Joseph Karanja Wainaina

INFORMATION MEMORANDUM TOWARDS THE DEVELOPMENT OF A OFFICE DEVELOPMENT ON PARCEL NO. LR 22501-1/M.N NEW NYALI, MOMBASA COUNTY KENYA PREPARED BY: JOSEPH KARANJA DATE: 13TH AUGUST 2019. New Nyali Office Block Table of Contents 1. Executive Summary 2. Introduction 3. Plot 4. Location 5. Layout 6. Pricing 7. Timing 8. Project Cost 9. Project Financing 10. Project Revenues 11. Entry and Exit 12. Investment Structure 13. Distribution Of Cash Flows 14. Investment Return 15. Assumptions 16. Conclusion New Nyali Plaza 2 26/08/2019 1 EXECUTIVE SUMMARY 1.3 This is an information memorandum into a proposed commercial for let and development in Nyali, Mombasa County. The proposal is to develop a 4-storey office complex as a greenfield development along 2nd Avenue off Mahesh Doshi Road. 1.4 This will offer the potential tenants with a prestigious and preferred business address to organizations who appreciate the importance of the same to their brand. The development is being built at a cost of Kshs 142 million and shall be financed through equity investments adding 3,585 sqft to the areas commercial space. 1.5 The office block shall consist of the below specifications; Figure 1: Floor Structure Floor Parking bay Ground floor Suite 1 Suite 2 Suite 3 Suite 4 First floor Suite 1 Suite 2 Suite 3 Suite 4 Second floor Suite 1 Suite 2 Suite 3 Suite 4 Third floor Suite 1 Suite 2 Suite 3 Suite 4 Total New Nyali Plaza Plinth area (sqm) 717 Circulation - Built up area (sqm) 717 - - - - - - - - - -,747.0 - -,585.0 3 26/08/2019 1.6 It is the intention of the developer/landowner hereby the Project sponsor to carry out the development within a duration of 18 months including the defects and liability period. 1.7 Figure 3 below gives a statement how the project will be financed Figure 3: Financing budget Cost item Kshs Land investment & Cash Equity External investor Total 1.8 1.9 1.10 53,542,537 89,309,363 142,851,900 This study contains detailed financial projections and the supporting evidence for those projections. It also details the potential financial upsides and downsides for the project. Contained within the study are details of the proposed marketing strategy and the project management activities. On the basis of the contents of Figure 3, this is considered to be an excellent project and we recommend that the development should proceed on the lines is detailed in this study. New Nyali Plaza 4 26/08/2019 2 INTRODUCTION 2.1 2.2 The intention is to develop an elegant commercial office block and thus the objective of this report is to detail the viability of the proposal in terms of financial and market viability, which includes pricing, construction cost, financing and the impact on the shareholder value. In preparing this report, we have evaluated the valuation report and conducted a market survey into the nature of developments within the area. The recommendation for the style of development has been made after careful consideration of the results of the research produced, consultation with the project sponsor and with the investors on the viability of the concept design. 3 PLOT 3.1 The plot is approximately 0.2849 acres in size and lays first row on 2nd Avenue. 3.2 The plot has been registered for residential use and a change of user has to be conducted to commercial use. 3.3 The plot is irregular in shape resembling a trapezoid, with a flat slope. The soil is mixed sandy soil and has one road frontage. The proposed development will be accessed from the front via 2nd Avenue on to a tarmac driveway and will provide ample circulation for vehicles. 3.4 The surrounding plots are developed with improvements comprising of office blocks and mid-rise residential apartments. 4 LOCATION 4.1 Nyali is a middle and upper income market located in Mombasa County. The area is located in the mainland north of Mombasa County and is well known for its quality hospitality and as an affluent residential area. 4.2 As a modern town, it’s relatively autonomous with plenty of services and amenities needless mentioning it is capable of providing its residents with all their basic requirements necessitating any need to cross the bridge to the overcrowded Mombasa Central Business District. 4.3 The Nyali coast line is not well served by quality office space as most firms tend to squeeze in with retailers in the larger footprint stores. Most spaces are not well categorized as office space and mixed up with retailers. 4.4 This has created an unprofessional business environment to firms who would like a serene and quiet environment to practice their trade as the foot traffic results in a noisy surrounding with several shoppers mostly window shoppers hovering around. New Nyali Office Block 4.5 Notable establishments include; i. City Mall This is a mixed use development located metres from the proposed site. It comprises largely of a retail centre and a small section reserved for office space. The property is a modern and recent build with spectacular services and amenities. The offices are let at a monthly rate of Kshs 120 psf. ii. Avenue Plaza This is a predominantly office space four storey building located opposite city mall. It is a grade B modern office building with top-notch finishes. The property is 100% occupied and lies almost 50 metres from the proposed site. The building is let at Kshs 100/= per month and the monthly service charge rate is Kshs 20/= psf. iii. Nyali Centre The building comprises of a mixed use development with retail and office space. The property is built within the past 20* years offering 330,000sqft of space built over a 6.7 acre parcel of land it’s the largest mall in Mombasa. The property is provides office space at Kshs 70 psf and a service charge of Kshs 16/=. iv. Epic Business Park The property comprises of a high rise office development comprising of 12 floors which can be categorized as a grade B office development. it is located along links road Nyali. It has several basic ammenities including three pasenger elavators, cctv survaillance, power back up, limited parking and regulated access controls. the asking rent for the property is Kshs 110 psf for sale space is kshs 10,000 psf. the property is a new build, well designed and its currently selling and leasing. the property is 5 km from the subject site. 4.6 4.7 4.8 Understandably the ever growing high presence of retail centres and insufficient office space in the locality could warrant the development of only commercial office developments on the proposed site. Office space demand is usually influenced by increased investment in infrastructural development. The renewed commitment in the development and upgrading of the road network in Mombasa County with its immediate impact on the office sector is immense. Most notable is the upgrading of the Mombasa-Malindi link road to a highway paves way for creation of a business district in the populated urban Nyali area. The island remains quite congested for decent and quality grade A or B office space. This has been achieved by improving the security apparatus in the region with small criminal gangs being subdued which was a major detriment to development in the area. Previously, the county government of Mombasa has spearheaded the advocacy in investment in manufacturing and maritime business. Notable large scale projects include the Vipingo Development by Centum along the proposed highway and 30 Kms from the proposed site. New Nyali Plaza 6 26/08/2019 4.9 4.10 4.11 This project which consists of an industrial park for light manufacturing, warehousing, an Export processing zone, a residential area and leisure destination. The office market demand along the highway is set to receive a boost as national economic growth which has a spillover effect as companies expand to the nation’s largest cities such as Mombasa. The rental rates for the office tenants in these buildings are usually exorbitantly high owing to rental rates at retail stores where the anchor tenant pays the least and the footprint stores and offices pay high rents as commonly experienced in Kenya. Further, retail malls tend to provide smaller spaces for the stores so as to accommodate as many tenants as possible. This does not provide good spaces for an office set up where firms would like to be accommodated in a sizeable space with room for expansion as their operations grow. Office space demand from a high-level assessment of the area could emanate from tour operators, professional service firms such as legal, engineering, accounting among others. New Nyali Plaza 7 26/08/2019 5 FLOOR LAYOUTS FOR THE N EW NYALI OFFICE P LAZA 5.1 The accommodation for the proposed development shall compromise of: i. Basement parking Figure 4: Typical basement floors description Basement Basement Level 1 ii. Sqm 717 Sqft 7,628 Description 20 Bays Office Space Figure 5: Typical ground floor and upper floors description Floor Basement 1 Ground floor Suite 1 Suite 2 Suite 3 Suite 4 Sub Total First floor Suite 1 Suite 2 Suite 3 Suite 4 Sub Total Second floor Suite 1 Suite 2 Suite 3 Suite 4 Third floor Suite 1 Suite 2 Suite 3 Suite 4 Sub Total Total New Nyali Plaza Plinth Area (Sqm) 717 Circulation (Sqm) - Built up area (Sqm) 717 - - - Office Office Office Office - - - Office Office Office Office - - - Office Office Office Office -,747.0 - -,585.0 Office Office Office Office 8 Description Parking 26/08/2019 Floor lay outs New Nyali Office Block 6 PRICING 6.1 Accordingly, we have selected the following target prices: Figure 7: Prices and Lease Assumptions Gross Floor Area 50% of total common area Net leasable area Net leasable area Rental rate Service charge(SC)/Sqft Floor Sqm Sqm Sqm Sqft Sqft Kshs Ground floor 717 104.7 612 6,588 120 20 First floor 717 104.7 612 6,588 110 20 Second floor 717 104.7 612 6,588 110 20 Third floor Total potential revenue 717 104.7 612 6,588 100 20 2,868 418.8 2,449 26,353 6.2 6.3 6.4 6.5 6.6 These prices are relatively conservative in comparison with the other developments and we believe that they are readily attainable. Every opportunity will be taken to maximise the returns, taking into account the state of the market. The renewable lease tenure has been estimated at six years. Within the duration the lease rate will have an escalation of 7.5% p.a. Fifty per cent of the common area shall be leasable and included in the tenant plinth areas. This is in accordance to industry norms and bearing that the tenants shall be using the facilities provided. Lease up will commence upon start of construction to ensure the building is fully let upon handover. Parking however will not attract any rates. New Nyali Office Block 7 TIMING 7.1 The estimated practical completion of construction period is 12 months. This will then be followed by a six month defects liability period which will also for the lease up of the property and acquisition of an occupation certificate. The implementation schedule shown below illustrates the project milestones. Period Stage Activity Conceptualization Pre-feasibility analysis Start 01-Jul-19 16-Jul-19 16-Jul-19 31-Jul-19 13-Aug-19 30-Aug-19 14-Aug-19 13-Dec-19 03-Jan-20 28-Dec-20 04-Jan-21 08-Jul-21 08-Jul-29 Appointment of consultants Preliminary Designs Pre-construction Information memorandum Detailed designs Surveys &approvals* Fund raising Contracting Implementation Construction Practical completion Construction end Defects liability period Lease-up/O.C Operations 1 Investor management Operations 2 Project sponsor management Ending 15-Jul-19 18-Jul-19 30-Jul-19 12-Aug-19 27-Aug-19 20-Sep-19 12-Dec-19 20-Dec-19 28-Dec-20 04-Jan-21 03-Jul-21 27-May-29 26-Sep-48 8 ESTIMATED P ROJECT C OST 8.1 The project cost has been calculated using a multiple of the plinth area, taking into account the requirements of the architectural concept in terms of materials and finishes. The project has a development cost of Kshs 142 million. Figure 8 below details the major elements of cost breakdown; Figure 8: Uses of Funds Development cost Total construction cost Professional consultancy fees Surveys and approvals Financial consultancy fees Sub total Land Total project cost New Nyali Plaza Kshs 85,923,875 1,800,000 1,742,537 3,385,488 92,851,900 50,000,000 142,851,900 11 26/08/2019 9 PROJECT FINANCING 9.1 The project shall be fully financed by owners’ equity and inclusion of an external investor’s cash equity. The landowner’s equity portion shall comprise of land and cash equity to meet the consultancy fees as well as survey and approval costs. 9.2 An external equity investment of Kshs 89.4 million shall be required to meet the cost of construction as well as the transaction advisory fees. A breakdown of the intended capital structure is as shown below. Figure 9: Sources of Funds Sources of Funds Land Investment & Cash Equity External investor Total Kshs 53,542,537 89,309,363 142,851,900 % 37% 63% 100% 10 PROJECT REVENUES 10.1 The projected revenues below are based on postulated market rates at the project completion time. Figure 10: Revenue Schedule Floor Ground floor First floor Second floor Third floor Total Potential Revenue - Net Leasable Area Rental Rate Gross Monthly Rent Service Charge (SC)/Sqft (Sqft) 6,588 (Sqft) 120 (Kshs) 790,602 (Kshs) 20 6,588 6,588 110 110 724,718 724,718 6,588 26,353 100 658,835 2,898,873 Monthly Service Charge Total Annual Rent Annual Service Charge (Kshs) 131,766 (Kshs) 9,487,221 (Kshs) 1,581,204 Total Gross Annual Rent & Service Charge (Kshs) 11,068,425 20 20 131,766 131,766 8,696,619 8,696,619 1,581,204 1,581,204 10,277,823 10,277,823 20 131,766 527,067 7,906,018 34,786,477 1,581,204 6,324,814 9,487,221 41,111,292 As may be seen below, the project shall be able to generate gross potential monthly revenue of Kshs 2.8 Mn before service costs and vat Annual gross income inclusive of service costs but before VAT is Kshs 41 million at full occupancy Total net leasable area is 26,353 sqft which includes 50 per cent of the common area. New Nyali Plaza 12 26/08/2019 11 ENTRY AND EXIT 11.1 Upon investment the project shall move to the implementation phase. After completion and award of the occupation certificate, you as the investor shall operate the property for a period of eight years to which you will recoup the invested capital and make a return. 11.2 The property shall be managed by an independent property manager who shall run the operations professionally in the best interests of the principal joint venture partners. 12 INVESTMENT STRUCTURE 12.1 The relationship between the investor and the landowner shall be governed by an investor lease agreement to which the parties will subscribe to. The investor will lease the site, develop it and operate it for a period of eight years as mentioned above. 12.2 The expected duration of the investor lease is expected to be 9.5 years which covers construction, defects liability period estimated at 18 months and operations for 8 years. The cash flow distribution will be made as illustrated below. Project Operations Jul-21 Jul-25 Jul-29 Jul-33 Jul-37 Jul-41 Jul-45 Jul-49 Project sponsor management Investor management Start Duration(Days) Investor management 08-Jul-21 Project sponsor management 08-Jul-29 2,880 7,020 13 DISTRIBUTION OF CASH FLOWS 13.1 As an investor you will draw 75% of the total net rental revenues post operational expenses and taxes. The project sponsor (landowner) shall equally draw 25% of the total net revenues. The project sponsor, investor and leading property agents will work together towards ensuring the property is fully let within the year post practical completion of construction. 13.2 Upon conclusion of the eight year period the project sponsor will assume full ownership and possession of the property. In any event the assumed hurdle rate of 12% is not attained; a potential extension of the period is warranted until the investor lease agreement. New Nyali Plaza 13 26/08/2019 14 INVESTOR RETURN 14.1 From the structure and distribution indicated above, the project provides a very attractive preposition to you as the target investor. 14.2 The net profit arising from the rental receipts will be able to provide you with an internal rate of return of 14%. 14.3 The investment multiple achieved shall be 2.21 times over the invested capital. A tabulation of the expected cash flows is as shown below. Figure 11: Investor annual cash flows Year Jan-20 Dec-22 Dec-23 Dec-24 Dec-25 - 1 2 3 4 Dec-26 Dec-27 Dec-28 Dec-29 Count (Yr) 5 6 7 8 Cash outflow (89,309,363) - - - - - - - - - 16,283,426 22,228,380 24,070,429 26,030,801 28,138,201 30,403,655 33,813,041 36,713,296 (89,309,363) 16,283,426 22,228,380 24,070,429 26,030,801 28,138,201 30,403,655 33,813,041 36,713,296 (89,309,363) (73,025,937) (50,797,558) (26,727,129) (696,328) 27,441,873 57,845,528 91,658,569 128,371,865 Cash inflow Total cash flow Cumulative cash flow 14.4 TOTAL RETURN Figure 12: Summary of Returns Performance metric Result Harvest period (Yrs) Internal Rate of Return Total Cash Inflow Total Cash Outflow Total Net Cash Flow Investment Multiple New Nyali Plaza 8 14% 217,681,228 (89,309,363) 128,371,865 2.44 14 26/08/2019 15 ASSUMPTIONS 15.3 Inflows i. ii. iii. iv. Inflows comprise of the gross office rental income and service charge; VAT on office rent; Annual rental rate escalation of 7.5% p.a; Vacancy and credit losses of 10% p.a. in the first year. 15.4 Out flows i. ii. iii. 15.5 i. Management expenses at 2% of gross potential revenue; General and administrative expenses at 10% of gross potential revenue; Provision for capital expenditure. Rental prices The rental prices adopted are as determined by the expected asking rental prices in Mombasa particularity within Nyali area within the next two years when the property will be complete. 16 CONCLUSION 16.3 The project presented herein is in its initial stages and we have reviewed initial work done to capture the potential of the proposed site. The financials point towards a favourable project concept based on the design specifics and elements incorporated. 16.4 It is however expected that the figures are bound to change over time but they are based on reliable estimates from reputable real estate agents and valuers. We believe this is an attractive venture for any real estate investor wishing to reap good yields for their investment. New Nyali Plaza 15 26/08/2019 APPENDICES APPENDIX 1: PROJECT CASH FLOW STATEMENT Figure 13: Cash Flow Statement (Figures in KSHS ’000) Date beginning July-21 July-22 July-23 July-24 July-25 July-26 July-27 July-28 July-29 July-30 Date ending June-22 June-23 June-24 June-25 June-26 June-27 June-28 June-29 June-30 June-31 Count year 1 2 3 4 5 6 7 8 9 10 90% 100% 100% 100% 100% 100% 100% 100% 100% 100% Movement in space(sqft) 23,718 26,353 26,353 26,353 26,353 26,353 26,353 26,353 26,353 Office rent/sqft p.a 31,308 40,352 43,379 46,632 50,130 53,889 57,931 62,276 66,946 71,967 VAT 4,508 6,456 6,941 7,461 8,021 8,622 9,269 9,964 10,711 11,515 Service Charge 5,692 6,325 6,325 6,325 6,325 6,325 7,906 7,906 7,906 7,906 41,508 53,133 56,644 60,418 64,475 68,836 75,106 80,146 85,564 91,388 Occupancy level Gross Potential Revenue 26,353 Less: Operating Expenses Leasing commission(Kshs/sqft) 237 26 Operating expense 3,321 4,251 4,532 4,833 5,158 5,507 6,008 6,008 6,008 6,008 Property Management fees 1,245 1,594 1,699 1,813 1,934 2,065 2,253 2,404 2,567 2,742 415 531 566 604 645 688 751 801 856 914 5,218 6,402 6,797 7,250 7,737 8,260 9,013 9,214 9,431 9,664 36,290 46,731 49,847 53,168 56,738 60,576 66,093 70,932 76,133 81,724 Capex Total Expenses Earnings Before Interest, Depreciation & Tax - - - - - - - - Less: Depreciation 120 120 120 120 120 120 120 120 120 120 VAT 4,508 6,456 6,941 7,461 8,021 8,622 9,269 9,964 10,711 11,515 Corporate Tax 9,499 12,046 12,836 13,676 14,579 15,550 17,011 18,254 19,590 21,027 22,163 28,108 29,950 31,911 34,018 36,283 39,693 42,593 45,711 49,063 Earnings after Tax APPENDIX 2: TOTAL PROJECT RETURN Figure 17: Project Return Year ending Jan-20 Count Cash outflow (142,852) Cash inflow Total cash flow (142,852) Cumulative cash flow (142,852) Value (Figures in KSHS’000) Dec-22 1 Dec-23 2 Dec-24 3 Dec-25 4 Dec-26 5 Dec-27 6 Dec-28 7 Dec-29 8 Dec-30 9 Dec-31 10 Dec-26 TVCF 22,283 22,283 (120,568) 247,594 28,228 28,228 (92,340) 266,163 30,070 30,070 (62,270) 286,125 32,031 32,031 (30,239) 307,585 34,138 34,138 3,899 330,654 36,404 36,404 40,303 355,453 39,813 39,813 80,116 382,112 42,713 42,713 122,829 410,770 45,831 45,831 168,660 441,578 49,183 49,183 217,843 474,696 817,243 817,243 Project Net Present Value: Kshs 286,360,247 Payback Period Rental Yield: 10.17% 1st Positive Cash Flow: Kshs 3,899,336 Internal Rate of Return: 35% Payback Period (Yrs): 5 APPENDIX 3: LANDOWNER RETURN New Nyali Plaza 16 26/08/2019 Figure 18: Project Sponsor Return Figures in ‘000 Year Count(Yr.) Cash Outflow Cash Inflow Total Cash Flow IRR Jan-20 Dec-22 Dec-23 Dec-24 Dec-25 Dec-26 Dec-27 Dec-28 Dec-29 Dec-30 Dec-31 - 1 2 3 4 5 6 7 8 9 10 - 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 45,831 45,831 (53,543) 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 45,831 45,831 Dec-31 TVCF (53,543) 29.2% New Nyali Plaza 17 26/08/2019 817,243 New Nyali Office Block