Steps govt can take to bring rents down

When the Jubilee Party and the NASA coalitions held rallies at Uhuru Park on Friday and Saturday of last week respectively, Mr Evans Tangy, 34, was among the thousands who attended the rallies.

“I haven’t had a job for close to a year now, so I’ve been keeping myself busy by joining different campaign teams,” he told DN2 a day to the General Election.

After the rallies, Mr Tangy took a bus to Kibera and then trudged about two kilometres home to Soweto Village. The corrugated iron shack he shares with his wife and three children measures barely six-foot-square.

“I moved to Nairobi with my wife six years ago after I got a job at a factory. We first lived in a one-bedroom house in Baba Dogo and paid Sh3,000 rent. Unfortunately, I lost my job after six months and had to take up casual jobs to provide for my family. I was forced to move from Baba Dogo to Kibera because the rent increased steadily every few months, and I could no longer afford it when it reached Sh5,000,” he explained; he pays Sh500 a month for his shack in Kibera.

RENT RESTRICTIONS

Asked what he thought of NASA’s promise to institute rent restrictions if it came to power, Mr Tangy said he doubted that such a policy would benefit him and his family.

“I can barely afford my current rent. Even if the government brought down the rent of a two-bedroom house in Lang’ata to below 2,500, I would still not afford it,” he says.

Still, Tangy believes that capping rent would be beneficial to many Nairobians. He hopes that the government that comes to power will recognise that decent housing has become unaffordable for the common man and institute measures to tame the exploitative rents, especially in Nairobi.

Notably, when asked about his pledge to reduce rents during the presidential debate, Mr Raila Odinga said the promise was premised on the implementation of the Rent Restrictions Act (RRA), saying it had been ignored, thereby giving landlords the freedom to raise rents arbitrarily.

However, Mr Reginald Okumu, a director at Ark Consultants Ltd, a real estate and property valuation company, believes that the implementation of the Rent Restrictions Act will not be easy.

“If you look at the RRA, it says that for a landlord (charging up to Sh2,500 per month) to increase rent, he or she must go through the tribunal. There is only one tribunal and it holds sittings on a rotational basis around the country. Considering the number of business and residential premises in the country, resolving cases could take years. So if a landlord is charging Sh2,000 and wants to raise that amount by Sh500 and it takes him or her five years to get the nod, by that time the rent should have gone up by more than that amount,” he offers.

Mr Okumu adds that, should the government raise the limit from Sh 2,500 as provided by the RRA, the immediate effect would be a sudden increase in rent, a reaction by landlords to ensure that they are outside the regulatory bracket.

He believes that the answer does not lie in legislation, but rather in providing enough incentives for investors to venture into low-income housing. Better still, he says, would be for the government to fund county governments and state agencies like the National Housing Corporation (NHC) to enable them to build enough houses for low-income earners, for whom the private sector does not cater.

“If you look at Nairobi, the last council housing estate was built in 1978. So for approximately 38 years the government has not put up any social housing, yet low-income earners depend on social housing not just in Kenya, but throughout the world,” says Mr Okumu, adding that the social housing model has been successful in other countries.

Mr Stephen Ambani, the chairman of the Institute of Surveyors of Kenya (ISK), agrees, citing the NHC housing project that helped reduce rents in Langata by increasing the supply of houses there.

Mr Ambani regrets that the NHC, despite being a government agency, has to buy land like a private developer. He says the government should empower the agency to enable it to provide cheaper housing.

Statistics from the 2015 Yearbook of the Centre for Affordable Housing Finance in Africa (CAHF), an independent think-tank based in South Africa, indicate that Kenya faces a backlog of 1.85 million units and requires at least 132,000 units every year to cater for new migrants to urban areas.

Noting that Nairobi alone receives about 40,000 people every month — which comes to about half a million new residents every year — Mr Okumu says that, although social housing might appear the best bet to eradicate the housing shortage, its success depends on cooperation between the county and national governments.

Asked whether rents in Kenya are so high that they warrant government control, Mr Okumu replies: “If you earn nothing yet you are supposed to pay for housing, it doesn’t matter how low the rent for that house is. You will not afford for it. The problem is not the cost of housing, but rather, poverty.”

However, he adds, to keep the cost of housing in check, there is a need to look at the whole value chain.

“Every investor wants to recover his or her cost, plus earn a profit. So if I put in Sh100, I expect to get back my Sh100 – and more. But if I have to pave a road, bring in electricity, pay all the necessary levies to the city council, then I must recover all those costs. At the end of the day the person who pays it back is the tenant or buyer, so we need to look at the whole value chain and evaluate where government intervention is necessary to help developers cut costs,” he says.

He gives the example of the infrastructure fund that was introduced by the government sometime ago but failed thanks to too much bureaucracy. In an effort to help basic infrastructure match the growth of the development of property, which is said to be growing faster than the rate at which the government can put up basic infrastructure, the government set aside a kitty for developers to claim any money they had spent on supporting infrastructure such as roads, electricity, water and sewer systems from the government.

This was intended to prevent developers from pushing this cost to property buyers or tenants. But as a result of too much bureaucracy, Mr Okumu notes, most developers ignored the project and simply pushed the extra cost to buyers and tenants.

“So if the government can create such a fund and make it easy for developers to access, it would go a long way in solving the housing problem. Alternatively, the government can state clearly that when you spend money on basic infrastructure, you can recover the same from the taxes you are supposed to pay. Later, when conducting an audit, the revenue authority can determine whether you did it correctly or not, instead of spending your money then chasing the government for a refund,” Mr Okumu suggests.
The experts give the capping of interest rates charged by commercial banks as a good example of the impact capping of rents would have.
Mr Okumu says that getting credit has become very difficult since the capping of interest rates, noting that the same would happen if a more aggressive approach to rent restriction were adopted.
His sentiments are echoed by Mr Ambani who says, “When banks are lending and property is placed as collateral, valuers come in to determine the actual value of the property so as to determine how much credit a bank can give. We have asked our members to give us feedback on the amount of valuation work they are doing. As it is, since the capping of interest rates, their work has plummeted. This means that banks are not offering loans to ordinary people the way they used to before the capping. So the conclusion is that the capping of interest rates is hurting the economy,” says Mr Ambani in reference to valuers under the ISK.
To drive the point home, he gives an example of two hypothetical developers. “If two people are putting up houses, at the end of construction the cost of putting up the two properties might differ, say due finishing. From a business perspective, the man with the more expensive finish is bound to charge more for his house. Therefore, in this case it is wise to let market forces determine prices,” he says.
Mr Ambani points out that solving the housing problem is not a simple matter that can be achieved in under 100 days as promised by the Nasa coalition, since it would require meticulous planning.
For instance, he says the government should establish why there are only about 20,000 mortgages in a country whose annual housing demand stands at 200,000 units.

THE POSSIBLE CONSEQUENCES OF RENT CEILINGS

Supposing a law were passed that limits the amount of rent a landlord cancharge for a particular house, how would the situation play out?

While admitting that such a ruling might be popular in a short while, Joy Kagika, a political economist, argues that such a form of rent control would only serve to exacerbate housing scarcity in the long-if the caps are placed below market price.

“Investors would shy away from putting their money in the rental market as potential landlords realise that rent regulation would limit their earnings. An influx of people to urban areas due to the cheap rents would only worsen the situation,” she adds.

Ms Kagika believes that regulating rent would only serve to destroy the country’s urban centres.

“Landlords will lack adequate cash and the motivation to carry out repairs in the housing units. Complimentary services like back-up generators, water storage, security and garbage collection will be pushed to the back burner,” the economist warns, adding that rent regulation will also significantly reduce the government’s revenue in income tax.
Robert Gacuca Mwangi, a Naivasha-based lawyer, says such a law would be a huge headache to the government with regard to its regulatory framework.

“Many existing laws, such as zoning rules, would need to be either revised or repealed.

Then there is the problem of varying land prices within urban centres. You cannot expect a developer who bought a plot for Sh20 million in Ruaka to charge the same rent for a two-bedroom unit as a developer who bought a similar piece of land in Kahawa West for Sh3 million,” he adds.

Another option for the government, Mr Mwangi says, would be to offer subsidies to landlords in a manner similar to what it did with millers to alleviate the maize-meal crisis. He, however, says this would be difficult to implement since the government would be forced to deal with thousands of landlords and not just a handful of millers as in the case of the maize-meal shortage.

“Owing to lack of close scrutiny, landlords would exploit such a system to extort billions of shillings from the government,” he notes.

Mr Mwangi says the government will have a better shot at bringing down rents if it reduces barriers to the development of apartments.

“We could start by abolishing the rental income tax. Then the government can subsidise building material like cement in order to attract developers. The cheap building costs will finally be realised in the form of low rents.”

In addition, Mr Mwangi says, the government should invest heavily in efficient public transport as this will enable people to live in satellite towns and still be able to commute to the city easily to work.