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29 May, 2023

Off-plan investment in the Real Estate sector has emerged as an enticing opportunity, offering a mutually beneficial platform for both developers and buyers. This concept involves selling and purchasing properties that are yet to be constructed or are still under development, with the completion and ownership transfer being governed by agreed contractual obligations. Over the years, off-plan investment has gained significant traction offering a good platform for both developers and homebuyers. Through a contractual agreement, the buyer becomes the owner of a Real Estate unit with predetermined characteristics and specifications, whether it is an existing property or one under construction. The developer, in turn, is obligated to complete the construction within the agreed-upon timeframe, while the buyer is obliged to pay the price either in an expedited or deferred manner. The growing popularity of off-plan investment signifies its potential to reshape the Real Estate market by providing a promising avenue for profitable ventures and fulfilling the housing needs of prospective homeowners.

However, there is a general lack of clear legal provisions specifically addressing the sale of off-plan developments in Kenya. While the Land laws in the country include provisions for property registration, no specific clause or article covers the registration of properties purchased off-plan. The residential properties commonly sold through the off-plan strategy in Kenya include apartments, townhouses, terraced and stand-alone maisonettes, and villas. Regulation for such developments is addressed through the Sectional Properties Act, 1987, No. 21 of 1987, which highlights the subdivision of buildings into units that can be registered separately by the Lands Registrar. Developers can generate a sectional plan from an existing site plan, enabling them to sell the concept of the off-plan development to potential investors. However, due to its relative newness and the lack of a well-established regulatory framework in the off-plan investment sector, these existing provisions do not fully encompass the specific regulatory needs and protections required for off-plan investments. These gaps in regulation have allowed some developers to exploit the system, leading to various challenges and risks for buyers.

Therefore, addressing these gaps in the regulatory framework is necessary to provide adequate safeguards and promote a transparent and secure off-plan investment environment in Kenya. As such, based on our analysis of the case studies, we propose the following recommendations for provisions that the government should incorporate during the formulation off-plan regulations in Kenya;

  1. Enactment of an Act of Parliament Specific to Off-Plan Real Estate: The government should formulate an Act of law that specifically addresses all aspects of off-plan Real Estate development and investment in Kenya. The regulatory framework should be comprehensive enough to oversee development activities and the sale and lease of off-plan rental units. This regulatory framework will; i) serve to protect the rights of all parties, particularly buyers, against fraudulent practices by developers, ii) promote transparency and fairness in the sector, and iii) enhance confidence among end users, developers, and investors,
  2. Licensing Requirements for Developers: Developers who wish to undertake off-plan Real Estate activities in Saudi Arabia are required by law to obtain a separate licensing certificate from the Wafi Committee that is renewable annually. Correspondingly, off-plan regulations in Kenya should require all developers who wish to undertake off-plan Real Estate development and sales activities to obtain an additional licensing permit along with the development permit obtained from the REDRB. The license should be renewable annually, subject to the fulfilment of preset conditions. This will assist in promoting consumer protection by ensuring that developers meet certain standards and qualifications before engaging in off-plan activities and quality assurance. In addition, the registry should be made available to the public at no extra cost. This would be fundamental in assisting buyers in assessing the credibility of an off-plan property developer and averting possible cases of financial losses and fraud,
  3. Formulation of Penalties for Non-Compliance: Both agencies responsible for overseeing the implementation and enforcement of off-plan regulations in Saudi Arabia and Dubai reserves the right to terminate or suspend an off-plan project on the basis of technical grounds, and failure by a developer to meet required conditions. As such, off-plan regulations in Kenya should convey power to the agreed-upon oversight regulatory body to terminate or suspend an off-plan project on the basis of either technical grounds or any other conditions set out in the Act. These could include; i) failure by a developer to commence construction of the project without an acceptable reason at the agreed upon time, ii) if development has stalled for a period exceeding twelve months, iii) if the developer has acted fraudulently, iv) if the authority is satisfied that the developer has no genuine intention or ‘good faith’ to continue with the project, v) failure by the developer to implement the project due to gross negligence, vi) if any provision of the off-plan Regulations is violated, and vii) any time the authority having investigated deems fit to do so.

Furthermore, additional measures such as fines and revoking a developer’s licensing certificate to engage in off-plan Real Estate activities in case of law breaches should be implemented. Subsequently, revoking a developer’s licensing should be followed by an amendment in the Real Estate developer’s registry with the removal of the developer's details. These measures would ensure developers comply with the law, maintain high ethical standards in the industry, and fulfil their obligations in a timely and responsible manner, failure to which would result in legal action,

  1. Establishment and Operation of Escrow Accounts: Off-plan regulations in Kenya should compel developers to open escrow accounts with approved banks, as in Saudi Arabia and Dubai. Escrow accounts safeguard buyers' funds in off-plan Real Estate projects by establishing a trust account where the funds are held. The funds are to be released to the developer in a controlled manner, typically linked to specific project milestones or completion stages, ensuring that buyers' money is protected and used exclusively for the intended project. This reduces the risk of misappropriation or misuse of funds by developers, providing buyers with financial security and minimizing the potential for fraud or project abandonment,
  2. Refund of Payments Made by Buyers: Off-plan regulations in Saudi Arabia and Dubai ensure the reimbursement of payments made by purchasers to the developer or any financing obtained by the developer should a project be terminated or suspended. Similarly, off-plan regulations in Kenya should provide for the same in case of project suspension or termination. This would help minimize financial losses in cases where projects fail to materialize,
  3. Expert Supervision of Off-Plan Real Estate Projects: The off-plan regulations in Saudi Arabia require that a consultation office accredited with the Organization of Saudi Engineers supervises all off-plan projects. Correspondingly, off-plan regulation in Kenya should contain a provision for expert project supervision by a consultant engineer approved by the Engineers Board of Kenya. This would ensure quality and timely project delivery through regular technical and progress updates reports made by the consulting engineer to the oversight authority,
  4. Safeguarding Investors and Buyers' Rights: Dubai's off-plan Real Estate regulations allow for provisions that safeguard investors' and buyers’ rights, such as restrictions and cautions placed on land on which the project is to be constructed. These measures limit land sale or conveyancing before or during construction. Likewise, it is prudent that off-plan regulations in Kenya incorporate such measures to ensure buyers' and investor’s rights are protected by law,
  5. Standards for Advertising and Marketing: Off-plan regulations in both Dubai and Saudi Arabia contain strict regulations on real estate properties' advertising and marketing standards. Real Estate marketing and salespeople and developers are required by law to include certain information in their advertisements, such as the license number of the dealer or developer and any relevant disclosures. This provision helps prevent deceptive advertising practices and enhance transparency and protect consumers by providing them with essential information about the developer's legitimacy and qualifications. More so, these requirements ensure that buyers have access to crucial details, enabling them to make informed decisions and,
  6. Stimulation of Capital Markets to Improve Access to Financing: Insufficient funding poses a significant challenge for off-plan projects, frequently resulting in project delays or, in some cases, project suspension. Without adequate funds, developers may struggle to commence or complete construction on time, resulting in extended project timelines, which can frustrate buyers, erode investor confidence, and lead to reputational damage for the developer. As such, the government should work towards the stimulation of capital markets in order to improve access to financing for developers. This can be achieved through the establishment and utilization of specialized Collective Investment Schemes (CIS) and Real Estate Investment Trusts (REITs), known as Development REITs (DREITs). Through CIS and DREITs, developers can tap into a broader range of potential investors and expand their investor base, thus increasing the availability of capital for development projects while reducing reliance on traditional financing channels such as bank loans.

Off-plan Real Estate development and investing in Kenya offers a promising opportunity for both investors and developers aiming to capitalize on the country's rapidly growing property market. Investors can leverage the potential for significant returns and the advantage of purchasing properties at lower prices during construction. Simultaneously, developers benefit from pre-sales, which provides upfront funding and ensures a ready market for their properties before project completion. However, the sector benefits from establishing a robust regulatory framework firmly enshrined in law. Such a framework would fuel the sector's growth, ensure sector regulation, foster transparency, bolster investor confidence, and pave the way for a thriving business landscape in off-plan Real Estate development and investing in Kenya.

For more information, please see our topical on Off-Plan Real Estate.