Wednesday, March 2, 2016

Land and Chinese Private Investment in Kenya: From Real Estate to Agriculture

By Hongxiang Huang, Yin Qiu, Mingxuan Huang
[Editors Note: China House is a client of Cowries and Rice]

Between 2013 and 2014, 35 km from downtown Nairobi, a group of ambitious Chinese investors planned a 300-acre real estate mega investment – City of Harmony. It was going to be the China city of Kenya: stores; factories; residential homes; and offices. Hundreds of Chinese businessmen were the shareholders of this project and investment flooded in from many parts of China. Kenya’s role in China’s One Belt One Road meant that a there were potentially huge profits to be made by early speculators.However, in 2015 this project ended with a lawsuit, and the City of Harmony was gone.

"Li Wenjie, one of the major shareholders and a businessman in Kenya, colluded with locals and committed land fraud of over 20 million rmb [$3.8 million], and he blamed me for cheating the system," said Guo Dong, another major player of this mega project. In his eyes, a Chinese con man is almost worse than a Kenyan one, as many Chinese businessmen trust their countrymen, making them easy to exploit.

To date, Guo Dong and Li Wenjie have not resolved their case in Kenya.

Land deals have translated into overnight fortunes in China. When it comes to Chinese private investment in Africa, real estate follows a similar pattern as it is seen as one of the most profitable investment options. In Kenya, there is a famous story about four elderly Sichuanese Chinese businessmen who, around 2007, came to Kenya to work on a state engineering project. Having realized there was great opportunity for profit, these four businessmen quit their job and each put up 2.5 million rmb [$385,000] to buy a piece of land and develop it into residential housing. They each ended up making 10 million rmb [$1.5 million] from their investment.

This story, dubbed the "Four Chinese Elders Dug Gold in Africa", inspired many other Chinese entrepreneurs to come to Kenya for real estate, which was hugely profitable as land price rose 535% from 2007 through today. Currently, real estate is still one of the hottest destinations of Chinese private investment in Kenya. However, without enough local knowledge and experience, a lot of money is lost as well.

"When we started building the house, some people came to us and said this land belonged to them. More importantly, they presented their deeds, which were as authentic as ours," recalls a Chinese businessman in Kenya who does not want to reveal his name. According to our research, this kind of situation is very common in Kenya.

"Because of a multitude of reasons, problematic land deeds are common in Kenya, and good land titling is crucial," explained Faith Kanaga, a Kenyan lawyer who specializes in land transactions. According to Kanaga and other lawyers, when foreign investors do not understand the local context, it is easy to be cheated by many so-called "brokers", Kenyan and foreigner alike.

"Chinese investors do not have good service channel when they come to Africa, and therefore a lot of times they run into problems. And because there is no good platform to share knowledge, many Chinese investors can run into fraud since they never share lessons learned regarding problematic land titling," said Sherry, a Chinese entrepreneur who has lived in Kenya for over 20 years.

However, despite these risks, Kenyan land keeps attracting Chinese investors.

Mike, a real estate broker in Nairobi, told us that "the Chinese want land plots in Nairobi, and only in prime areas."

As developable land in Nairobi becomes more and more scarce, a handful of Chinese businesspeople have started to look into rural lands as well, but not solely as a real estate investment. According to data from the Food and Agriculture Organization, in 2009, Kenya was the world’s largest grower of pyrethrum, a flower used to make insecticide. However, due to management issues, this industry declined in Kenya in recent years.

"We partnered with Kenya’s Ministry of Agriculture and are aiming to revive this industry," said a Chinese entrepreneur in Kenya who does not want his name or his company to be identified. Today, they are acquiring rural land through partnership with locals, and the lands are producing large quantities of pyrethrum, which will be processed and then shipped to China for further refining.

Beyond pyrethrum, Chinese businesspeople are looking at other opportunities in rural Kenya. For example, Zheng has been cultivating his farm, a one-hour drive north of downtown Nairobi. Unlike many Chinese entrepreneurs who focuses on the city, he believes rural areas host the most profitable new opportunities. Two years ago, he began renting four acres of land and planted Chinese vegetables on them, to test whether they could grow in this foreign soil. Today, his farm has almost dominated the Chinese vegetable supply chain to estimated 40,000 – 60,000 Chinese who are living in Kenya.

"I partner with local farmers, teach them how to grow Chinese vegetables, supply them with seeds, and buy from them when their crops are ready," said Zheng, mentoring his local farmers to harvest vegetables for his customers.

Foreigners are not allowed to purchase land in Kenya, so Zheng partners with locals to make his investment effectively invisible. In his eyes, this saves him a lot of trouble.

“The Chinese have a saying: be quiet and make your money, that is the wisdom” explained Zheng.