Property &Investments

CONTENTS Rent income tax has a silver lining 54 Delivering cheap houses 55

Sh760m
The total cost of constructing the three buildings for the Strathmore Business School at a savings of Sh650 million

COMEBACK

Speaking Chinglish: A developers love aair with Chinese

BY AAMERA JIWAJI
s Kenya develops its business relationships with the Far East, many local rms are shrugging o the stereotype that Made in China means substandard and opting to source directly from China. The worlds second largest economy is gradually being embraced by Kenyan companies as a long term business partner. Questworks is one such company. It started as a department within the Strathmore Business School but was catapulted to become an independent entity after its success in putting up three state-of-the-art buildings with a 45% cost saving. Mr Timothy Kipchumba, a procurement consultant at Questworks, shares his experiences of working with China, and highlights issues that Kenyan companies need to keep in mind when dealing with the Chinese.
Tell me about the Strathmore University project, because that is where the story begins. Strathmore University is seen in the market as an expensive institution but it is a trust, a not-for-prot business. In 2008, the university wanted a set of buildings, including one for their business school - a total of 21,000 square metres of space - but they only had Sh550 million. When they advertised it publicly, they received tenders for Sh1.4 billion for the three buildings! And at this cost, they could not proceed and so they
| Nairobi Business Monthly July

wanted to hold the project. We approached Strathmore as a department within the university and said, If you give us Sh200 million more, we can complete all three buildings at a cost of Sh750 million. But we will need to take the risk jointly, although the end benet will be yours. Strathmore agreed and we started thinking about how best we could deliver. How did you settle on China? The choice of China was purely accidental.

Traditionally when people in Kenya want to buy from China, they are taken by a commercial bank or a shipping agent. But each party is interested in their own gains so, for instance, the shipping company wants you to ship the goods back with them; if it is a bank, they want to lend you the money. We went with a shipping company and it was a terrible experience because the support structure for potential buyers was completely non-existent. You go to China and you are confused. And

you need to risk a huge amount of money, like Sh3 million, to ll one container. You dont know who to trust; you dont know the suppliers; you havent done a risk assessment. So we didnt buy anything. But you eventually settled on China as the preferred supplier. How did this happen? After the rst experience, we returned to China a second time, and then a third time - and invested around Sh14 million in these trips in terms of manpower, money spent, and mistakes made in the supply chain. In our three trips to the country, we dealt with over 200 suppliers and visited 42 cities in China. At the end of it, we know China better than the Chinese. Before we went to China, we had had the conservative idea that we could only source what people see: the doors, windows, sanitary fittings. But then we realised we could buy everything from China: the glass, the doors, the balustrade, electrical ttings, mechanical components, furniture. Everything, including the curtain walling, which is now the biggest in Africa in terms of service area. What was it like working with the Chinese? In 2008 when we rst went there, the global economic meltdown had just happened and 69,000 factories in South East China had collapsed - which is where you mostly buy. So it was a bad time. But we found a local partner in China, after interviewing many. Thats also a problem but in the end you have to trust them. We were lucky and we built a partner, literally. They didnt have an oce so we set one up for them and now we are joined. I really dont know if theres a rule about working with the Chinese. I suppose, the same as the classic advice that they give: Dont listen to what he says; look at what he does. People can promise you everything but what they do is dierent. Where did your 45% savings come from? The total cost of all three buildings was Sh760 million, so we made a savings of Sh650 million. We started the project in October 2008 and completed the buildings in less than three years in March 2012. The savings dont come from going to China alone. In this particular project, the savings really came from the client becoming entrepre-

neurial, meaning that Strathmore was willing to take a bit of risk to make money. Without an entrepreneurial client, the rest is not possible. If you have this, you can accomplish other cost saving measures. We saved 10% of costs through value engineering and good project management. This is basically nding a cost eective way of achieving what you want without spending a lot of money. In Kenya, project managers prepare reports

but they dont have an impact. Proper project management needs to make an impact beyond the report, so it is not just about the accounting but also technical and managerial incentives. Then we saved around 10% from actively procuring the items we needed. And around 13% of our savings came from tax incentives like refunds and remissions. The rest of the savings were made by having an in-house team of technicians to install all the elements.
July Nairobi Business Monthly |

Property &Investments

BUDGET BLUES
What do Kenyan companies need to know when they are planning to work with the Chinese? Indians are probably the opposite of the Chinese. The Indians drive for bargaining. The Chinese get oended by bargaining. So never bargain with the Chinese - they are competitive enough. And remember that the price is just the tip of the iceberg. If you push too hard, the Chinese will give you a lower quality. When the Chinese see a black person, they will take you to the African market. Ask for the American market. They call America the great country. The Chinese are relationship driven. They look at the long term. Kenyans on the other hand are short-term and look for the quick savings. And the Chinese focus on mutual cooperation. So you have to do those lunches since the relationship comes rst for them, which is dierent from the British or the Americans where business comes rst. Seventy to 80% of the people you will deal with in China are ladies. They are very active and aggressive, and they speak Chinglish, the Chinese version of English. You have to admire them; the fact that they know your language because for you to learn basic Mandarin would be very dicult. What else did you learn? We visited leading business schools across the world to benchmark best practices. So, for instance, the atrium at the Strathmore Business School is a copy of one at Harvard, which comfortably houses 40,000 students, because it is dicult to get an auditorium large enough. From Italy, we learnt about a leading technology which basically adds recycled plastics to the concrete and allows a saving on steel and cement while increasing the exibility of the building and creating a structure of seismic proof. As a result, this building has received the LEED (Leadership in Energy and Environmental Design) award, which recognises the use of natural air, light, drainage and so on. This building has also implemented a BMS (Building Management System), which monitors use of energy and allows a saving of 20% on your electricity bill. So the Strathmore buildings were created at a substantially lower cost and with lower environmental impact than any other project in the region.
| Nairobi Business Monthly July

Rent income tax has a silver lining

Move will professionalise property market and promote investment through REITS, says real estate experts

ents are set to rise if Parliament passes Finance minister Njeru Githaes proposal to tax landlords, the rst time rental income is being raided for taxation in recent budget history. The proposal in the 2012/13 Budget empowered Kenya Revenue Authority to map out all buildings to identify rental houses and bring them in the tax net. Some landlords have already reacted to the move by raising rents to cover for the new taxes. The Kenya Revenue Authority will shortly implement a comprehensive strategy to ensure that all landlords are eectively brought into the tax net and all rental income taxes are paid, said Mr Githae. KRA estimates that landlords constitute the single largest group of businesspeople whose income is untaxed, and plans to raise Sh90 billion in the current nancial year through the proposed measures. Rental income will be taxed at the income rate and will require landlords to simply pay tax on whatever income they earn from rental property. The tax, he said, would be paid by landlords earning more than Sh10,000 per month and

graduated on the Pay As You Earn scale. Reaction from industry players was fast and furious. Consumer Federation of Kenya threatened to go to court to block the Kenya Revenue Authority from charging taxes on rents for residential houses, saying taxation would squeeze household incomes through higher rents. We will seek legal arbitration in the judicial system if KRA moves ahead to collect taxes from landlords, said COFEK chief executive Stephen Mutoro. Mr Mutoro said COFEK would push for suspending the tax until the ongoing mapping of rental properties is complete. He said it would bring out the true picture of the residential rental market whose ownership is so fragmented. The Central Organisation of Trade Unions joined the Institution of Surveyors of Kenya in opposing the tax, which some experts have argued, surprisingly, could lead to a drop in rents in some quarters as landlords seek to reduce their tax obligations. COTU Secretary General Francis Atwoli said enforcing the directive would result in double taxation on property owners who are already paying rates to local authorities. Landlords are already paying land rates, said Mr Atwoli. The law on property taxes came into eect in 2007 but enforcement has been delayed. Property experts said the tax would discourage new investments in real estate.