How Developers Can Survive This Year

• LAGOS Developer, AYO KUYEBI

Ayo Olanrenwaju Kuyebi is a Lagos real estate developer of repute. He is the Chief Executive Officer of GMH Luxury Limited, a company established 8 years ago which is already playing big in the real estate sector with offices in Victoria island, Lekki and Abuja. His wealth of experience of over 20 years in business speaks volume about him as he has achieved quite a number of high-profile projects in Nigeria and abroad. Ayo is a visionary entrepreneur who is passionate about revolutionizing the African Luxury real estate sector, starting from Nigeria, his home country. His company, GMH Luxury Limited has grown in lips and bounds that it now has 4 sisters’ companies such as BHOUX, Civil Acme, G2g Investment and Geostruct Konsult.

Few weeks back, Ayo was among the distinguished facilitators at an MCPD training organised by the Nigerian Institution of Estate Surveyors and Valuers. He gave a good account of himself during his highly insightful presentation where tackled issues relating to the financial sharing ratio for those going into Joint Venture business.

Immediately after his presentation, City People GM, Wahab Bashir and Jamiu Abubukar (08085185886) held an interview with the versatile Ayo and we got him talk about the many challenges, developers face while trying to executive projects and what they need to do to achieve more in 2024. Read and get the gist!

Can you do a summary of the presentation you just delivered at the training?

Okay, basically for joint ventures, it’s really straightforward. It’s equity, real estate asset equity, financial exposure equity. So that is what joint venture is about. And once you’re able to identify the value of the land vis a vis the cost of construction infrastructure for land development, you can know what the sharing ratio is. So once there is transparency, there is a strategy and there is data driven driving the joint venture. That means the joint venture is actually bound to succeed. Do you understand? But in the absence of this, that means the joint venture is actually doomed to fail from the start. So there has to be clarity. There has to be transparency. There has to be a clearly divine role of both the landowners and the development partner. In the case of joint ventures towards developers.  Joint venture towards land, there has to be a clear, divine role of who assigns work and what are the ancillary facilities that will be present as far as that land development is concerned. We have seen estates in this country and we have seen estates. Do you understand what I’m trying to say? VGC was developed by SPG Group very long ago and it’s still a reputable estate to live in today. We are aware of some estates which are nothing to write home about in terms of infrastructural development. So those are the issues around joint ventures. So, the expectations have to be very clear from day one.

During your presentation you described how the instability in naira affects real estate. Can you tell us a bit about that?

Okay, so basically, so if you go into a joint venture, that’s why I said don’t do a joint venture. That the return on investment is less than 80%. Because you are looking at the cost of fund inflation and Naira devaluation. So if you don’t take that into cognizant, definitely your joint venture will fail. Because if you consummate a project in January this year, you are still going to do the project for 18 or 24 months. And we are working on a tightrope of maybe less than 50% return on investment, the project will fail because there has to be a very strong contingency amidst the economic instability in countries like Nigeria. But if you are able to be working with a minimum margin, a standard of 80%, whatever it is, it’s only in the case of abnormality that you would not be able to survive.  You’ll be able to scale the development start and you’ll be able to finish it.

Generally speaking, even in a stable climate, the minimum is based on interest rates, the cost of funds. So if you are talking about the UK now, the interest rate is between 9% and 10%. So if you want to do 80% in the UK, you outprice yourself in the market. So you have to do something that will be double of whatever your interest rate is doing. So, if for instance in the UK, you are taking a facility in the UK at 9%, that’s 18% in two years. So you must be working with a minimum margin of 36%. That’s what it means, 36% to 40% return on investment. So anything below that is going to put you into trouble even in a stable economy. But guess what? They even do more than that in terms of return on investment because of your capital appreciation. Because you know that they don’t play with their infrastructure. But in Nigeria it’s a development preceding infrastructure. In their own cases, infrastructure before development. You see roads, empty land; new town development. When was the last time Lagos State created any new town? Even the Ibeju-Lekki we are selling. It’s unfortunate. It’s a new town development, but there is no visible infrastructure. They don’t even know where it will be. So people investing in those axes are disasters waiting to happen because by the time they come Lagos State will come up with a master plan. A lot of people will lose their land. The implementation of Lagos state master plan, a lot of people will lose their land.

You talked about how the principles of crowdfunding can be applied by developers to raise funds for their project. How can this be achieved?

Crowdfunding is good, but the huddle around it is difficult. A real estate company cannot do crowdfunding because you need a SEC approval to be able to legitimately do crowdfunding. So, what we do is a sales product tailored towards crowdfunding. If you want to buy a property of 10 naira and what you have is 1 naira, that is 10% equity of that property. So when you are buying to own, you enjoy capital appreciation. In the case of a house now, you have a rent. There is a management company they must create around crowdfunding to be able to guarantee the return of individual investors. So, crowdfunding is a sale product they can tailor in. Crowdfunding in real estate is the same model as REIT. The only difference is the fact that in this case now the asset is not built yet or the infrastructure for the land is not built yet, but for REIT is built already. We can see it. That property must be generating cash flow for you to be able to do a REIT against it. So REIT is like gating against the property that the property is doing 10 million this year. By next year, the property is able to generate 15 million. So they will now project that okay, in five years’ time, what would the property be generating based on demand and trend. So they will now say people should invest at the current rate of today. So whatever the difference is the dividend that the investors will be enjoying. So for crowdfunding, very good! But it has to be from a reputable real estate company.

Now, were you able to come up with these brilliant ideas?

Data and Knowledge Acquisition! I always tell my people, even if you must say pepper, you have to learn it because there is a secret behind every trade. So if you have money and just buy pepper and say you want to sell pepper, do you know how to preserve the pepper? If you don’t know how to preserve it, you are going to lose your investment. For every business you must do, you must know about the business. That’s the first step. Knowledge acquisition based on business. You must have it. If you don’t have it, go and buy stock and put your money in a bond and fixed deposit.

In the case of your presentation, you raised a caveat on seeking for bank loans to develop real estate, why did you say that?

Yes I did, it’s not even suitable. The alternative is actually being able to presale. But real estate is really, really lacking in public trust. People put their money on two years projects, five years, they are still there. Six years later, they are still doing the project. Your fund is locked on. You are not able to utilize your fund. There is no capital appreciation because what the developer promised, he has not delivered on them. So your money is tied down. So people don’t really want to put their money into real estate because of a lot of uncertainties around this legacy is becoming like a concrete jungle already. There’s a lot of abandoned projects left, right, and centre. It’s not the intention of the developer but it’s because proper planning is not in place when they are going into development. So it happens. The funding that is suitable is also not accessible because of the bureaucratic process around it. If you want to take money from BOI today or CBN intervention fund, you must know somebody on the inside. It’s a must if you don’t know somebody on the inside, 99% of the time if you walk into BOI, you’re not going to come out with money. It’s almost guaranteed. You must have somebody on the inside helping you to push your documents. And in a normal setting it’s not supposed to be. It has to be on the merit of your submission. But whether you merit the submission or not here you’re not going to get the money. End of story!

So what do you advise in that case?

So in that case, what I advise is the fact that you have to use other means. There are three ways to finance projects as a developer. So your capital injection, which is your personal fund. Angel funding, which is family and friends. Then if you must use debt from the bank you must be looking at a minimum of 1 year. If not, you work for the bank and you can equally put yourself in trouble. Minimum you must take is twelve months. That means you are done with the carcass, you are doing your finishing, then you can take a debt and you know you can circle out in twelve months.

What are the danger signs of doing Joint Venture which a developer should run from?

The sign you see in a joint venture that you don’t want to go into is the first thing first, I always tell people the most important thing in a joint venture is not the documents but the person going into it? Is the person going into it somebody that is reasonable and sensible? Because joint ventures are not a straight line. It’s bumpy. Life is not a bed of roses. It’s like a pool. So, there will be ups, there will be downs and all of that. So when the chips are down, will this person be reasonable with you? Or the person is going to trigger a crisis. One grey area and the person triggers a breach of contract clause. It puts your investment at risk. It will make everybody fold. So the first thing first is, can I really work with this person? Joint venture is like a marriage. Are we compatible? Are we going to be singing the same song?

How do you come up with assessing or knowing these? From the tone of the conversation, you will know you want to do a joint venture with somebody. The value of the land is 500 million. He’s asking you to come and borrow him 100 million in advance. And if somebody is telling you I’m very finicky, if I come and the line is not straight, I ask you to break everything. That if you are going to call it white, it must not be grey. It must not be grey. That is an indicator to tell you that this person I want to deal with is rigid. So everything has to be on point.

What are the other things one should look out for?

So another thing you should look out for is the title document. Once the title document is defective or encumbered, run. Title document is not on a straight leg run. When there are multiple owners and some are not available. Don’t put your hand.