Jaco Maritz speaks to John Latham, founder of Unity Homes, about his business journey, the best locations for housing developments and other lessons learnt in the real estate industry.
Unity Homes is a Kenya-based affordable housing developer. British-born founder and executive director John Latham, who has lived in Kenya for almost two decades, previously worked as a project manager for an East African construction company. Latham had some management shares in the business and when it got acquired by another player, he received a handsome payout which he used to start Unity Homes.
He first became interested in the housing industry after reading a World Bank report that forecast rapid urbanisation, and subsequent demand for housing, in Kenya. Three business acquaintances were invited to come onboard as shareholders in the company. All four partners invested their personal money and joined the company on the same terms.
Latham says Kenya’s housing market can be divided into three categories:
- Formal: Housing built by professional housing developers.
- Semi-formal: Typically small apartment blocks developed by people with spare cash who want to create additional income streams. The quality is normally not as good as formal developments and the structures might not adhere to building regulations. Oftentimes these properties don’t have adequate water and sanitation infrastructure or they might lack sufficient parking space.
- Slum dwellings: Densely packed informal housing units of weak build quality.
Unity Homes caters for the lower end of the formal market. Its cheapest properties are 45m2 units that cost about US$35,000.
The company’s first development, in the western Kenyan city of Eldoret, broke ground in 2014. Cognisant that he didn’t have a track record in housing development, Latham saw Eldoret as a “safe space” to hone his skills. “I liked Eldoret because there were few developers there. I was very aware that I was not an A-grade developer at that point. However, there were some downsides which I didn’t see at the time, which was how much less income people have in the regional towns and cities.”
It took four years to build and sell the development’s 239 units. But the project wasn’t very profitable; Latham says the returns were similar to that of a 10-year Kenyan government bond. Frustrated by the mediocre profits, Latham was unsure whether to continue onto the next project, locking in his capital for another lengthy period, or call it quits. He eventually decided to push ahead.
Unity Homes’ next project was a 400-unit estate on the outskirts of the capital Nairobi, in the Tatu City mixed-use development comprising homes, offices, factories, schools, a shopping district and medical clinics. Despite the Eldoret’s development’s lacklustre returns, it taught the company many lessons which it implemented in the Nairobi project. A more refined product with better architecture, construction and marketing all contributed to a much more profitable development, which was completed in two and a half years. Several buyers from Unity’s first estate also bought units in the second project.
Over the years, Unity Homes has built a vertically integrated business, which includes architectural design, engineering, construction, procurement, marketing and sales. It has a core team of about 65 employees but some of its bigger developments can have as much as 500 contractors on site.
Unity Homes is currently building an additional two estates within Tatu City, comprising 640 and 1,200 apartment units respectively. The company has recently also expanded to Nigeria, where it is constructing houses in Alaro City – backed by Tatu City developer Rendeavour – in the Lekki Free Zone in Lagos State. Latham says because the development is within a free zone, it is protected from much of the bureaucracy associated with doing business in Nigeria.
Unity Homes effectively sells a retirement plan. The majority of its customers are professionals who buy the houses to put on the rental market. Over their lives, these people would aim to buy several such properties and then live off the rental income once they retire. “We’re actually selling an investment,” Latham explains. Because of Kenya’s underdeveloped mortgage industry, most of the transactions are in cash or through short-term payment plans.
Complexity as a moat
Warren Buffett popularised the concept of a business moat – a company’s ability to maintain a competitive advantage. Like a medieval castle, the moat protects those inside the fortress from outsiders. Moats can include cheap access to raw materials, high switching costs or brand recognition.
Latham believes complexity in a business, and a company’s ability to manage it effectively, serves as a strong moat. He says Unity’s vertical integrated business has a high level of complexity with many moving parts, something that competitors may find hard to replicate. “We’ve got a very complex network of humans managed correctly.”
Regional economic hubs offer the best returns
While Unity Homes cut its teeth with its first development in Eldoret, Kenya’s fifth most populous urban area, Latham believes regional economic hubs – such as Nairobi in East Africa and Lagos in West Africa – offer the best potential for formal housing developments. He says while there is demand for housing in secondary cities, spending power is generally much lower than in the commercial capitals, which impacts a project’s overall profitability.
“If you are in the formal sector you should be focusing on the capital cities in a country or even better the regional hubs. That is why we are in Nairobi and Lagos. At this stage even the idea of going to Kigali or Kampala versus just going to the other side of Nairobi, just doesn’t make sense,” he explains.
Turning capital over quickly
Unity Homes pays close attention to ensuring its projects lock up as little capital as possible and keeps a tight handle on cash flows, which means it hasn’t been in a position where it was forced to raise outside money. By developing its housing estates in small phases and handing over the properties as soon as they are finished, the company can recycle its capital quickly, unlike some developers who first complete the entire project before handing over the units to buyers. Prospective buyers, who need to pay a deposit off-plan, are also more likely to commit if they can see completed units delivered to buyers.
While some businesses prioritise growth over profits, Latham says Unity Homes’ goal was to be profitable from day one.
Aligning the team
Another tactic that has contributed to Unity Homes’ growth is ensuring its management team and employees are incentivised and aligned with the broader business goals. With its first Nairobi project it started sharing profits over a certain threshold with a few senior team members. This initiative was expanded to a wider group of staff for the second Nairobi estate. Commission structures for the sales team have also been reworked to ensure they are highly incentivised.
Latham has implemented this philosophy further down the organisation. For instance, it pays certain contractors a piece rate rather than an hourly fee, which means they can earn substantially more money. “If you hire a tiler and pay them an hourly rate, they will give you 30% or 40% of the production they are capable of. However, if you pay them a piece rate, they can be two times as productive and make over double the money. It also means the work gets done quicker, which means we can turn over our capital quicker.”