Investors should be less missionary in approach to risk
Friday, June 4th, 2021 00:00 | 3 mins read
Traditionally, Kenyans have preferred to put their money in land and buildings, since these are considered less risky compared to other investments.
The problem with this model is that an appreciation in the value of property is only on paper, rather than in real terms, unless such property is sold and capital gains actually realised.
One other challenge is that such investments do not create job opportunities.
They only require low level labourers such as caretakers, gardeners and security service providers.
This, in my view, is partly why Kenya has low employment rates. It also highlights why local investors ought to be encouraged to put wealth in businesses that create products and support economic value chains, such as manufacturing and agro-processing. Here is why:
As a general rule, Kenyans who invest in land do not consider it as a factor of production.
Rather, they buy it largely for speculation, keeping it for years without developing it.
They only sell it once infrastructure projects such as roads and electricity make the location more habitable.
In essence, it means private investors unlock value only because of work undertaken by government, not from own effort or secondary investments after acquiring the property.
It is important, therefore, for wananchi to be re-educated that land is not meant for hoarding.
Instead, it is meant to be put into productive use to create wealth for owners or occupiers and the country.
Sadly, though there is a law that prescribes high taxation for idle land, this is seldom invoked, meaning that government has been losing millions of shillings in revenues by failing to tax idle land.
Even where land owners build houses for rent or sale, they seldom create high value jobs since construction is mostly menial or mechanical, except for engineers during construction stage. Similarly, once construction is finished, no new jobs are created.
Yet, for a similar amount invested say, in a commercial milling plant, milk processor or fruit extraction factory, an investor will not only unlock more wealth for himself but also create numerous employment opportunities in addition to supporting an entire value chain, from suppliers who offer logistics, packaging, insurance and other related services.
This is exactly why government agencies ought to be more innovative in finding ways to make it attractive for local investors to start small factories, especially in rural areas where raw materials are to be found in abundance.
Such small or cottage industries can feed into larger companies to create a vibrant economic network that devolves creation of both wealth and employment.
Increasingly, the world is moving towards a knowledge economy. Disruptions caused by Coronavirus have accelerated this new trend while also showing traditional business models are no longer the solid rocks they were once believed to be.
Indeed, companies without real estate — but with transformative ideas — are increasingly becoming more valuable and attractive to investors.
As it were, many — such as Google and AirBnB — have their roots in America.
Whereas it is encouraging there are local firms borrowing a leaf from them on a much smaller scale, they are operating without much government support or legislative framework to shield them from more traditional competitors.
This is why companies like SWVL, despite their innovative approach to public transport, have been running into legal headwinds which require them to form saccos and operate only on designated routes.
This is an old model and it is important for lawmakers to bring legislation up to speed on what is actually happening on the ground.
Investments in digital platforms is also a new opportunity that Kenyans can and should leverage on.
Again, their operations are ahead of legislation, meaning many such platforms operate outside the framework of regulation.
This is both risky for individuals and bad for economy because it creates an uneven playing ground for companies that are basically doing the same business but have to operate under a regulatory regime simply because they have brick and mortar premises.
Of course, the Nairobi Securities Exchange is on a rebound and Kenyans should be encouraged to take advantage of its renewed activity to grow wealth.
The point, when all is said and done, is to encourage investors to be more versatile and less missionary in their perception of risk. — The writer is a Partner and Head of Content at House of Romford — [email protected]