöhler,

2002).

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The development of gated communities in the USA mainly involves equity of about 90%. That is

the developers’ reserve and different assets while commercial banks’ debt is of about 10% thus

reducing the risk to developers (Xu and Chen, 2012).

In South America, inhabitants of the gated communities believe that the government has failed

them and they therefore prefer to live within gated communities where they can provide

themselves with security and other social amenities they prefer (Mycoo, 2006).

iii. Great Britain

Gated communities have been developed for a long time in the Great Britain from time

immemorial and they involve three types of gated communities’ i.e. infill gated communities,

heritage conversion gated communities and village gated communities. Infill gated communities’

have a common entrance with few buildings set backward from the entrance. Heritage

Conversation gated communities’ are an improvement the existing structures. Village gated

communities majorly include a large number of dwellers usually more than 150 people (Blandy,

2006). In Great Britain gated communities are well established with a long-term history

iv. Australia

In Australia, customers entirely look into the fulfillment of their needs. Although the

development might be expensive they may buy if it suits their needs and most of the buyers do

not mind the amount of money they invest. The location of the particular development does not

affect the sales of the property so long as it meets the wishes of the customers (Chris, 2007).

v. Eastern Europe

They have been most recently introduced in the Eastern Europe. Although in Bulgaria, there has

been an existence of communities that resemble the gated communities in that right to say the

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significant development started 20 years ago in the capital city, Sofia and are located in the up

markets in the periphery of the city (Stoyanov and Frantz, 2006). The rich prefer these type of

housing since it separates them from the outside world in that they are being defended from the

outside (Stoyanov and Frantz, 2006).

vi. Ghana

Similarly, a study in Ghana by Milanovic (2011) observed that accessing long-term capital was a

primary obstruction to gated community development property delivery. Even though the

government approaches perceive the private sectors the one derailing the real estate sector in that

the banks only offer short-term lending hence cannot support projects that require an extended

period. Therefore, there was a need of coming up with a flexible mode which includes mixed

mode of funding gated communities.

2.3.1 Summary of Empirical Review of Gated Communities in Different Countries

It has been illustrated that gated communities’ development in different countries has been

driven by various forces such as economic globalization whose demand for housing differ from

those of the locals as seen in China. Also, different countries like China developers almost

entirely depend on banks for financing these projects while in the USA equity plays the most

significant role.

Usually, developers are driven towards profit making while financiers are more interested in

recouping their principal amount plus accrued interests. Therefore, the overriding interests in the

development of gated communities’ are many and complex and striking a balance becomes

paramount to keep either party on board and satisfied.

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In Ghana, where multiple hurdles are being experienced in the developing of gated communities

due to discriminatory lending practices of the banking sector sharply contrasts the Great Britain,

where the lending by the banks even if it was there or not, the gated community projects have

been there from time immemorial.

Finally, security was the leading primary reason for developing gated communities over time as

experienced in Trinidad. However, other reasons are slowly coming up such as class separation

and making use of open public land in South America. Capital is driven as a sign of prestige as

shown in Bulgaria and the desire to access multiple amenities within these developments as

demonstrated by the Australian residents who do not mind the location of the developments as

long as the amenities within those properties meet their respective needs.

2.4 Mode of Financing and Minimum Threshold Requirements

Mode refers to the manner in which something occurs or is experienced, expressed, or done.

According to Makachia (2015) in the development process, gated community finance is vital.

There is a necessity of full funding to begin a gated project venture. Furthermore, in that capacity

due to the vast financing capital cost and high units borrowing has turned out to be the only

option for the development of these gated communities. It's usually not easy for smooth flow of

capital from the lenders to the private developers in these gated communities if at all it happens

they impose a strict minimum requirement for the acquisition of this construction loans. This

reluctance of banks to give credits to the private sector usually hinder the development of this

gated communities.

Aguko (2012) points out that a construction loan is a short-term loan that is availed to pay for the

cost of building a house. It may be offered for a term that allows the customer to build the house.

Such loans have a variable rate that fluctuates with the prime rate. While applying for such a

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loan, a lender will have to be provided with a construction timetable with detailed plans and

budget. The builder is provided with funds at designated intervals for the continuation and

completion of the project.

These disbursements are provided at the various stages of the construction process. Equally

important, the number of draws and the amount to be paid is negotiated between the lending

institution and the borrower. The lending institution may release the draws after the inspection of

a particular construction stage. After the draws have been paid and construction completed, the

buyer will have to take the end loan to pay off the construction loan. The balance that is left to be

paid off the construction loan is rolled into the standard mortgage (Sila and Olweny, 2014).

Usually, the builder requires payments regarding the different stages of construction. These

stages include six phases fully adopted from an online Project Management – Training Journal as

shown below:-

vii. Initiation phase

Usually is the start of the project, the main reason for execution is stipulated and explained in

length, with a clear objective of finding the feasibility of undertaking the project. A clear picture

is drawn on the people to be responsible for undertaking the project and whether people involved

in the said project fully supports the project.

A project proposal is written by the prospective lender of the project which usually contains the

fore mentioned objectives. Upon approval from the prospective sponsors they provide the

required financing with proper evaluation and the project starts.

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viii. Definition phase

It is the second stage after the initiation stage upon approval which stipulates the requirement of

the project result. Identification of expected results from both parties involved in the project are

given out clearly.

ix. Design phase

In the design phase, requires the development of one or more designs, with which the project

result can be achieved. The number needed for this stage help to explain the design choice of the

project. Development phase follows, once the design has been chosen, it is hard for one to

change the earlier model.

x. Development phase

Involves the implementation of everything that is required in arranging the execution of the

project. Materials and required tools are ordered for, and scheduling is made with suppliers and

subcontractors being called for, and personnel told on the schedule. The information should be

clear for all the parties involved for implementation to set in which is the next stage.

xi. Implementation phase

The implementation phase is the doing stage whereby the outsiders see the real project, it's the

shaping stage of the project that involves the actual construction of the project, encoding by

programmers, graphic design is undertaken, and contractors are busy working hence causing a

significant change in developing sites.

xii. Follow up phase

Usually involves writing handbooks, coming up with a receptionist, giving training to

prospective users, and valuation of the project, celebration of significant achievement, report

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writing and transferring powers to the directors. Although this stage is often assumed it is equally

important to be fulfilled for successful completion of the project

Usually, before the final payment, an expert will be sent by the lender to investigate the

completion of the construction; if it is not found to be satisfactory, then the lender can withhold

payment. Nevertheless, the interest and the repayments will only be charged on the funds used.

Once the gated community is built, the developer may then pay up the construction loan with the

proceeds of the off-plan sales or mortgage loan. In a different arrangement where the gated

properties are to be sold on completion, the construction loan repayment may be made

differently.

A build to sell loan may be adopted whereby an investment for development is acquired either

for commercial or residential purposes whereby it is finally sold to the final users upon

completion of the said project (Hansen 2015) with this approach the principal loan amount is not

paid during the construction process but instead its connected to the completed developments.

The developer has to wait until the conclusion of the sales within the negotiated period to get his

profit.

Usually, all lenders evaluate borrowers based on different factors that include previous business

experience, and this will significantly depend on the number of projects the developers have

overseen over time and the level of success they have achieved. Most financiers prefer at least

five years with a proven success rate of more than two projects which can be determined.

Secondly, the ability to repay the loan which includes the value of the collateral being offered

and the personal/entity standing in the economy together with the developer's character. The

developers on their side need to thoroughly prepare the documents that help them to plan and

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have personal documentation for further and future references, proper legalization and adequate

planning.

In general, the developer needs to come up with a well-stipulated plan to convince the lenders to

provide the finance for the development since the lenders are mainly concerned with the ability

of the borrower to repay the provided loan while minimizing risk as much as possible. The plan

must indicate the debt requirement and a form of security in case the developer fails to repay the

loan. Developers can be grouped into Equity Developers (Angel Developers) and Venture

Capital Developers. Angel Developers usually don't like the business that stagnates the flow of

cash rate, whereas Venture Capital Developers require a business that has returns quickly. So the

lesson to be learned here is that the developers need to be straight with their objectives.

2.5 Challenges Experienced in Determining the Appropriate Financing Mode Globally

In the selection of procurement option, it's important to look into these features; the Main

purpose of a project, delivery mechanism should be in line with the project's requirement and

risk management which are vital in the selection of funding decision and procurement in an

infrastructure project. There are multiple procurement options available such as PPP (Public

Private Partnerships) and Project Alliances (PA). Failure to audit the procurement process to

ensure it is in line to general procurement policy and stipulated best practice guidelines, and the

robustness of procurement options analysis poses a significant threat to the development of gated

communities.

Other significant challenges facing property developers is in hiring a probity adviser, seeking

technical and commercial advice, conducting continued workshops for the project team and

carrying out due diligence. These processes impose additional costs on top of the construction

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costs. This has mainly been attributed to the fact that these costs cannot be directly associated

with a particular outcome of the project but in the long run, they are of tremendous benefits.

Most financiers fail to research the projects presented to them to determine their viability. In

most circumstances, they rely on feasibility studies and market research undertaken by valuers.

The real estate industry over the years has grown, and most of the developers rely on previous

feasibility studies and market research without giving regard to the currently existing market

trends. The financiers also fail to insist on innovation from the part of the developers. Since they

trust methods that have been tried, tested and worked in the market and tend to discourage the

using of innovation in constructing gated properties because of the associated increased costs and

uncertainties.

Over the years financiers undergo different training from that of the developers. They might not

understand the gist of the development plans presented to them for financing and might also not

be having the necessary capacity in determining the appropriate amount of finance they are

supposed to remit to the developers over the life cycle of the projects. It leads to redundancy of

the projects through the failure of taking into account the principle of minimizing costs while

maximizing output.

There should be a precise mechanism to curb any form risk although it is difficult for one to

identify the risk it's appropriate to plan and invest in its management where a clear investigation

should be drawn from all angles. The risk is inherent, and therefore proper management is

required for all projects. This is usually overlooked both by the financiers and developers in the

development process. Risk can manifest itself through fluctuating inflation over the development

life cycle of a project.

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Finally, it is an international requirement that an Environmental Impact Assessment (EIA) of

each project is undertaken independently and the Project Affected Persons (PAPs) compensated

accordingly. Most projects kick off without EIA reports or compensation of the PAPs thus are

rendered detrimental at a later date leading to losses. Auditing is necessary, an independent

auditor usually does this for assurance to the project stakeholders that it complies with the

required validation. However, this is always overlooked, and this terrible mistake has been

exemplified by relevant authorities who approve development plans without the requisite

documents, and these projects get rejected at a later date leading to losses of funds that had

already been invested in the project.

2.6 Time frame Period and the Payment Plans Adopted

Time frame refers to the development process of a gated community by dividing it into stages

whereby the total workload is divided into smaller components for an easier inspection hence

smooth run of projects. Depending on the location, availability of resources and magnitude of the

project, it can be between two and four years or more to finalize a project, and the developer sells

the homes throughout this period.

During the development process of the gated community projects, investors buying an off-plan

property can only pay a minimum deposit such as 10% or 15% of the sale price to secure that

property; thereby, allowing investors to sell the property with a profit when market prices

increase. Most developers prefer off-plan sales because it is a manifestation of the projected

project success. Financiers usually set the minimum number of properties that need to be sold off

– plan before groundbreaking, however as the development continues a decrease in sales may

imply failure of the project. It is imperative to point out that usually, properties sold off – the

plan is sold at a low price as opposed to those properties which are sold once the project is

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complete. As the project is being rolled out more properties can be sold out during the

construction process or once the project is complete. Many home buyers are more convinced

once they see the final product as opposed to a situation whereby they buy properties out of

graphical imaginations of the final property.

Developers' employ various methods of project payments from property buyers which can

include lump sum cash option, down payment followed by sequential payments at given intervals

as the contract may stipulate between the developer and buyer, cheque, bank accounts, etc.

Usually, lump-sum cash option has an added advantage to the buyer who pays slightly less as

opposed to the down payment followed by sequential payments. The more extended the payment

period, the higher the payment cost on the part of the buyer and the more the risk involved by the

developer.

2.7 Theoretical Model

Gated Community Project

Pre – Implementation Phase about six months to one year. Implementation Phase about two years
to three years depending on the magnitude of the project and the availability of resources.

Determining the capital structure of the project by screening it through the

theoretical concepts of finance i.e. Traditional Theories of Optimal
Capital Structure
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 Determining the Project Capital Structure by the developers

Equity Capital Determining the Debt Capital amount to be facilitated to

developers by financiers through screening

Equity Share Capital

Preference Share Capital Term Loans, Debentures
Share Premium
Retained Earnings Deferred Payment Liabilities
Other Long Term Debt

Striking a balance on the appropriate Equity – Debt Ratio to be adopted in regard to the
magnitude of the project. Usually 40% of Equity to 60% of Debt is preferred. In most
circumstances Debt has a higher percentage compared to Equity for profit making investments

Source: Kishore, R.M. (2009) and Field Survey, 2017

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter involves the samples and sampling procedure, background information of the study

areas (i.e. Lapfund Gardens, Fourways Junction, Crystal Rivers and Rosslyn Park), data

collection and analysis, synopsis of the study objectives, ethics in research and a summary table

of the entire chapter.

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3.2 Samples and sampling procedure

Rossi, Wright, and Anderson (2013) argue that a sample design is a way of collecting

information from a specified location. It is the ways a person who carries the study identifies

what to include in the sampling techniques. The target population in statistics is the specific

population about which the study is to be carried out. Denscombe (2014) a population is a well-

defined or set of people, services, elements, and events, group of things or households that are

being investigated. Initially the researcher set out to study in particular six gated communities

but due to the responses of the respondents the researcher specifically chose four case study

areas which involve three gated communities from the middle-income earners, i.e., Lapfund

Gardens, Fourways Junction Estate and Crystal Rivers. The remaining one gated community is

from the upmarket earners, i.e., Rosslyn Park.

The researcher gave out two questionnaires to each of the selected case study gated communities

totaling twelve questionnaires but only eight were returned. In each of the selected case study

gated community both the developer and financier were given a separate questionnaire to fill.

3.3 Background Information on the Study Areas

This study is limited to a sample of four gated communities which came about due to their easy

accessibility to the necessary information, and they are newly developed or some of its phases

are complete with the remaining phases expected to be completed within three years.

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3.3.1 Lapfund Gardens

It is located approximately 1.3 Kilometres off Mombasa Dual Carriageway, 3 Kilometres past

the Athi River Interchange on the way to Mombasa, Athi River, Machakos County. It neighbours

River Park Estate and Sunset Boulevard.

Figure 3.1 Location of Lapfund Gardens

From Nairobi

To Mombasa

To Kitengela

Source: Google Earth Pro, 2017

It is a gated development of 131 maisonettes on a 10 acre parcel, having typically three types of

houses that include: acacia (36), bamboo (39), cedar (56), block of 5 specialist shops and

requisite ablution facilities, nursery school block having offices, 3 classrooms and kitchen

facilities, and a conveniently located commercial centre.

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3.3.2 Fourways Junction

It is located approximately 10 Kilometres from Nairobi Central Business District (CBD),

approximately 7 Kilometres off Thika Superhighway and 550 Metres off Kiambu Road, Kiambu

County. Nakumatt Ridgeways is within close proximity. The name Fourways is coined from the

fact that the estate is found at the Cross (X) Section of Northern Bypass and Kiambu Road.

Figure 3.2 Location of Fourways Junction Estate

Source: Google Earth Pro, 2017

It has a mixture of cluster houses, apartments, office blocks, a shopping mall, a 3 star hotel, a

BPO Park (Business Processing Outsourcing), a nursery, primary/secondary school, a retirement

home and fully fledged country club.

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3.3.3 Crystal Rivers

Crystal Rivers is located 25 Kilometres from Nairobi Central Business District (CBD) and 1.2

Kilometres past the Athi River Interchange. It covers 5.7 acres with a residential area consisting

of 3 and 4 bedroom townhouses, plus a cluster of 3 bedroom apartments. The project is under

construction and is expected to be completed in 2 phases. Phase 1 which includes a mall and to

comprise 138 townhouses and 140 apartments while Phase 2 will comprise 120 apartments.

Figure 3.3 Location of Crystal Rivers

From Nairobi

To Mombasa

To Kitengela

Source: Google Earth Pro, 2017

3.3.4 Rosslyn Park

The subject property is situated at the extreme western end of Lone Tree Road, within Rosslyn

Springs, approximately 12 Kilometres from the City Centre of Nairobi and approximately 1.6

Kilometres off Limuru Road. Rosslyn is a residential area to the North West of the City Centre

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of Nairobi, Kenya, just next and East of Runda Estate. It borders Kiambu County to the west.

The estate is close to the newly opened Two Rivers Mall and Rosslyn Riviera.

It is a modern architect designed gated community whose villas are in three typologies namely

Five Type A located at the top of the plot, eight Type B located part at the middle and part at the

lower side of the plot, and four Type C located at the bottom side of the plot. The units have

spacious accommodation comprising four en suite bedrooms. Each unit has a detached servants’

quarter unit for two.

Figure 3.4 Location of Rosslyn Park

Source: Google Earth Pro, 2017

3.4 Data Collection and Analysis

Data according to Rossi, Wright and Anderson (2013) are the facts collected by the researcher

from the study environment. Further, they argue that primary data is the firsthand information

acquired by the researcher specifically for the study and secondary data refers to already existing

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information in the known sources. For example, the primary data was obtained from oral

interviews supplemented with explanations and clarifications; and administering of open and

close-ended questionnaires. On the other hand, the secondary data were obtained from

government publications, websites, books, newspapers, articles, and journals.

Data analysis involves a myriad of stages depending on how well the respondents understood the

questions and answered them. In this research while analysis the responses the researcher

ensured that those responses that did not match the research objectives were discarded.

Qualitative data and content analysis were used in the study of the reactions. The study was

purely descriptive in nature and the researcher used conceptualization in conjunction with

content analysis to analyze the data; the findings which mainly were texts were tabulated and

later on formulated into bar graphs and pie – charts.

Objective 1: To Investigate the Mode of Financing and Minimum Threshold Requirements

Needed by Financiers when Facilitating Loans on Gated Community Projects

This data was obtained from financiers and developers in regard to debt and equity respectively

of various gated community projects. Primary data was collected through oral interviews

supplemented with explanations and clarifications, and administering of open and close ended

questionnaires. Secondary data was obtained from built industry analysis, websites, books,

newspapers, articles and journals. The data was presented in form of narrative texts.

Objective 2: To Determine the Gestation Period for Various Projects and the Payment

Plans Adopted by Developers when Selling the Properties

This data was obtained from the developers through oral interviews supplemented with

explanations and clarifications, and administering of open and close ended questionnaires. The

data was presented in form of narrative texts.

Page | 25
Objective 3: To Determine the Challenges Faced Both by Financiers on Giving Loans and

Developers on Rolling Out the Projects from Inception Up To Complete Selling of the

Properties

This data was obtained from financiers and developers who have been involved in gated

communities’ development projects through oral interviews supplemented with explanations and

clarifications, and administering of open and close ended questionnaires. Secondary data was

obtained from government publications, built industry analysis, websites, books, newspapers,

articles and journals. The data was presented in form of narrative texts, tables and bar graphs.

3.5 Ethics in Research

This research strictly adhered to research ethics and none of the respondents was forced to fill the

questionnaire. There was no plagiarism, fabrication, falsification of results and the responses

were not manipulated for self-gain.

3.6 Summary Table

Table 3.1 Summary Table

Objectives Data Needs Data Sources Collection Methods Data

Methods of Output

Page | 26
 Analysis

Objective 1 Mode of Financiers, Oral interviews, Narrative Narrative

financing Banking Sector questionnaires, built Texts and Texts,

and and Developers industry analysis, tables tables and

minimum websites, books, bar graphs

requirement newspapers, articles

s needed by and journals

financiers

Objective 2 Gestation Developers Oral interviews and Narrative Narrative

period and questionnaires Texts Texts

payment

modes

accepted by

developers

when selling

the

properties

Objective 3 Challenges Financiers and Government Narrative Narrative

faced by Developers publication, oral Texts and Texts,

financiers interviews, tables Tables

when giving questionnaires, built and Bar

loans and industry analysis, Graphs.

developers websites, books,

when rolling newspapers, articles

Page | 27
 out the and journals

projects

Source: Field Survey, 2017

CHAPTER FOUR

DATA RESULTS, ANALYSIS, AND INTERPRETATION

4.1 Introduction

This chapter contains the data collected, its analysis, interpretation and presentation. The

responses were analyzed following the research objectives. The research objectives were: to

establish the challenges facing financiers and developers when investing in gated communities in

Page | 28
Nairobi, Kenya. To investigate the mode of financing and minimum threshold requirements

needed by financiers when facilitating loans on gated community projects. To determine the time

frame period for various projects and the payment plans adopted by developers when selling the

properties. To determine the challenges faced both by financiers in giving loans and developers

on rolling out the projects from inception up to selling out of the properties; and to recommend

the best ways forward to both the financiers and developers in giving out loans and development

of gated communities respectively.

The collected data were subjected to content analysis and descriptive statistics that include;

historical statistics, tables, and bar graphs. Qualitative and conceptualization methods were

adopted for the study of non-discrete data. Primary data was collected through oral interviews

supplemented with explanations and clarifications and administering of open and close-ended

questionnaires. Secondary data were obtained from the built industry analysis, websites, books,

newspapers, articles, and journals. The data tabulated narrative texts, tables, and bar graphs, then

discussed based on the research objectives. In total, four financiers and four developers were

interviewed giving a gross total of eight respondents.

4.2 Response Rate

The oral interviews and questionnaires response was very motivating and encouraging. Eight of

the questionnaires given out to the selected gated communities were returned and any

clarification needed was sought immediately. In summary four questionnaires were returned

from the developers and four questionnaires were returned from the financiers. Making it a 67%

response rate as shown in Table 4.1

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Table 4.1 Questionnaire Response Rate

Category Number of Number of Percentage (%)

Interviewed Questionnaires Questionnaires

Administered Returned

Developers 6 4 67

Financiers 6 4 67

Total 12 8

Source: Field Survey, 2017

4.3 Lapfund Gardens

Citic Developers developed Lapfund Gardens. The primary source of funding was debt with

equity from Lapfund Secured Retirement taking a paltry of less than 30%. Pre-implementation

period dates back to 2010 and groundbreaking was hard to achieve within the stipulated

timelines. It was completed in February, 2014.

Although not all the units have been sold there are multiple complains from the homeowners

regarding poor artistry and some of these homeowners are literarily selling their units. The

current sole selling agent is Advent Valuers Limited.

In general, the process can be rated as below average or 40% because the invested funds have not

been recouped both by the financiers and developers. The project significantly disadvantaged the

homeowners regarding design, water availability, and artistry among other issues.

The procurement process did not fit the characteristics of the project. The risk assessment

research relied on the feasibility study of valuers who were not well conversant with proper

Page | 30
project development processes and formulated an over-ambitious feasibility study full of

hearsay.

This project was underpinned by a body of appropriate sound policy and received the medium-

term commitment of the relevant parameters. The project failed to take practical steps to ensure

value for money by not taking into account the advantage of joint governance and advice from

experts

A risk in selling was not appropriately transferred through a general listing. A defective

Environmental Impact Assessment (EIA) and no meaningful community engagement were

undertaken. The implementers of the development failed to show keenness in learning lessons

from previous projects.

Since the project was finished in 2014 the homeowners have been suffering from the

unavailability of water, and it is just this year (2017) that a fully-fledged borehole has become

operational, and the units are slowly selling, but they are experiencing stiff competition from

Crystal Rivers among other surrounding gated communities.

The credit risk associated with this project was relatively high because the top management of

Lapfund Secured Retirement Scheme was accused of embezzling funds. The market business

risk was also tricky to predict because of the ever-changing inflation rates in the economy.

Smart customers who prefer to pay a little premium and then wait for the properties to be

completed posed a significant challenge at groundbreaking thus compelling the investors to use a

lot of debt.

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4.4 Fourways Junction Estate

Suraya Property Limited is developing Fourways Junction Estate. The primary source of funding

was the debt from both Standard Chartered Bank and Equity Bank taking a proportion of about

65% with equity from Suraya Retained Profits. It is being built in phases with the latest Phase 3

having a groundbreaking of March, 2017 and is expected to be completed in September, 2018.

The Suraya Property Selling Group are the sole selling agents. To be fair, the development is not

doing poorly off, but it is over-ambitious in that there are multiple properties within the same

development, i.e., maisonettes, a block of apartments, hotels among other properties. It has been

accused of denying the homeowners privacy, and the plot ratio to development is small. The

ground coverage is quite significant, and many critics have questioned whether it underwent the

proper planning approval processes.

It was able to break ground over the shortest time possible because the developers have been in

the field for over ten years and have a good development standing record. Phase 1 is completely

sold with few units of less than 15% remaining in Phase 2 while Phase 3 is still taking shape, but

approximately 15% units have been sold off – plan.

In general, the process can be rated at 85% because the invested funds were able to be recouped

both by the financiers and developers at a profit within the stipulated timelines in Phase 1 and the

same appears to be likely in Phase 2.

The project assessment and planning is overboard overarching good project governance and

delivery. There is a good balance of allocation of financial risk in funding and delivery. The

procurement guidelines were transparent, and the overall process had certainty.

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Suraya Property Group Limited is underpinned by a body of strong, sound policy and receives a

long-term commitment from its top management. The project design of the three phases was well

thought over time and met the needs of the users and the broader community.

Right from the top management downwards, there is strong procedural lineage with well-

stipulated responsibilities of principal players and the administration. The risks are well

transferred between the developers and financiers, and a sound Environmental Impact

Assessment was carried out.

Although it has been of late accused of poor governance in the media and some of its sections are

on receivership by Equity Bank. It was in the opinion of many overvalued by Acumen Valuers

Limited during the process of taking mortgage.

4.5 Crystal Rivers

Landmark Developers are developing Crystal Rivers. The sole source of funding is equity from

Safaricom Staff Pension Scheme. It is expected to be completed by December 2018. There are

multiple selling agents, and over 20% of the units have been sold off - plan and its image has

been boosted by the brand name of Safaricom and Landmark Developers who have been in the

field for over ten years and have a good development standing record.

Business case development, entails project assessment and planning making overarching project

governance to look good. The procurement process is adequately featured in the project. The

government policy was followed to the latter, and a risk assessment research was done with a lot

of transparency.

This project is governed by strict guidelines and so far receives the long-term commitment of the

appropriate parameters. The project has met the design and specification needs of users and the

Page | 33
broader surrounding community needs, hence maintaining the value of money by utilizing the

advice from experts and comprehensive policies.

The risk in selling has been appropriately transferred through general listing which includes

Safaricom, Advent, and Crystal Selling agents among others. An Environmental Impact

Assessment (EIA) has been undertaken, and sound mind community engagement leading to

perfect design and delivery changes thus improving the asset. The implementers of the

development have shown keenness in learning lessons from previous projects.

Its main shortcoming is that the completion of the mall has not been achieved as anticipated but

it is expected that early next year before the end of March it will have been completed. So far

this is the best project, and its success can be rated at 80%.

4.6 Rosslyn Park

Rosslyn Park main source of funding was equity from Kengen Staff Retirement Benefits

Scheme. It was completed in May, 2011 and has been in the market over the last five years. The

artistry is exemplary but the selling price asked then (2011) is what the properties are selling for

currently.

Based on the reality that this development is situated at a prime location, its failure to perform

has dramatically brought into question the credibility of Kengen procurement staff and the top

management. Its critics argue that funds were misappropriated and since they could not be

justified the administration wanted to cushion itself by selling at a high price to recoup the lost

funds.

Although the project dramatically appeals to the homeowners regarding design, water

availability, amenities, and artistry among other issues, it is regarded as a failure.

Page | 34
The project had been poorly investigated and unsatisfying prior planning, including business

case development and governance. The project delivery was good regarding artistry, but the risk

entirely rested on the Kengen Staff Retirement Benefits Scheme which was the sole source of

funding. The procurement model chosen was not based on the project requirements and failed to

follow the required publication. Also, the degree of transparency and certainty were overlooked

by the management.

This project was not based on strong governance policies and failed to receive the lasting

commitment of the appropriate parameters of Kengen. The project further was unable to meet the

broader surrounding community needs. Usually, different gated community projects pose

different risks at any particular time and place, and this keeps on varying from time to time

depending on some factors such as the political climate and the prevailing economic situation

among other factors, and all this were overlooked. Its success rate can be rated at below 40%.

4.7 Mode of Financing and Minimum Threshold Requirements

Usually, lending institutions and banks offer loans to developers at different stages of

development. Before they facilitate any loan a valuation report is typically done to ascertain the

number of funds that have been used at that particular stage. The payments can be monthly or

quarterly or semi-annually depending on the project and the agreement between the involved

parties.

The developers are needed to furnish their respective financiers the construction timetable with

detailed plans and budget at designated intervals for the continuation and completion of the

project. Usually, the developer requires payments regarding the different stages of construction.

Page | 35
The borrowers need to furnish the financier's information regarding their way of doing business

in the past tendency to repay the loans and personal guarantee. The developers also need to

prepare their documents. For scrutiny purposes, legal reasons and for management by keeping

such documents as balance sheets and personal financial statements. The developers should have

a good plan or repayment of the lender whereby clear security is provided for if they default on

repayments.

Quite often financiers need a CRB (Credit Reference Bureau) document from the developers to

determine their past credit repayment character. They need to show their experience over time in

the development of gated community projects, and usually, most financiers prefer not less than

five years with at least two successful projects.

4.8 Time frame Period and Payment Plans Adopted

Depending on the location, availability of resources and magnitude of the project, it usually takes

between two and five years or more to finalize a project, and the developer sells the homes

throughout this period. The pre-implementation phase is between six months to one year, and the

implementation phase takes two years.

During the development process the gated community projects are sold off - plan. As the project

is being rolled out more properties can be sold out during the construction process or once the

project is complete as it is the case in most circumstances. A careful sales strategy should be

established to ensure all the units are sold over the time frame period and achieve maximum

returns since selling prices start at low in the off-plan sales and rise as construction progresses.

Page | 36
Developers' employ various methods of project payments from property buyers which can

include lump sum cash option, down payment followed by sequential payments at given intervals

as the contract may stipulate between the developer and buyer, cheque, bank accounts, etc.

4.9 Challenges Faced by Financiers

The regulatory agenda is one of the significant challenge financial institutions are facing. Banks

and housing financiers are facing a lot of problems in that they lack finance to support the

economy in that there are too much short-term funding and too high leverage. These reforms

increase resilience in banks. For instance, IT resources don't work adequately to deliver on

innovation purposes hence hindering the technological adaptation for long-lasting viability which

is used by both the financial institutions and developers in the country.

Credit risk is another challenge the financiers are facing be it funding the gated community

project or funding any other project in the market. Hence, to minimize the credit risk on the

banks' or other financial institutions, they tend to increase the interest rates for borrowers by

considering factors like the steady income, type of employment assets owned and the credit

score, a loss in investment may occur when transactions are not fulfilled at both ends

Similarly, most of the project funding institutions are facing the challenge of business risks that

come when these financial institutions funds development projects such as a gated community.

In general business, risk refers to when the company does not achieve the target objective hence

making lower profits or cause a loss. A clear plan should be drawn to portray the flexibility and

adaptability to market demands. Long-term plans should be followed with a good backup plan

since the entire banking system is prone to changes since its unpredictable in nature and

predicting these challenges cannot be adequately determined.

Page | 37
The main goal of various financial institutions is to loan, make positive earnings and reward its

shareholders for their ventures. Financial institutions make their profits from using their

depository base to lend out credit to consumers at interest. As they do this, they experience both

good and bad borrowers. In this manner, the majority of these housing financiers are not in a

better position of overseeing element nature of the economy and concoct most ideal

methodology to be embraced in financing housing projects in the Kenyan market. Usually, banks

have a poor understanding of the gated community market as they lean more on making profits

and cushioning themselves against bad debts while overlooking the potential of the market.

The other most concerning challenge confronted by the house financing and banking sectors is

the inability of having enough knowledge in knowing the developers well and the projects which

they intend to set up. Financiers need to articulately determine whether the developers will be

able to pay both the principal amount and interest as their contracts stipulate. They need a variety

of information on different borrowers' regarding points of interest to incorporate their capacity

(volatility of earnings), capital (leverage) and security. The financier gauges the developers on

the conventional three C's of lending which are the security factor, perimeter variable and credit

factor.

Another difficulty financiers of gated communities face is the delicate saving money framework

that cannot support plans for further growth of the housing projects due to the dynamic nature of

the housing business in the Kenyan market. For instance, in the year 2014/2015, a few banks had

reported reduced profits margins from funding gated community businesses. Currently, some

banks such as National Bank are facing significant challenges and are struggling to survive since

Capping of interest rates was introduced by the government in 2016 thus affecting their lending

rate in the market.

Page | 38
There are instances where new mortgage fund banks have little comprehension about the

property market and end up dealing in managing un-careful stakeholders who exaggerate the

properties lucrativeness. These properties are over-esteemed on account of advertisements and

amenities to be offered within them, and this is usually not realized once they are completed.

Also, a significant portion of the housing improvement financiers is facing the test of raising

cash-flow to accommodate mortgage fund. For example, the banks need to disclose to existing

and potential shareholders the significance of venturing into this new line of financing, and this

is not easy. This opens to another challenge where the shareholders must be persuaded and give

assent for such expensive capital costs.

Moreover, identifying the correct property developers to work with and who won't exploit the

bank's clients regarding the property value and even reliability is difficult and requires thorough

screening. Similarly, while adjusting the desires of the shareholders regarding quick returns

versus the truth that the profits from mortgage fund would not be discharged instantly is also a

challenge and requires greater care to strike a balance. It takes time for one to close a deal in

mortgage finance and returns are not quickly achieved.

The macroeconomic policies and regulations are another challenges gated community funding

institutions are facing. Some of these macro regulations may not be adapted to affect the interest

rate and the dynamic nature of inflations that has changed the efficiency of housing financiers.

Therefore, sound macroeconomic regulation strategy structure keeps inflation on the lowest

possible level, ensures there is no deficit or if it is there it is minimal and it ensures that the

current accountant sustains the firm’s operations. Most central banks in developing countries use

money hold reserve and liquidity proportion as tools of fiscal control. Money hold reserve refers

Page | 39
to the percentage of what the banks have deposited in the central bank with what they can lend in

the market.

Housing in Kenya is relatively expensive in that most people can't afford it. Developers tend to

use this narrative of non-availability of a proper house to raise the land price high, but in the real

sense, this does not exist. There is a downfall of prices since it is not the accurate representation

of market value leading to a collapse of prices thus it becomes harder for the developers to pay

the financiers.

Financiers feel that other sectors of the economy are superior and realize better returns hence,

under financing the development in gated communities. Research indicates that there is a

growing shortage of funds for gated communities' development due to competing needs for using

the same funds to finance other productive sectors of the economy.

The above-established bottlenecks experienced by the financiers when investing in gated

community developments' can be summarized in Table 4.2. It is paramount to point out that the

calculations are based on four questionnaires returned from the financiers.

Page | 40
Table 4.2 Challenges Faced by Financiers

Challenge Lapfund Fourways Crystal Rosslyn Number of

Gardens Junction Rivers Park Respondents

Estate who identified

the challenge

Regulatory measures by the 1 1 1 1 4

government

Credit and business risk 1 1 1 1 4

Poor understanding of the 1 - - - 1

economy by financiers as they

lean more on making profits

Insufficient information on the 1 - - 1 2

developers and the projects

they are financing

Introduction of the interest - 1 - - 1

capping rate thus influencing

the free lending rate

Dynamic inflation rates in the 1 1 1 1 4

economy that are difficult to

predict

Speculative development of 1 - - 1 2

the gated communities which

does not represent the real

Page | 41
 market values thus increasing

the possibility of a market

downturn

Competitive allocation of 1 1 - - 2

funds among competing

productive sectors of the

economy

Total 20

Source: Field Survey, 2017

The study established that the descending order of the challenges faced by financiers in giving

out loans for gated community projects was as follows: regulatory measures by the government;

credit and business risk; dynamic inflation rates in the economy that are difficult to predict;

insufficient information on the developers and the projects they are financing; Speculative

development of the gated communities which does not truly reflect to the current market needs

leading to a decline in the market values; Competitive allocation of funds among competing

productive sectors of the economy; poor understanding of the economy by financiers as they lean

more on making profits; and introduction of the interest capping rate thus influencing the free

lending rate. This can be ranked as shown in table 4.3 below.

Page | 42
Table 4.3 Ranking of Challenges Faced by Financiers

Challenge Number of Percentage of

Respondents Ranking (%)

who identified

the challenge

Regulatory measures by the 4 20

government

Credit and business risk 4 20

Poor understanding of the 1 5

economy by financiers as they

lean more on making profits

Insufficient information on the 2 10

developers and the projects

they are financing

Introduction of the interest 1 5

capping rate thus influencing

the free lending rate

Dynamic inflation rates in the 4 20

economy that are difficult to

predict

Speculative development of 2 10

the gated communities which

does not represent the real

Page | 43
 market values thus increasing

the possibility of a market

downturn

Competitive allocation of 2 10

funds among competing

productive sectors of the

economy

Total 20 100

Source: Field Survey, 2017

Bar Graph 4.1 Ranking of Challenges Faced by Financiers

Percentage
25
20
15
10
5
0

Source: Field Survey, 2017

Page | 44
4.10 Challenges Faced by Developers

Gated community developers are taking longer to sell luxurious properties in gated communities

due to the high prices of these properties and low demand in the market. Developers deny facing

significant setbacks in repaying the loans but accept the fact that low demand from the market

has dramatically impacted the property sales. Most consumers nowadays do not mind buying

completed property even with an extra premium. Developers’ face a significant setback in that

they don't have enough cash fall to complete the projects which need substantial funding.

Challenges are facing gated community designers and investors, for example, shortage of good

serviced land, absence of funds, the absence of a talented workforce and obsolete building codes

and by-laws. The Kenyan Government has however endeavored to settle the shortage of land

issue by opening up other rural zones particularly within the environs of Nairobi City for vast

scale property advancement, by actualizing infrastructural changes including development of the

Thika Super Highways, Bypasses and Dual Carriageways.

Also, there is a higher risk involved requiring extensive totals of funds and assets to be tied up in

the construction process and giving a product that is generally indivisible. The method and the

profits thereof are likewise explicitly influenced by the economic conditions at the local, national

and international levels. Unfortunately, most investors and designers don't have such expensive

aggregates of cash nearby to put in the development and in that capacity need to fall back on

acquiring a mix of value and obligation to fund their development ventures. Regardless of the

possibility that they add value, numerous investors are passionate adherents to use and would

like to use as little costs as possible under the prevailing circumstances while maximizing output.

In Kenya like numerous other countries, gated community development is a significant venture

resource class. The idea of proprietorship profoundly ingrained in the minds of many Kenyans,

Page | 45
an unbalanced measure of the nation's riches is tied up in gated community properties.

Regardless of whether it is the buying of the family's first house or building up a multi-billion-

shilling business venture, availability and affordability to financing is the way to fruitful gated

community investment. Episodic stories flourish of yearning Kenyan business visionaries whose

interest in gated community properties available to be purchased or rentals curve dependably in

limbo. It has been confirmed by the Kenyan landscape which has been filled with projects which

have slowed down or considerably deferred due to non-reasonable money-related issues.

More importantly, Kenya's gated community market is at an intersection on the ground that as

designers continue attempting to connect the house deficiency, the market elements appear to be

unable to bolster their expectations. Of specific worry to developers is the way that development

costs have increased by around 15 percent for the past five years due to a weakening shilling that

has seen higher import costs while existing credits are presently costlier by no less than 1.5

percent.

These new developments on the money related front represent a problem for most developers

beginning new projects, as the increasing expenses will hit the last part of their activities. With

expanding development costs, an increase in the fund expenses and purchasers who are

confronted with high mortgage rates, it now looks practically self-destructive to begin new tasks.

It will be incredibly intense for new undertakings. The market flow is not for either the buyers' or

the developers'. The increase or drop in these rates can fundamentally influence the cost of

financing and mortgage rates. The fixing position of interest rates by the Central Bank with a

specific end goal to pad the shilling has additionally observed an increase in between bank trade

rates. Some changes in this segment influence the measure of capital accessible for gated

community ventures.

Page | 46
The connection between loan fees and property costs has gone under severe investigation since

the lodging blast of the mid-2000s, and the resulting ensuing financial crisis of 2007–09. They

further point when loan fees or interest rates are down, credit moderateness is up, expanding

interest for houses, pushing house costs up and when financing costs are high, credit winds up

noticeably costly, requests come down, and house costs fall. Two perspectives have risen out of

this experience. One is that policy ought to react all the more proactively to resource value

increases and particularly to abundances in the property markets. As indicated by this view,

central banks can protect or attenuate asset price bubbles, and thus promote financial stability.

The inefficiency of the Kenyan land market has led to difficulties in accessing development

lands hence making it hard for consumers to access it with ease this discourage them to venture

into such business. This has been magnified by the reality that the Central Government has failed

to have a uniform land titling system and at times the titling process has shown gross mistakes

i.e. the ongoing Ruaraka Land saga among other cases.

On the other hand, most of the gated community developers are not only facing the challenges of

financing the project but also selling the units in a gated community. The property market

performance has met tremendous change over a few years. Housing demand and supply

landscape has greatly varied over the last couple of years. Many developers are currently leaning

more towards renting of the units than selling and their main market has been the middle and

high income earners.

The real estate market has seen marginal changes over the last one year. Overall 2017 has seen a

depressed market. It is mainly attributed to the capping of interest rates with the financial

institutions withholding or limiting credit to the economy and the prevailing political situation

mainly due to the general elections with most buyers adopting a wait and see mode.

Page | 47
Also, most of the projects in Kenya are faced with the challenges of external forces such as

government regulations and housing policy politics that may affect the rolling out of the projects

from inception up to selling out of the properties. Most of the developers may find themselves in

court due to harsh regulations that are influenced politically and thus affect either the

development or the selling of the properties once they are ready for sale.

The above-established bottlenecks experienced by the developers when investing in gated

community developments' can be summarized in Table 4.4 below.

Table 4.4 Challenges Faced by Developers

Challenge Lapfund Fourway Crystal Rossyln Number of

Gardens s Rivers Park Respondents

Junction who identified

the challenge

Too high prices of gated - 1 - 1 2

community properties

Smart customers paying a 1 1 1 1 4

little premium and then wait

for the properties to be

completed thus developers

need enough cash to

complete the projects on their

Page | 48
 own

Greater risk involved in 1 1 1 1 4

using extensive funds and

assets to be tied up in the

generation of giving a

product that is generally

indivisible

Profits are influenced by 1 1 1 1 4

economic conditions at the

local, national and

international levels

Increasing of development 1 1 1 1 4

costs and weakening of the

Kenyan Shilling

Purchasers are faced with 1 1 1 1 4

high mortgage costs

An inefficient land market - - - 1 1

External negative forces such 1 1 1 1 4

as poorly thought

government regulations and

housing policy politics

Total 27

Source: Field Survey, 2017

Page | 49
The study established that the descending order of the challenges faced by developers on rolling

out the projects from inception up to selling out of the properties were as follows: smart

customers paying a little premium and then wait for the properties to be completed thus

developers need enough cash to complete the projects on their own. Greater risk involved in

using extensive funds and assets to be tied up in the generation of giving a product that is

generally indivisible; profits are influenced by economic conditions at the local, national and

international levels. Increasing of development costs and weakening of the Kenyan Shilling;

purchasers are faced with high mortgage costs; external negative forces such as poorly thought

government regulations and housing policy politics; too high prices of gated community

properties; and an inefficient land market. This can be ranked as shown in table 4.5 below.

Table 4.5 Ranking of Challenges Faced by Developers

Challenge Number of Percentage of

Respondents Ranking (%)

who identified

the challenge

Too high prices of gated 2 10

community properties

Smart customers paying a 4 20

little premium and then wait

for the properties to be

completed thus developers

need enough cash to

complete the projects on their

Page | 50
 own

Greater risk involved in 4 20

using extensive funds and

assets to be tied up in the

generation of giving a

product that is generally

indivisible

Profits are influenced by 4 20

economic conditions at the

local, national and

international levels

Increasing of development 4 20

costs and weakening of the

Kenyan Shilling

Purchasers are faced with 4 20

high mortgage costs

An inefficient land market 1 5

External negative forces such 4 20

as poorly thought

government regulations and

housing policy politics

Total 27 135

Source: Field Survey, 2017

Page | 51
4.11 Limitations Encountered when Undertaking the Study

Limitations refer to the challenges experienced when carrying out the research and this included:

choosing the right methodology in undertaking the research. The researcher overcame this

challenge by realizing that the research methodology is generated from the research questions

and not one's preferences. The design comes out of the study, rather than being imposed on the

study. This study involves a qualitative direction, and therefore the methodology is borne from

who the data was collected from, how the data was collected and how it was analyzed.

Participants especially financiers had issues regarding the confidentiality of the information they

presented. Also, some participants had a lot of anxiety due to the location of the interview,

uneasiness or lack of rapport with the researcher as they were interviewed at their workplaces

while sitting on their workstations. This was overcome through rescheduling interviews with

those participants who felt uncomfortable with the setting of the interview environment and the

researcher overstressed the research confidentiality to get their attention.

The interview design and procedure posed another challenge. The process of designing an

interview guide, formulation of the interview questions and staying focused throughout

researching without any diversions was highly considered. All the participants did not clearly

understand the research questions. Therefore, assistance was offered to some participants

through explanations and clarifications.

Once the data was collected its analysis and interpretation posed a real challenge. Bias at times

posed a real threat due to inceptions. This problem was overcome by letting the received data to

speak for itself without any manipulation through analysis and presentation.

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 CHAPTER FIVE

SUMMARY, CONCLUSION, AND RECOMMENDATIONS

5.1 Introduction

The main goal of the research was to establish the challenges faced by financiers and developers

when investing in gated communities in Nairobi, Kenya. Other goals were to investigate the

means of getting finance and minimum threshold requirements needed by financiers when

facilitating loans on gated community projects. To determine time flame period for various

projects and the payment plans adopted by developers when selling the properties, and to

recommend the best ways forward to both the financiers and developers in giving out loans and

development of gated communities respectively. The objectives were further formulated into

questions to conduct the research. The study was undertaken then setting out to answer these

questions. This chapter contains a summary of the study findings, the conclusion, the

recommendations and areas of further research.

5.2 Summary of Study Findings

The study established the challenges facing financiers in giving out loans for gated community

projects include government banking regulation policies; credit risk; market business risk; poor

market understanding by the financiers; insufficient findings about the developers and the

potential projects to be financed; poor saving by the banks in the Central Bank that cannot

guarantee plans for further growth; dilemma of balancing desires of banks. Shareholders

regarding quick returns versus the truth that the advantages from mortgage fund would not be

discharged instantly; and dynamic inflation rates in the economy that are difficult to predict. The

challenges faced by developers in rolling out the projects include too high prices of gated

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community properties; smart customers paying a little premium and then wait for the properties

to be completed thus developers need enough cash to complete the projects on their own; greater

risk involved in using extensive funds and assets to be tied up in the generation of giving a

product that is generally indivisible; profits are influenced by economic conditions at the local,

national and international levels; increasing of development costs and weakening of the Kenyan

Shilling; purchasers are faced with high mortgage costs; an inefficient land market; and external

negative forces such as poorly thought government regulations and housing policy politics.

Finally, the research sought to determine the time flame period for various projects and way of

payment by the customers. The payment plans adopted by developers when selling the properties

was realized to be sold throughout the life of the project that is from off plan stage up to

completion. The payment method employed include a down payment followed by subsequent

payments as the parties involved may agree.

5.3 Conclusion

In conclusion, gated communities are faced with a myriad of challenges that cannot guarantee

plans for further growth. The problems are spread from financing, developing pricing. All

stakeholders face these challenges in the development of gated communities, but this research

has specifically limited itself to the challenges faced by developers and financiers.

This research has established that financiers are not ready to give finance for construction

development especially after capping of lending rates. They only finance those developers who

have proven themselves in the development of more than two prosperous gated communities

with timely loan repayments.

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Several mortgage theories are used as a basis for determining the ratio of equity and debt that

should be adopted in financing gated communities.

The gated community properties have different time frame periods depending on the specific

project magnitude. The research has shown that vast projects but better priced may take a shorter

period than expected and Crystal Rivers Estate evidences this.

5.4 Recommendations

1. It can be noted that Lapfund Gardens principal funding was from debt and the top

management embezzled funds and ended up hiring the services of incompetent developers who

also used poor building materials. The WACC was not maximized, and the risks of selling the

units were not shared appropriately amongst different selling agents.

This can be overcome by employing a transparent procurement system and leaving this process

to the advice of competent specialists.

2. Feasibility studies should be used from entrusted valuers who are well conversant with the

gated community projects developments, and this is well illustrated by Fourways Junction who

have employed their specialists in undertaking these studies.

3. Procurement methods should be tailored to the project and in particular to the unique risks of

each project as evidenced by Crystal Rivers which is developed next to Lapfund Gardens and

significantly learned from its shortcomings.

4. Developers should be encouraged to use own reserves and their different assets thus reducing

the risk of relying entirely on credits. But the development process should be well monitored by

specialists, and this has been the success story so far for Crystal Rivers where specialists are used

at every stage of the development process.

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5. Banks should be allowed to freely operate under provided policies and regulation which are to

be provided by the government if, after all, they are to be used by the developer to provide

finance for development The capping rates by the Kenyan Government has reacted negatively

on the demand and supply aspects of money flow.

5.5 Areas of further research

1. An investigation into the challenges facing homeowners of gated communities in Nairobi,

Kenya.

2. Implications of developing mixed properties in gated communities on their saleability.

3. Effects of the rental value of gated communities properties' in a neighborhood rental market.

4. An investigation into the challenges facing the apportionment of service charge in gated

communities.

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