In four years, the property tech startup, Spleet has gone from an idea born out of trying to solve a pesky housing problem in Lagos to planning an expansion to Rwanda and Ghana.
When Dolapo Adebayo was ready to move out of his parents’ house, he faced an interesting and expensive problem. Renting a house in many states in Nigeria, requires tenants to pay a year or two years’ rent. This excludes other charges.
Those charges pile up and discourage renters in a city like Lagos where property prices are high. So Dolapo founded Spleet with Akintola Adesanmi. Spleet is a property technology startup helping people in Nigeria rent houses without needing to pay costly upfront fees. The solution uses technology to match people with flexible and affordable rental options.
Instead of paying a year’s rent upfront, you can pay monthly, quarterly or for six months. The houses you’re matched with are furnished and have all the utilities paid for.
The economics of flexible rental options
Some back of the napkin maths shows that if a property company gets a three-bedroom apartment in Victoria Island, Lagos at an agreed price of ₦3 million ($7,334) per year, modifications may cost an extra ₦1.5 million ($3,667) yearly. Modifications may include partitioning a flat, installing washing machines or heaters and general repairs.
If that unit is occupied 40% of the time at an assumed daily charge of ₦60,000 for a short-let apartment, that could generate returns of ₦8.9 million ($21,760) per year for one apartment unit. It may explain why property tech startups are leaning on short-let rentals (rentals of 1-4 days) as much as monthly rentals.
But proptech companies are only one half of the equation, what is in it for homeowners? Startups like Spleet allow homeowners to list their houses and then receive rent on a monthly basis.
On paper, the advantage for homeowners to join services like Spleet is that they will get the best rental prices for their homes. Also, collecting rent monthly spares them the troubles that come with yearly renters.
Most homeowners run into legal problems when renters are unable to renew their rents. Under Nigeria’s rental law, homeowners need to provide six-month notices before ejecting yearly tenants. Ejecting renters who owe rent can get wrapped up in legal complications. It is common to find a lot of rent-related cases in Nigeria’s magistrate court.
Companies like Spleet do not tie renters to yearly contracts and therefore do not need six-month notices to eject them. Yet they have their own shortfalls. They do not offer homeowners the kind of lump sum that they can get from yearly renters.
Akintola Adesanmi, Spleet’s CEO says that many of these homeowners in Lagos are “people who are in their fifties and are used to collecting rent yearly. It’s difficult trying to change their mindset.”
The Supply Problem Vs TAM
Despite the benefits property tech companies offer homeowners, there is still a supply problem. Many homeowners are not chomping at the bit to list their houses on proptech websites.
According to Tobi Adama, CEO at AlphaCrux Limited, a traditional real estate brokerage firm that helps proptech companies secure properties, “these companies offer great deals to tenants, they’re not offering great deals to landlords.”
Most landlords prefer to get ₦2.5 million upfront than ₦3.5 million in monthly instalments. By taking yearly rent upfront, landlords figure they can invest in other businesses and beat Nigeria’s rising inflation.
It means that while proptech companies often point to long waiting lists as proof that there’s a demand for their service, scaling will be difficult until they solve the supply problem.
*Yomi, an investment banker in Lagos told TechCabal that while house hunting for an apartment on the websites of proptech startups, he didn’t find as many options as he imagined.
A look at some of the most popular proptech websites in Nigeria shows that none of these startups have up to 2,000 listings.
“So yes, you’re right, it’s a supply problem,” Akintola says, “but it’s not necessarily a supply problem, it is unlocking it.”
Solving the proptech supply problem
How do you solve a problem like this? One suggestion is that these companies offer homeowners yearly payments, but this method is expensive. Spleet will not consider this model because they prefer growth methods that don’t “impact their balance sheet.”
According to Akintola, “What we’re trying to do is get more supply onto our platform. We’ve taken our time to understand what the problems are so we haven’t gone the fintech way of ‘build fast and fail fast’.”
“For us, we will slowly grow and try to adhere to the complexities of the market.”
Fibre, the pioneer proptech startup which has been under the radar recently told TechCabal that the company hasn’t been in the news because it is shoring up its backend operations. While COVID-19 slowed things down, the startup says its radio silence is deliberate.
The director of operations at Fibre, Munachi Ogbonna thinks that proptech startups have more than a supply problem. He told TechCabal, “In the past 24 months, supply wasn’t much of a problem; the quality of the supply was the problem. We have to make sure that these houses meet the standard.”
Many times, the waitlists are long because a certain type of housing unit, studio apartments, for instance, are in high demand while most of the houses on the market are 3 or 4-bedroom apartments.
For Munachi, there’s no avoiding the conversation around how a downturn in the Nigerian economy is reducing the addressable market for proptech. While the percentage of Nigeria’s middle class from 1999 to 2006 was around 38%, today that figure is 10%.
“The challenge is that there’s a lot less earning power for the middle class. From 2016, you had young families who wanted houses on the island, by 2020, people were moving out of those places.”
“People are moving to the mainland because of earning power; I can name half a dozen properties that are empty but rent expectations are ridiculous. The load on the tenant becomes really high so you have fewer people who can afford these houses.”
It explains why Muster and Spleet are now focusing on expanding outside of Nigeria.
Expanding outside Nigeria
Last week, Spleet announced plans to expand its operations into Ghana and Rwanda later this year. The company’s CEO explained the thinking behind the expansion to TechCabal.
“We tested Ghana with our short-stay service during the Year of Return and one of our partners, Wallets, helped us with settlements. It worked, so we went back a month later to take feedback about whether the long-stay problem exists as well.
“We found out that the long-stay problem in Ghana is even worse. You have to pay rent for one or two years upfront first of all. If we’re doing comparables, let’s say you wanted to live in a three-bedroom flat in a place that you can compare to Lekki in Ghana, you’d be paying 1.5 times the amount you pay in Lagos.”
The expansion is a no-brainer. With limited capital, proptech startups will always gravitate towards where they can get the highest return on their investment. It’s also a way of testing their business model – which looks a lot like the Airbnb model – across Africa.
While Airbnb has cheaper offerings, Spleet and Muster, which also talked about expanding to Ghana in 2020, justify their pricing by touting themselves as lifestyle companies. Realistically, the competitive edge of proptech startups over AirBnB in the short-let market is their better knowledge of a wonky real estate market.
While these startups say that they save you the cost of paying a hefty yearly rent upfront, they are often an expensive alternative. For instance, this one-bedroom shared apartment on Spleet costs ₦260,000 ($635) per month. When we factor in one-time booking fees and a security deposit, it comes to ₦3.2 million ($7,823) yearly.
But for its pricing, you get a furnished apartment with paid-up utilities. You also get access to EdenLife, a lifestyle startup that helps you avoid house chores. It is a compelling offer for upwardly mobile millennials who are happy to outsource chores.
There’s the argument that these costs pile up but these startups are catering to a niche market anyway. In a country where GDP per capita is $2250, you will not find a lot of people who can afford to pay $635 as monthly rent.
But Spleet’s recent announcement that it has hit $1 million in lifetime revenue may prove that a small addressable market is not a deal-breaker. If proptech startups can unlock supply in upscale areas of Lagos like Lekki where yearly rents are expensive, they will achieve success.
Spleet is confident that it can unlock supply. It wants homeowners to get their rent payments upfront while continuing to let customers pay monthly without needing to put their business at risk. This implies that there will be a middleman that will finance the process of paying homeowners upfront while the interest is passed on to renters.