Quest for cheap housing hard hit by rising costs

Many developers are finding it difficult to provide affordable, low-cost housing in the prevailing economic situation due to the costs involved.

This has left the task to big-time players and government agencies in the real estate sector.

Indeed, early last month, the National Housing Corporation (NHC) announced an ambitious plan to build 11,000 low-cost houses on Nairobi’s Thika and Mombasa roads.

The firm said it would build 3,000 units on Thika Road and 4,000 units on Mombasa Road,  1,200 houses in Eldoret, 1,000 houses in Kisumu, and 1,800 houses in Mombasa.

NHC Managing Director Wachira Njuguna said the one- and two-bedroom apartments, would be going for as little as Sh2 million. “Our target market is individuals in the lower and middle market segments who want decent housing at affordable prices,” says Mr Njuguna.

At this price, and with the NHC’s flat interest rate of 13 per cent, buyers will pay about Sh25,304 monthly for 15 years. Getting low-cost financing is a big challenge to many developers as the cost of development mortgage is high in spite of the base lending rate being a single digit.

“The demand from the public should be enough to show the banks that there is a market. But in a scenario where interest rates are nearly double the base lending rate, we cannot supply the right number of units. This is the main problem,” says Mrs Sue Muraya, the CEO of the Suraya Property Group.

High mortgage costs

Mrs Muraya says that mortgage costs are extremely high compared to the incomes of most Kenyans.

“These costs aren’t just punitive to the buyers, but are also high for developers who, at the end of the day, have to pass them on to the buyers.”

Mrs Muraya adds that ensuring that young people own homes should be a priority for the government because this is the way to ensure that the housing deficit is addressed.

The mortgage report for the first quarter of 2014 released recently by HassConsult shows that there is increasing demand for low-cost housing, with developers and financiers turning their attention to this segment of the market.

The high construction costs, coupled with high interest rates, have for a long time seen developers shy away from these segments, but many are now trying to serve them, with one-bedroom apartments and bedsitters now cropping up in Nairobi and its environs.

Even then, most developers say the high construction costs prevent them from building houses for low-income earners because they still remain out of their reach.

During the release of the report, Ms Carol Kariuki, Managing Director of The Mortgage Company, said that the focus on the lower end of the market is a natural shift by developers to generate a new income stream.

“The next market is the lower end of the pyramid. This is where most people who don’t own homes are, and many developers have realised that there is money in the numbers,” said Ms Kariuki.

Construction sector robust

The Central Bank Annual Supervision report for 2013 shows that the construction sector is now robust, with cement consumption, a key indicator of building and construction performance, increasing from 3,858,402 tonnes in July-June 2011/2012 to 4,007,226 tonnes in July-June 2012/2013.

Notably, these statistics don’t reflect an increase in housing in the lower end market, which cannot even service mortgages.

The report also shows that the value of building plans approved by the Nairobi City Council also increased significantly from Sh191 million in July-June 2011/2012 to Sh211million in July-June 2012/2013.

In the recently released economic survey 2014 by the Kenya National Bureau of Statistics (KNBS), overall construction costs jumped to 7.2 per cent from 5.6 per cent in 2012.

The cost of building materials also went up. Labour charges also increased by almost 10 per cent due to the increase in statutory minimum wages by the government in May last year.

“What this means is that developers factor in all these price increments and pass them on to the buyers,” says Mr Kennedy Gesami, a quantity surveyor.

He adds that it is difficult for developers to provide low-cost housing because of the high cost of development financing, land, construction costs and lack of government incentives.

“This leaves developers like NHC, Shelter Afrique and other giants in this market because they can access cheap financing and affordable land, which the government can provide with infrastructure,” he says.

He says that if the government could provide infrastructure such as roads, electricity, water and sewerage, as well as give tax rebates to developers, it would be easier to provide low-cost housing.

“The developers have the headache of looking for land, then they have to face increasing unfriendly financing options, high cost of labour and materials. At the end of the day, you cannot have a house going for less than Sh3 million because the margins will be low,” he says.

A report by the Africa Development Bank shows that while about 80 per cent of new houses on the Kenyan market target high- and upper middle-income earners, the greatest demand, estimated at 83 per cent, is among low- and lower middle-income earners.

With only about 11 per cent of Kenyans earning enough to support a mortgage, few can afford to buy even an entry-level house.