For the average Kenyan, the only dream they can afford after decades of hard work is a decent house.

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What stands in the way of the affordable housing dream?

In a country where more than 10 million people are slum dwellers while only 15 per cent of the population own homes, having a grand dream house in mind might seem like just that. A dream.

For the average Kenyan, the only dream one can afford after decades of hard work is a decent house.

This reality gets sadder when one only manages to buy or build their dream home during their sunset years.

On the backdrop of these facts, President Uhuru Kenyatta made affordable housing one of his Big Four Agenda.

While we are still far from the promised 500,000 units, a lot of changes are taking place in the housing industry.

Financiers, developers, manufacturers and the government are joining forces to make affordable housing a reality.

As a result, there have been more affordable units in the market, especially in the last two years. But what more can we do to clean the industry and make housing accessible to everyone, including the 10 million slum dwellers?

Managing Construction Cost

When Patrick Muchoki, the Managing Director of Mahiga Homes got his first job, his parents told him to get himself a piece of land.

“It is the only wealth that does not decay,” they said. Muchoki went beyond getting a piece of land and partnered with others to form Mahiga Homes, which promises prospective clients “modern, quality and affordable residential housing, with flexible payment plans”.

With more than four years in the housing industry, Mr Muchoki has handed over eight estates to buyers and is hoping to hand over five more this year. With each estate comes experience, and Muchoki has plenty to offer when it comes to the affordable housing dream.

Developers face a myriad of challenges which impact the cost of construction, eventually affect the pricing of units.

“One of the biggest influencers of construction budget is the cost of materials. For example, the prices of steel and iron have increased by over 150 percent since 2019,” he explains, adding that importing such materials increases the likelihood of incidental costs.

Imports translate to various kinds of taxes such as VAT, import duty, and other relevant levies and fees. Couple these with logistics and your construction budget can easily get out of hand. In the long run, these costs circle back to the end buyer.

Delays also tend to affect construction cost, as with any project. “Sometimes the supply of a particular material may go down, which then disrupts a project,” he adds.

Delays can be caused by a number of factors, including legal issues, red tape when seeking approvals or natural calamities. In project management, there are three factors that make or break a project: cost, scope and time.

If one aspect changes, the other two are affected. For instance, if you expand the scope, then the cost and time have to increase as well. Delays translate to increasing the amount of time labourers spend on your construction site. If you had leased machinery, you also pay overtime. Not to mention you might end up in legal battles with angry buyers who want their units on time.

Photo credit: Shutterstock

 Elephant in the room

Different developers have tried various payment schemes and some have helped reduce the cost of housing, while others have failed.

The rent-to-own purchase scheme is one of the most enticing arrangements for buyers, but there are drawbacks that make it difficult to implement.

For instance, tracking payments and maintaining a property for decades seems like a lot of work for a landlord, if they will eventually have to let go of the property. The profit margins are also compromised if the maintenance cost is high.

In the past, many developers have opted to work with the off-plan buying scheme, which presents a balanced win-win situation for both the buyer and the developer.

However, scandals involving developers who took payments but failed to deliver led to trust issues among buyers, thus compromising a rather good scheme that holds the key to affordable housing.

Mahiga Homes has however continued to provide units off-plan despite the challenges. Muchoki explains that the biggest drawback stems from lack of professionalism among developers.

In an off-plan scheme, developers collect a percentage of funds from buyers and use them to develop units. Developers building and selling off-plan enjoy economies of scale benefits.

“A three-bedroom bungalow on an 1/8-acre piece of land may cost about Sh5.5 million when built by an individual, but in a large development with hundreds of units, the same house may cost about Sh3.5 million. Off-plan is all about economies of scale. Developers purchase materials on a wholesale basis and they may attract discounts from manufacturers,” explains Muchoki.

People imagine that the profit margins in real estate can turn one into an overnight billionaire, but the reality is different.

“In a month, you collect a lot of money but the profit margins are very little. The money belongs to the customers and construction,” he says.

 Cultural shift

While developers work on changing their attitudes toward profit margins, buyers too need a cultural shift. The ever-rising cost of land is by far the bane of the affordable housing dream.

Owning a piece of land somewhere is the ultimate Kenyan dream. Muchoki observes that people are willing to buy land anywhere regardless of its value and location as long as they have a title to their name.

This buyer behaviour impacts the industry negatively especially when multiple land owners speculate for years on undeveloped land.

Over time, land has become scarce and expensive, hence developers have to dig deeper into their pockets to buy large chunks for big projects.

Muchoki adds that Kenyans also need to change their attitudes toward housing and be more realistic about what one can afford. There are new modes of construction, and some cut the cost and time of construction extensively.

A good house does not need to be a traditional brick and mortar structure. If we are open-minded, we can construct more decent homes using alternative materials.

 Access to affordable credit

Before the Kenya Mortgage Refinance Company (KMRC) was formed in 2018, the credit sector (which plays a pivotal role in access to housing) was barely accessible by low-income earners.

By then, there were about 25,000 mortgages in a country with over 17 million people working in formal and informal sectors.

Only a mere 2 percent of the population representing high income earners could qualify for mortgages. To add insult to injury, there were only short-term home loans with relatively high interest rates.

Other costs such as legal fees, stamp duty and titling costs which increase the cost of credit added the financial burden to borrowers, therefore making mortgage a no-go zone for inspiring home buyers.

Unfortunately, the cost of any decent house is far greater than most people’s household income or savings.

You can almost never save sufficiently to afford a dream house out of pocket unless you have a very high income, hence, access to credit plays a significant role in housing.

Johnstone Oltetia, the Chief Executive Officer of the Kenya Mortgage Refinance Company says the affordable housing agenda is two-sided.

On the supply side, there is an undersupply of units. Kenya’s population is growing rapidly at a rate of 2.6 percent per year, which beats the global average of 1.2 percent.

Population growth means more people are in need of housing yet the number of affordable units released into the market is so low that a deficit of 200,000 units is created each year.

On the demand side, there is need for financing, yet only 2 percent, as mentioned above, qualify for home loans. Besides, financial literacy is scarce and even those who qualify may end up avoiding mortgages altogether.

Oltetia has come across various misconceptions toward mortgages over the years. For instance, he says the name “Mortage” bears certain connotations. Due to numerous foreclosures that took place in the past, people have developed fear of home loans.

Mortgages are also perceived as a preserve of the elite, hence very few average Kenyans consider approaching the bank for such - KMRC is a treasury backed entity that came into the housing scene to address the credit crisis.

“Buying a home is a long-term investment, hence when buyers are presented with short-term loans, there is a mismatch,” says Oltetia.

Johnstone Oltetia

Johnstone Oltetia, CEO, Kenya Mortgage Refinance Company. 

Photo credit: Jeff Angote | Nation Media Group

The lender therefore introduced the idea of wholesale financing, whereby they offer mortgages to finance entities such as banks, saccos and micro-financing institutions at a relatively low interest rate.

The retail institutions would then re-lend the mortgage to home buyers at a single-digit interest rate, with a long-term payment duration. Ordinarily, bank loans come with an average of a 14 percent interest rate per year while saccos will offer slightly cheaper loans at 12 percent.

Oltetia explains that lowering the interest rate while increasing the repayment duration has a big impact on the affordability of home loans.

He gives a projected example of financing a 4 million shillings house with a loan charged at 9.5 percent interest rate with a repayment duration of 10 years. The borrower will make monthly repayments worth 52,000 per month- a figure that is accessible to middle income earners.

If the repayment period is increased from 10 to 20 years, the monthly repayment figure goes down to 37,000.

However, if the same loan was borrowed at a regular 13 percent interest rate, the monthly repayment would swell to about 60,000 a month. This projection demonstrates how affordable mortgages can impact the market.

Oltetia notes that less expensive units going for 1.5 million or less, can have monthly repayments as low as rent prices, the ultimate goal for key stakeholders in the affordable housing agenda.

With about 20 finance institutions working with KMRC to provide single digit interest rates for borrowers, low and middle-income earners have a chance of owning homes now, rather than saving up for ages to finally buy in cash.

Personal Effort

Multiple stakeholders are working together to make housing affordable. The government introduced tax incentives for players in the industry which led to a sudden increase in affordable units. For instance, every 100 affordable units attract a 50 percent tax discount for developers.

Majority of the cards, however, are in the buyer’s hands. It takes personal responsibility to enjoy the new wave of affordable housing and it perks.

To access affordable loans for instance, one has to be strategic with their money. Creditors will always assess borrowers to establish risk and credibility.

Oltetia explains that for one to qualify for an affordable loan, one will need to first show their source of income. For those in formal employment, this is easy.

For businesses, one will need proper account records to prove financial stability and consistency. He advises small businesses to invest in basic book keeping to show their cash flow. From time to time, they may engage a professional accountant to help with the account records.

With clean, consistent records, financiers are able to calculate the average income and advice on loan options.

Oltetia adds that a good credit history matters too. In an era where loans are just an app away, it is easy to default and create a bad credit history. Such minor mishaps give one a bad image in the eyes of serious lenders.

Lastly, Oltetia advices buyers to be open-minded and realistic about the homes they can afford.

“Don’t think about your dream home when buying for the first time. Assets improve your equity and can give you access to financing in the future,” he explains. You can always buy a home within your means first and then work your work towards your dream home later.