Mwaura: Why mortgage refinance firm should work with developers

The recent announcement by the Kenya Mortgage Refinance Company (KMRC) PLC that it is looking into various initiatives to increase the stock of affordable housing including developer finance is much welcome because of the financial institution’s huge potential to make the dream of Kenyans to own a home a reality.

First, let us look at what the KMRC is or what it does. The KMRC, established in 2018, is a state-backed non-deposit financial institution that works with commercial banks and saccos to offer affordable mortgages by providing these lenders with long-term and affordable funding.

These lenders also known as Primary Mortgage Lenders (PMLs) in turn offer affordable mortgage loans to borrowers. These mortgage loans are capped at Sh10.5 million per borrower with a 9 percent fixed rate for up to 25 years.

This is important because a lack of long-term and affordable funding is one of the main reasons that Kenya has a paltry 25,000 mortgage loans yet we have a housing deficit of 250,000 housing units annually. Needless to say, there is a yawning gap that needs to be closed.

Now, KMRC’s plan to finance developers is a game-changer for affordable housing in Kenya. Just like commercial banks and saccos, developers will also have the capacity to introduce affordable houses because they will have access to affordable long-term credit at favorable terms.

Currently, developers are borrowing from commercial banks at interest rates of as much as 20 percent. This is very high when you consider that loans for developers such as construction loans tend to be long-term.

The result is that developers will in most cases pass on most of these increased costs of borrowing to buyers, making it harder to introduce affordable houses. But it also becomes more complicated because as a developer you can only pass so much to buyers who are also facing stagnant incomes and ever-competing needs for their pay slips including the wave of new and increased statutory deductions.

For developers, the alternative is either you reduce the size of the housing unit or use lower-quality finishing’s (not workmanship) and of course neither of these options is ideal.

By partnering with developers in addition to the aforementioned PMLs (banks and saccos), the institution can radically change the capacity of developers to introduce affordable housing.

Accessing long-term credit at single-digit interest rates would enable developers to introduce not only affordable housing but also houses that meet one of KMRC’s goals of green affordable housing or that promote energy efficiency, water efficiency, and waste management.

Partnering with developers is also ideal because they have an existing customer base and by extension an intimate knowledge of what home buyers want about location, style, social amenities, etc. Such a partnership between developers and KMRC would reduce the risk of putting houses that do not appeal to buyers and are therefore left unsold.

Finally, under such a partnership the KMRC should consider supporting developers by buying land whose prohibitive price is one of the reasons the cost of housing is very high in Kenya. The cost of land can account for between 40 percent and 60 percent of the value of the project.

By buying land in bulk and financing essential infrastructure like roads, sewage, electricity, and internet, KMRC can significantly reduce upfront costs for developers. This frees up capital for developers who can then focus on building high-quality, affordable homes for Kenyans.

Of course, there must be some framework to govern such partnerships so that we avoid a situation where rogue developers take advantage of this reduced cost of funding to increase their margins by not passing on these savings. Additionally, some sort of vetting must be done to block fly-by-night operators from soiling such partnerships. Kenya is awash with a list of dud developers who have left a trail of incomplete houses, non-performing loans, and shuttered dreams of homeownership.

Should the KMRC’s proposal to work with developers come to fruition it will supplement its commendable success with PMLs and catalyse the dream of homeownership by many Kenyans. Let this be a clarion call for the institution to make this partnership come alive.  

Mr Mwaura is the CEO of Finsco Africa. [email protected]. @FinscoAfrica