What is financing Kenya’s construction boom?

About two months ago, Central Bank of Kenya governor Prof Njuguna Ndung’u sent shock waves through the property sector when he announced that the bank would conduct a survey to ascertain the source of the money behind the boom in the country’s real estate sector.

His concern was that the high level of activity in the sector was at variance with the low level of home purchase borrowing, which currently stands at only about 17,000 mortgage accounts.

“There is something wrong somewhere that needs to be investigated. Where is the money coming from? We need to engage a consultant,” he said during the opening of trading on Housing Finance Sh3 billion housing bond on the Nairobi Securities Exchange.

So where is the money being used to build the many new pricey homes in Nairobi and other major urban centres really coming from? Some have suggested that piracy or some other “blood” money is the one financing Kenya’s real estate sector.

No one knows for certain, for now. But even if that were to be true, it would just be half the story.

According to a new survey, very few Kenyans have an outstanding home purchase loan.

Titled, 2012 Yearbook: Housing Finance in Africa, the survey conducted annually by South Africa-based Centre for Affordable Housing Finance in Africa, says that most Kenyans own homes through construction loans, rather than through mortgages.

“Loans for home construction are more prevalent,” it says. Here are the numbers: 3.4 per cent of the top 60 per cent of income earners have construction loans, and 3.8 per cent of the bottom 40 per cent of income earners also have one.

On the other hand, the report says, only 1.1 per cent of the top 60 per cent of income earners in Kenya have an outstanding loan to purchase a home, while only 0.6 per cent of the bottom 40 per cent of income earners have a mortgage.

The report, which describes Kenya as one of the most developed economies in East Africa with a vibrant housing finance sector and a booming property market, says this trend is surprising, especially given the country’s high level of financial inclusion: 37.9 per cent of rural and 76 per cent of urban Kenyans over 15 years of age have an account with a formal financial institution.

It notes that credit is fairly common in Kenya: 66.3 per cent of adults over 25 years of age report that they had a loan in the past year to 2011.

Most of these loans were from family or friends. Only 12.6 per cent of adults had a loan from a financial institution and only 7.6 per cent had a loan from a private lender.

According to the report, Kenya has a dynamic mortgage industry, which is growing rapidly and become increasingly competitive, with 33 financial institutions currently offering mortgage finance.

As at December 31, 2011, the total mortgage book was Sh91.2 billion and comprised 16,135 mortgage loans.

This is up 48.5 per cent from the May 2010 figure of Sh61.4 billion and 15,049 mortgage loans.

During that period, the average loan size rose from Sh4.1 million to Sh5.7 million.

Quoting the Central Bank of Kenya, the report says it is believed that the rise is likely to be due to an increase in property prices.

Another thing: Non-performing loans sat at 3.9 per cent of total outstanding mortgages, or Sh3.6 billion, and comprised 764 accounts.

Between May 2010 and December 2011, there was also another observable trend: There was a shift towards variable rate mortgages, which make up 90 per cent of all mortgages issued in 2011.

The shift is seen to be a likely consequence of the volatility of the interest rate in the period, and contributed to a slowing growth in Kenya’s residential mortgage market.

Despite all these developments, however, the bad news is that mortgage lending is still accessible to only a tiny minority – mortgage lending as a percentage of the gross domestic product (GDP) was 2.6 per cent in 2010, growing at 14 per cent annually.

What is wrong? According to the new report, which reviews housing finance markets in over 30 African countries annually, affordability ranks very high.

It says that only about 11 per cent of Kenyans earn enough to support a mortgage. This means that most middle-income earners cannot afford an average mortgage necessary to buy an entry-level house.

(The Kenya National Bureau of Statistics defines middle income households as those whose monthly incomes fall between Sh23,671 ($260) and Sh112,717 ($1,330).

The Central Bank of Kenya recently stated that the average mortgage in the country is worth Sh6.6 million, thus demanding a monthly repayment of about Sh90,000 for 20 years. Only a handful of Kenyans can afford that.

“High levels of inflation and interest rates in 2011 and 2012 affected house prices severely, especially for those with variable interest rates. Borrowers who had taken out loans at the edge of their affordability found they were unable to manage the increased monthly costs,” says the report.

It continues: “A highly speculative property market and high demand for housing has driven Kenya’s residential property price inflation up steadily over the last 12 years, especially, more recently in the rental market.”

It says property prices have gone up by 3.7 times since 2001, a 2.7 per cent rise in the last quarter and a 1.9 per cent rise in the past year.

The average price of a stand-alone house is Sh32.6 million, up from Sh8.8 million in December 2000.

Townhouses have also gone up, by 2.9 times since 2001. The average price for a townhouse is Sh19.1 million, up from Sh6.5 million in December 2000.

Apartment sale prices have increased by 2.2 times since 2001, and the average price is Sh11.7 million at present.

Rentals have also risen rapidly – 10 times the rate of the last two years, as landlords have sought to manage rising costs and deal with increasing demand.

All these have made mortgage to be out of reach for most Kenyans who have instead chosen to go for home construction loans.

And aiding this is Kenya’s strong microfinance sector. The report notes that currently, Kenya has 34 microfinance institutions (MFIs).

By 2011, these financial institutions had clocked 1.1 million active borrowers and a gross loan portfolio of Sh144.5 billion ($1.7 billion).

Kenya also has an emerging housing microfinance sector. “A number of pioneering Saccos and non-governmental organisations are using this lending methodology to provide housing finance for the poor,” it says, citing Jamii Bora Bank and the National Cooperative Housing Union (Nachu).

Rooftops Canada is involved together with Homeless International, the Cooperative Housing Federation of Norway, the Swedish Cooperative Centre and other partners, in a programme with Nachu to provide technical and financial support to scale up Nachu’s housing microfinance and housing support services.

A crucial component of this work, it notes, involves identifying appropriate and sustainable finance for Nachu to be able to extend housing credit to its members.

The promised Central Bank of Kenya audit report on sources of real estate funding may not be out yet, but we certainly now know why mortgage uptake is low – and where aspiring home owners turn to when they need money to put up a dream house.