Building construction company in Kenya talks about office developments in Nairobi and the contracting sector

Interview with Bharat Kerai, Managing Director and Project Manager of Ark Construction Ltd

Let´s talk about the sector itself. How can you define the sector in 2016? What are the main trends?

At the moment we find that the changes are in the designs and the new ideas that the designers come up with, particularly the new materials that the designers use. I think that is the major trend at the moment in the interior fit out market. Before, you used to find it was very limited in terms of what you could do with interior fit out because there was not much exposure and also people´s budgets did not allow for much. Now you find that because people have travelled around and they know what they want, they give the interior designers and consultants more to play around with. You find projects with bigger budgets and so you can use more expensive materials. In the general sense also the sheer size of the projects has grown; before when you worked on office blocks the maximum you would work on would have been 3 floors at a time but now you find people taking up 7 floors or wanting to do the entire building. You also find that headquarters of businesses are shifting to be outside of the central business district of Nairobi because of all the traffic chaos here and so they want to look at new geographic areas and target new markets. Kenya is developing very quickly in terms of the rising middle class so you find that banks and insurance companies are looking to move into new areas and into the more urban and residential areas.

Next year will be the elections, so often construction companies want to try and finish all of their projects before the elections, then the elections come and everything slows down until the new office comes in and then prices start to rise once more. Can you describe the situation at the moment in 2016 and what the situation will likely be in 2017?

The general trend is that 6 months before and 6 months after the elections there is often a general slowdown in the economic situation. What happened in 2007 elections with the violent uprisings meant that people are now reluctant to put money into infrastructure projects or even in investments in general. Thus 6 months before and 6 months after the elections there is a slowdown. Once the elections are over and the situation becomes calm again then things start to pick up and people are willing to invest. Payments here are not that regular so you find that people are holding onto their money right now and so one of the major challenges facing the market is liquidity. People are not very willing to invest right now because they want to hold onto their money and so there are many delays that happen with the purchases. Once things regulate and the political situation stabilises and people have more confidence that everything is back to normal, they are more willing to invest and things pick up.

So you work mostly with office projects or do you also work with residential projects?

We do both. In terms of residential projects we don’t do single private homes, no matter the budget because we have found that when we have done that kind of project, the clients are more intimate, they want to be on the ground, they want to be hands on and we find with that situation there are more delays and a lot of changes. When we do office projects we have a full on consultancy team so we know who we are answerable to. When we do residential projects it is often for a good number of townhouses or residential houses and so we focus on those kinds of projects.

What proportion of your revenue comes from office projects as opposed to residential? Where would you like to develop further?

At the moment around 80% of our portfolio is based on office building including the developments and the interior fit outs. At the moment we have just recently ventured out into the civil and general building construction sector, so for the past 2 years or so we have been investing more money into civil machinery to enable us to be able to take on more such projects and to be able to look at working on more residential apartments. Previously we were focused mostly on offices, particularly office fit outs.

What is your strategy to move further into civil construction?

We have been in the market for nearly 7 years now. For the majority of that time we have focused on interior fit outs and we feel that we have specialised ourselves in the field of interior fit outs. People know us and they know what we do. The next step is venturing into new markets; by new markets I mean venturing further into the civil construction area. We find that we have a lot of technical expertise in that area but generally we haven’t been able to specialise in that market yet because we are a growing company and we want to take on one sector at a time. Now we feel that we are well established in the interior fit out sector and so we are now developing into residential and office developments and we have had a good number of projects in the last few years. I think we are now well into the residential apartment sector as we have a good number of projects for residential apartments and we are slowly looking at working with architects and consultants to go into office developments as well.

Are there large international companies coming here and doing big projects or are Kenyan companies like yours strong in the sector?

The Kenyan market is a bit peculiar because you have the major government contracts which are all geared towards the Region 2030 such as the likes of the Lamu port which is currently underway, the new terminal that is being built at the Jomo Kenyatta International airport and the SGR railway which is mostly being financed by the Chinese government. The Chinese contractors have in fact taken the majority of those big projects but you also find that there are established players in this market who have been in the country for more than thirty years who have also been taking on government projects. These players don’t normally take on the very large scale projects but they take on projects that are under 10 billion Kenyan Shillings.

For those projects there are a lot of local contractors who are already established in the market. However for the majority of projects and the projects that require a lot of funds because of the nature of those projects, the Chinese contractors have taken up those projects because of the partnerships with the Kenyan and Chinese governments where the Chinese government is financing 90% of those projects. In these relationships it means the Chinese contractors do the projects and the materials come from China. It is up for debate how much this benefits the local market and economy, it obviously requires more in depth research because you need to look at how many of the materials that are procured by local companies come from China etc.

You also have the private companies, like PWC for example, who are now taking up their own headquarters here and which are also massive projects. For those projects they would most likely prefer to have local contractors because the notion in the market in Kenya or even generally worldwide is that the Chinese contractors or even the Chinese products in general are not up to quality. Because of that notion, you find that a lot of these multinational companies prefer to go for local contractors even though they may be a bit higher in price but they know that they will get good quality work.

Talking of quality, what are the challenges in that sense and what has been your policy?

At Ark Construction we have a policy of no compromising in terms of quality. If the client is paying for something they should get the best quality out of it. It doesn’t matter if you have to demolish everything and incur a cost on yourself. At the moment in a market like Kenya you have to look at building up relationships. You are not there for the short term, you can´t say “ok I will get this project and I will make as much money out of it as possible and then we can look at a new one”. You have to build relationships. Most multinationals are building branches year on year so they are looking at repeat business from their clients. If you have not made good money on one project, you are still looking at the continuous relationship that you want to have. We do not compromise on quality.

We might be a bit higher in the market in terms of our pricing but in terms of quality, time and the service we provide we pride ourselves on those three aspects. In the Kenyan market now with the emergence of the middle class and upper middle class who now want to spend a bit of money in developing their offices to be more personalised, they are looking at spending a bit more to have some character in the design and they are willing to spend a bit more to get the right contractor to do it for them. They don’t want to go for a cheap contractor and then have a lot of headaches during the project with compromises in quality or materials that are not up to spec. People have had bad experiences with low quality contractors and they become more aware going forward in terms of what they want. That is a big advantage to us. When a client has hired a designer to design their own office space or their own residential apartment, they normally ask their designer or consultant for a recommended contractor.

We normally find that because of our good relationship with those consultants, we are always referred to the clients. I think the main challenge that we had about 2 years ago was the emergence of all the new contractors that came into the interior fit out space of the market particularly the emergence of low quality players in the market. They were able to offer lower pricings and we found that people went for that. It was a bit of a challenge for a couple of years in terms of getting work and repeat business but we found that once people gauged the quality that they were getting with those contractors, they were finding that the savings they were making were not benefitting them and now they are returning to our company.

As a company you are a family business. Are you interested in having investors coming in or do you want to keep it in the family?

At the moment with the expansion that we are currently facing in the Kenyan market there is a lot of scope for growth and improvements. We always encourage partnerships with international players or local players if they want to get into partnership with us for example with developers, contractors or any kind of suppliers etc. We always welcome that because we are always looking for new opportunities for value creation in the market.

We generally find that in the Kenyan market at the moment, although the construction industry is booming, in terms of doing business in Kenya it is very traditional. That is reflective on the kind of designs that come up and the kind of construction that is going on. It has only been in the past 2 or 3 years that people are becoming more daring in terms of the high rise buildings that they are constructing. A couple of years ago the highest buildings were just 20 floors but now you find that because of the availability of funds from the international markets and the partnerships with the Chinese, there is a lot of funding for infrastructure. That has liberalised the Kenyan market as a whole to enter into the construction of a lot of high end, high rise apartments. Previously the traditional apartment block would be just 4 stories tall and they used to cover a lot of space.

Now the apartment blocks cover less space and are shooting up. That has been the emerging trend now in Kenya. This is also happening in the office development space; buildings are coming up that are over 20 stories and so to move into that field we are always looking for partnerships in terms of development, availability of land, training people etc. If someone has land but doesn’t have money, they could come to us and see how we can partner together. In this way we create value for the developer, for ourselves and for the local market as well.

Kenya is your market, are you mainly based in Nairobi? Would you like to expand outside of Kenya?

At the moment we are highly into Kenya, so when I speak of Kenya I mean all over Kenya, all the way from Mombasa to Kisumu and beyond. We have an established base all over the Kenyan market. We take on jobs all around the country. We are also in Uganda but we don’t have much of a presence there as we are just setting up. We are looking for strategic partners to partner with us to enter into the Ugandan market at the moment.

What is your strategy to look for partners at to move into Uganda?

At the moment we take things one step at a time. We have taken up a few projects in Uganda and we have done that with one or two contractors. We are gauging how they respond to our way of doing business in terms of the quality that we aspire to because the Kenyan market and the Ugandan market are totally different in terms of culture and availability of skilled workforce such as we have here in Kenya. Obviously we don’t want to put our foot there and then find that the resources that we want are not available. We want to know the amount of investment that we need if we have to train people for example to do that kind of work. We want to know if we will have to bring in skilled labour from Kenya to do the work or if those skills are available in Uganda and to what extent so that we can gauge how many projects we could take on at one time. We are gauging that by taking on a few projects at a time. Recently we have done a few projects within Uganda and we have done a branch of Citibank.

That gives us a bit of an idea in terms of labour and skills and also how quickly we can do these jobs. We want to know if they are up to speed with what we normally provide our clients or if there is a bit of a slowdown. That will help us gauge in terms of timelines. We need to know if we can give our timelines based on our Nairobi workforce or not. I would say that the Ugandan culture is a bit more laid back so the way they work is a bit slower also. Again, it is about doing things one step at a time. We are serious about expansion and going into the Ugandan market and so we don’t want to go into Tanzania and Rwanda all at the same time and do it badly because then we would be nowhere. We have established ourselves well in Kenya, so now we want to establish ourselves in Uganda and then probably Tanzania, and then take it on from there.

What would you like to achieve in ten years´ time? What is your vision for the company?

My vision for the next three to five years is to be more established in the civil development sector. By that time we should have established ourselves in other geographical areas aside from Kenya. Also, going forward we would like to be doing our own developments in terms of construction and developing our own buildings and renting them out or selling them to investors that would like to put in money into the Kenyan market. I feel that the Kenyan market at the moment is very ripe for investment in terms of infrastructure projects. Kenya is now coming of age in terms of the number of projects happening and the calibre and scale of projects. A number of shopping malls have just been completed in the country in the past 2 or 3 years.

These projects are massive and for a country as small as ours to have 4 to 5 mega shopping malls is something really big. For the short term you find some have suffered a bit in terms of the traffic that they are getting but now because of the general rise in economic development that the country is experiencing that is improving.

We are growing at nearly 5 or 6% a year, and that has exposed the local market and the citizens of the country to the global experience. They are now more willing to spend their money on luxury items as their spending power has increased. They are more likely to invest in homes because that is the typical Kenyan culture, people would rather invest their money in homes and cars first before going out and shopping for expensive clothes. That will be the main driver for the economic development of this country because the infrastructure development and construction market in this country has grown nearly 13 to 14% year on year. That is massive and it has been boosted by the local people who are more willing to spend their money, investing their savings or getting a mortgage to have their own home or office space. That is what has pushed the growth of infrastructure in this country to this point.

Is there anything else you would like to add?

The real estate market is now slowing down. In the past year the prices of homes have dropped, not dramatically but they have dropped. There was a massive shortage of housing and because of that shortage you then found apartments and homes cropping up everywhere. There was construction everywhere, but now because of this influx of new homes, it has driven up the prices of both land and homes. Since then there has been a slowdown now in demand for housing and in investors paying the prices being asked for and so land prices have also started to decrease. I feel that going forward in the next couple of years they will continue to drop until we get to an optimal level of demand, willingness to pay the prices for the houses and willingness to sell.