Today, I want to talk about the challenges of a real estate developer. Recently, I had the honour of being with Otunba Olajide Awosedo, the chairman of Grant Properties Limited, a foremost real estate developer particularly in Lagos State and the ice – breaker in the Lekki peninsular axis. Some of you would know a thing or two about Goshen Estate in Lekki, that’s the revered gentleman’s first project as it were. It took place in the early 2000’s and it was a groundbreaking occurrence in the real estate sector in Nigeria. Up until that time, estate development was not so common and from there, Grant Properties have moved on to other great developments.
However, it is interesting to discover that even at this time, regardless of the landmark achievements they’ve recorded in the real sector; they are still faced with the same challenges typical of most developers. The only difference is that they face these challenges at higher heights than some of us do at the moment. One might be compelled to ask, what are these challenges? The challenges are systemic; they can also be put down to some form of lack of understanding and then corruption.
I met with Rev. Olajide Awosedo in a case study session where he was sharing his experiences with some of our School of Estate Entrepreneurial Class participants. It was a practical session that lasted for a couple of hours and for me, it was a very knowledgeable encounter. As he took the floor, he mentioned four things that a developer should watch if he wants to make a success of his development and in today’s article, I am going to share a few of them with you.
One of the things he mentioned which is crucial and critical is FINANCING. He emphasized that the developer should pay close attention to his financing method. How financing is arranged can make or mar your real estate development. He was very clear on this and why was he saying this? Here in Nigeria where we currently operate, there is a big challenge in terms of the role banks are playing in funding businesses especially in the real sector. These banks are more accustomed to and more interested in funding trading activities… but the real sector hardly enjoys funding from these banks. One of the reasons responsible for this is that firstly, they are not really knowledgeable about the demands of the real sector and secondly, they claim not to have the type of funds required to empower the real sector. So, I then ask myself: why are they bankers? I mean, a bank should be able to go out there and create funds that can solve the type of problems banks are designed to solve; otherwise, they have no business in banking.
Basically, the issue of not having the type of funds does not sit well because we know that just before the recession hit, most of our banks went beyond the shores of this country, entered into partnership with other foreign banks and investment banking groups and got monies which was actually intended for financing the real sector. The sad part is that a very large part of the money the banks got was rather diverted to other funny purposes and the quantum of what was eventually done in the real sector was not commensurate with what could and should have been done.
It has been discovered that the bankers lack the will to disburse funds for the real sector. Therefore, any developer that wants his projects to be funded must be battle – ready to wrestle with the will of the bankers. He must prepare himself to hassle the bankers non – stop till they say “yes”… never take “no” for an answer. But it starts with being knowledgeable about your own products. Real estate projects are supposed to be treated as “PROJECT FINANCING” but if a project is to be financed, the basic thing you need to know is that the project at the end of the day, should be able to start pulling in funds mid – way into the completion of the project. What this implies is that if I am banker, and I have intentions to put up money for a project, somewhere within my disbursement of say 20% to 30% of the funds, there should be willing buyers who are ready to start making payment for the properties. This positive response on the part of willing buyers only serves to show that the project is bankable, is profitable and will definitely sell. If these variables are in place, then the project is worth it.
But the appalling situation we have on ground is that most bankers insist on you making a 20% down payment before they come up with the rest of the funds for your project. However, the truth is this: if I want to do a project of say N4bn and I have 20%, I wouldn’t need the bank for any reason. Why do I say this? Just as I said earlier: if the project is profitable, good and marketable, once I inject my 20% in the actualization of the project, I should be able to attract buyers who would be making payments and I in turn would be using their deposits to complete the project. So, with this said, why do I still need the bank?
In actual sense, we do need the banks, simply to do the project financing. All they need is for the project to have a title, so that the project is as collateral on its own, is sellable and can pull in willing and interested buyers. But a good number of banks are hardly convinced; even after you get them off – takers, they still tell you to get 20% equity contribution for a project financing credit. This only show that they either don’t understand project financing or they’re simply not willing to do project financing… they’ll rather do trading because they believe it brings quick returns on investment.
The bottom line is this; the developer must have a good understanding of finances. This entails how to project his cash flow. He should also be able to sensitize and test his own project. It boils down to the developer articulating his business plan on paper so that when he has a roundtable discussion with the bankers, he has an added edge as he has practically done their work for them. Still he has to be resolute in dealing with the bankers because it might not be as easy as anticipated. As a developer, you have to keep going to the bankers till you get a positive response from them.
That this why I thing the new CBN guideline to banks on stripping all other non banking subsidiaries they have to face the sole business of banking will help a great deal. Since those of them who instead of funding their customers became huge competitors on the excuse of Universal banking system being operated then will no longer be able to do that. I my own opinion Universal banking was a great distraction for the Nigerian banks while it lasted.
Another point of note is that you should never get your role mixed up in the scheme of the project. Remember that you are a developer. You should distinguish and separate yourself from the construction company. This is important because a lot of developers make this mistake. When signing a project, they present themselves as developers… before long, they are the same set of people that will do the construction! Most of such projects hardly see the light of day and when they do, quality would have suffered. As a professional, you must distinguish yourself. Get good contractor with acceptable track record for your projects. Someone that can get the job done not because he says he can but because he has shown to you that he really can deliver. This approach to project development aids you in getting financing as you are seen as someone who knows his onions.
Otunba Awosedo also gave another vital tip. He said developers should make sure they sign fixed price contracts. This prevents contractors from telling you “stories”. By the laws of construction, when you sign a fixed price contract, you are ready to advance the contractors a sum of up to about 40% of what is needed for the construction. This makes it possible for the contractor to have enough money to purchase materials before hand as these hedges against inflation. The advantage in doing that when you can is that the contract cannot come back to you for variation(s) if you keep to the agreed schedule of disbursement as he the contractor keeps to the programme of work. Of course, you should have the contractor give you a performance bond covering amount of your exposure to him per time. This can be called in if he fails to deliver.
In wrapping up, let me remind you of what I said earlier, don’t confuse your role, you are the mastermind, not the one who should be doing the construction work on site. It is not your expertise, all you need is a team of technically knowledgeable people who can monitor the construction and supervise the contractors.
I will also encourage developers to try and know a bit about everything that has to do with their business. You should be informed as per financing, construction and marketing. I will deal with these three factors in detail when next we meet as they are of prime importance to developers. Till we meet again…SEE YOU AT THE TOP!
MD/CEO Realty Point Limited.