Wednesday, June 24, 2015

A FEW BILLION TO SPARE? BUILD A MALL!

I try not to go into the Kampala business district. The traffic I can handle, it’s the lack of parking that is the bigger disincentive.

Last week I had to go into Kampala and realised how long ago I had been. Construction is going on at every turn with multi-storey buildings sprouting everywhere you look like weeds.

"The general feeling is that the economy is suffering despite what the official figures say – business is slow, shops are shutting down and property prices have gone in reverse...

It was surprising enough that construction goes on unabated in our city what was even more shocking is what these landlords are building. Malls!

That did not make sense to me. I know other better situated malls, with acres of parking space, larger shop floors and which have not lost their novelty with our fickle Ugandan shopping public, but where business is decidedly slower than a few years ago.

So what is it that these new mall owners know that more seasoned operators don’t?

I can hazard a guess or two.

One, these mall owners like many Ugandans before them are just playing copycat. Because someone else has built a mall and seems to have succeeded, they decided they will build their own too.
Not the best example of market research, but there.

Secondly, I am tempted to think there is a lot of hot money still sloshing around. How does one commit billons of shillings to an industry in decline, if he is really concerned about making a return? 

Ordinarily to build such malls would require millions of dollars in debt. What that means is that if you build your mall and the tenants are not forthcoming you will have to find a way to pay the bank or they take over your monstrosity.

"But on the other hand if you have all those billions in cash, you will have the luxury of waiting out an economic downturn as you have no external obligations. What kind of people have billions of shillings in cash in this economy? Cash, which they are willing to leave locked up in brick and mortar with little hope of adequate return...

The interesting thing with markets is that when there is an economic boom everyone looks like an astute businessman, but as US billionaire investor Warren Buffett says, “Only when the tide goes out do you notice who has been swimming naked”.

And when the economic downturn comes the cash returns to its rightful owners.

One can understand the attraction for storing away money in real estate. On the surface of it, it seems a no brainer. Get your money, put up a building, collect rent and watch the sun go down as you sip coyly on cocktails by the beach.

As many a landlord has found out, it does not quite work that way.

To begin with the returns on real estate are lower than those found in general trade. Secondly, it takes time and money to find the tenants and manage the building in such a way that one can extract maximum value.

The signs are all around. Our mall owners have converted basement parking into shops. They are cutting back on maintenance, leaving the washrooms dirty and stinky or shutting them down all together. Their tenants are leaving them in droves as they rush to reopen in the newest mall.

It was no surprise a few months ago that the epicentre of a typhoid outbreak was one of our malls.

But the mall fad is just part of a larger craze in the economy, which makes you shake your head while wondering “What were they thinking?”

"It seems to be, that the sum total of our market research before we go into business, is to look around at what other people are doing and join the bandwagon...

It could be the intuitive thing to do, but if one was to gather the statistics they may very well mirror the conventional wisdom that only five in a hundred businesses live to see their fifth birthday.

If you have hit a windfall and need to open a business yesterday, I suggest you park your money in a fixed deposit account. Deliver yourself from temptation. Seat down and try and plan how you intend to execute your business and find out whether there is a market for whatever you are bringing to the public.

And it need not be a colourful power point presentation with all the bells and whistles. The idea is that there are things that need to be clarified, that will determine whether your business will survive or not but also determine its long term viability.

"The story’s of entrepreneurs rushing headlong into a business on a hunch and a prayer are nice to listen to. However for every entrepreneur that goes headlong into the business, throwing caution to the wind and survive, there are easily a few hundred who have fallen by the wayside...

It may not sound sexy when you are telling it to your grandkids, but a bit of thought and preparation could go a long way in ensuring you go into the right business and that it survives long enough for you to brag about it to your grandchildren.


As for all those malls littering our streets? Let us talk about them in five year’s time.

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