What you need to know:
- The offtake risk and the cost of infrastructure has made it difficult for the private sector to deliver affordable housing and when it happens, it happens in locations that do not work for the target market.
In the last quarter of 2018, the government, through the State Department of Housing and Urban Development, released a Framework of Guidelines on the implementation of the affordable housing scheme in Kenya that outlines, among many others, the project’s financing, cost and design, quality and affordability as well as a clear road map for public and private-sector involvement.
Several policies and initiatives as well as strategic partners will be required to actualise this agenda.
Kenya can borrow a few ideas from Singapore, which has successfully provided affordable housing for its citizens through an integrated housing approach that ensured a proper and well-coordinated process through the Housing Development Board (HDB), which also provided estate management services.
A consolidated effort
Singaporeans were encouraged to use their social security savings to buy housing units, which they would occupy for a period governed by a minimum occupation period policy and hence limiting speculative purchases and ensuring that even after transferring the property, occupation remained within the citizens.
Their efficient urban planning and green building techniques enabled well-designed neighbourhoods with easy access to all amenities. It’s, however, important to appreciate that Kenya cannot copy-paste the Singapore model, as 90 per cent of the city-state’s land is state-owned.
However, there are aspects that can be replicated. For example, the government could enable the creation of quality new cities and communities instead of glorified slums, and this will only happen if there is neat infrastructure and a maintenance plan on the delivered units.
They could also be incentivised by the investment structure, which seeks to de-risk the investment into the affordable housing and, or make the same bankable.
In de-risking the investment into this space, the government will be offering offtake agreements as well as letters of comfort to the partners into this sector. Further, there are incentives in the form of reduced corporate tax upon delivering the required minimum size within a specified period and a partial refund on infrastructure cost.
These initiatives will go a long way in dealing with what has in the past prevented the private sector from participating in the housing agenda as they will now be cushioned against these risks. The offtake risk and the cost of infrastructure has made it difficult for the private sector to deliver affordable housing and when it happens, it happens in locations that do not work for the target market.
In addition to the above, through delivery of affordable housing, the government will address the mortgage issue that has continuously made it difficult for Kenyans to own homes and for private developers to deliver on the projected returns.
The mortgage issue will be resolved through the Housing Fund and the Kenya Mortgage Refinancing Company to introduce secondary liquidity and the Housing Fund, which will be a mandatory contribution. According to the 2018 Central Bank of Kenya (CBK) report, about 25,000 mortgages were issued per year versus the Housing demand of about 250,000 a year.
The current ratio of rent to mortgage in Kenya is 1:6 — a huge disparity indicating an overly priced and unaffordable housing system. If these two forces are sorted, the developers will be able to quickly offload their stock and hence the Return On Investments (ROIs) will be guaranteed. They will in turn be able to reinvest the cash in other sectors of the real estate space or allow for repeat projects in the housing scheme.
Additionally, it will incentivise international investors who are particular on the exits when they take development risk.
The private sector has a number of strengths that can be incorporated in delivering the housing agenda, including a development track record, meaning that they have great experience in delivering projects on time, on budget and as per designs.
Further, the private sector has the fire power to invest in the sector as long as the potential major risks are covered, which the government will do in this case. Additionally, the private sector owns huge and strategic pieces of land that can be utilised, topped with its capacity to build joint venture vehicles with owners of technology and or international investors seeking opportunities in Kenya.
The government’s initiative requiring the pre-qualified investors to put down a 10 per cent deposit of the total value of investment is very critical in the successful implementation of the housing agenda as it helps keep off briefcase investors that derail project implementation.
A win-win venture
It’s believed that for every one shilling injected in the housing sector, three shillings will be generated, meaning it will accelerate economic growth. Jobs will be created and the manufacturing sector will also grow, and hence there are trickle-down effects that will have real impact on Kenyans.
The private sector should embrace the affordable housing scheme and partner with the government to deliver this agenda, which upon successful completion will propel Kenya above and beyond other African countries that have tried and failed, thereby restoring faith in investors and opening the region for further development.