What will it take to achieve the affordable housing dream?

Of man’s many needs and wants, is the basic need for shelter. We all desire to have a decent place we can call home, where we can have moments of shared intimacy and joy with our families and friends, or just have a good rest after a day’s work toiling to meet our other needs.

Unfortunately, not everyone is lucky enough to have this basic necessity, and many more do not have decent living spaces.

A 2023 report by UN Habitat indicates the world’s population reached 8 billion in November 2022, with over half (55 per cent) living in urban areas, a figure projected to rise to 70 per cent by 2050.

Most of the urban growth is taking place in small cities and intermediate towns, exacerbating inequalities and urban poverty.

While the proportion of the urban population living in slums declined slightly, from 25.4 to 24.2 per cent between 2014 and 2020, the total number of slum dwellers continues to rise with increasing urbanisation.

In 2020, an estimated 1.1 billion urban residents lived in slums or slum-like conditions. Over the next 30 years, an additional 2 billion people are expected to live in such settlements – some 183,000 people daily – mostly in developing countries. 

Today, 85 per cent of slum dwellers are concentrated in three regions: Central and Southern Asia (359 million), Eastern and South-Eastern Asia (306 million) and sub-Saharan Africa (230 million). In Kenya, 10 million people live in slums, which translates to 21.2 per cent of the 47 million population as per the 2019 census. Nairobi leads with 36 per cent of its population living in slums.

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According to the census data, the county has a total population of 4.39 million people, which means over 1.5 million people live in the city’s informal settlements.

All these figures cast a grim image of the future, if effective measures are not put in place to curb the growth of informal settlements. Affordable housing is one of the 17 Sustainable Development Goals, under SGD 11: sustainable cities and communities.

When the SDGs were passed in 2015, former President Uhuru Kenyatta launched Kenya’s affordable housing initiative two years later as part of the key pillars of the ‘Big Four Agenda’ to deliver 500,000 units by December 2022. However, due to various setbacks, the government delivered less than 3,000 units through the Pangani and Park Road projects, indicating a massive deficit in the delivery.

Now President William Ruto has outlined affordable housing as one of his main agenda to deliver 200,000 units per year, and a target of 5,000 units per county, with one major step taken being the introduction of a housing tax.

The question, however, is, can this ambitious vision be realised, and what role does the private sector have to play in this?

We engage Jamal Hussein, Managing Director, Rehan Properties Limited, a private developer who is in the affordable housing sector. We begin by asking:

What is affordable housing?

Affordable housing refers to a housing plan that is appropriate for the needs of a range of very low to moderate-income households and priced so that these households are also able to meet other basic living costs such as food, transport, clothing, medical care and education.

According to the Kenya National Bureau of Statistics (KNBS), 74.4 per cent of Kenyan employees in the formal sector earn a monthly median gross income of Sh50,000 or less, implying that a large percentage of these individuals would benefit from the plan.

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Using the UN-Habitat definition of Affordable housing, assuming one can spend 30 per cent of their income on housing, at a commercial mortgage rate of 12 per cent and for a 25-year mortgage, it means an affordable house is one valued at Sh1,000,000 for a single income and Sh2,000,000 for a double income household.

What is the current state of housing in Kenya?

The National Housing Corporation estimates that the current housing deficit in Kenya stands at 2 million housing units with nearly 61 per cent of urban households living in informal settlements. The deficit continues to rise due to fundamental constraints on both demand and supply.

The need for 250,000 housing units against an estimated supply of 50,000 units every year results in an annual deficit of 200,000 dwelling units.

Additionally, KNBS indicates that 83 per cent of the existing housing supply is distributed between the high-income and upper-middle-income segments, with only 15 per cent for the lower middle and the remaining two per cent for the low-income population.

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Therefore, only 17 per cent of the housing supply goes into serving the lower-middle income segment, which does not achieve the main objective of the initiative. 

This is the reason why as a developer, I chose to focus on affordable houses. Before I started my own company I worked in various companies in the real estate sector as a managing director, however, I realised the prices of houses were so exorbitant, I could not even buy a good home for myself, despite my station.

It got me thinking then, how could the people working under me and the millions of other Kenyans who are in the lower-middle income and low-income ever own homes of their own? Consequently, Kenya’s homeownership rates continue to lag behind, compared to other African countries such as South Africa and Ghana.

What are the impediments towards realising affordable housing?

The under-supply of affordable housing remains a challenge due to an array of factors:

Inadequate funding – this has been one of the biggest challenges when it comes to affordable housing. Assuming the average production cost for a house will be 2 million, to produce 200,000 houses per year will cost the government Sh400 billion yet only Sh35.3 billion was allocated to the housing sector in the 2023/2024 financial year budget.

If the initiative is taken seriously, it would mean allocating 10.8 per cent of the Sh3.7 trillion budget to housing, and it’s not clear from which budget allocation it would be taken.

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This has further been fuelled by the overreliance on banks for funding by private developers, hence making it difficult to raise funds for affordable housing projects, unlike developed countries where capital markets account for the majority of funding.

High cost of land – affordable land is scarce for development due to rising land prices in urban areas. This can be attributed to the lack of proper laws governing this sector, therefore to achieve the objective of affordable housing, the parliament should pass laws regulating land pricing.

Increase in construction costs – the Integrum 2022 Construction Index indicates the average cost of construction per SQM in Kenya rose by 3.6 per cent to Sh34,650 in 2022 from Sh33,450 in 2021. This is attributable to the rise in prices of key construction materials such as cement and steel, which in turn increased the cost of development. This year, the cost increased further to Sh43,250.

Increased demand rates – Kenya has a high urbanisation and population growth rate at 4 per cent and 2.3 per cent respectively, compared to global averages of 1.6 and 1.2 per cent respectively, as at 2021. This increases the demand for housing amidst an existing deficit.

Ineffectiveness of Public-Private Partnerships (PPPs) for affordable housing development – this is due to setbacks such as extended PPP timelines and lack of clarity on returns and revenue-sharing, among others.

Unaffordable and inaccessible mortgages for those willing to be homeowners – accessing mortgages by low-income earners is a difficult task, given that mortgages require decent formal employment, or a piece of land or property to act as collateral. This, coupled with the rising cost of construction, makes prices of developments high and in turn causes low mortgage accounts.

Long transaction timelines – on average, it takes 44 days to register a property in Kenya with the average cost to register the property standing at 5.9 per cent of the property price. This is higher when compared to some African countries like Ghana, which takes 33 days, with the average cost coming in at 4.1 per cent, illustrating the generally slow processes in Kenya.

What then is the solution?

Given the above challenges, it is clear that for the affordable housing initiative to prosper, the government needs to address the challenges in a better and more strategic way. Measures the government can take include:

Involvement of private sector developers in the delivery of the projects. Creation of mandatory housing funds by parliament to help develop the projects, such as the 1.5 per cent housing tax. Engagement of pension institutions to help provide mortgages to potential homebuyers. Release of land by county governments for construction.

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Incentives also need to be put in place to encourage large numbers of private sector developers to participate in the initiative.

On the part of the developers, there needs to be healthy competition, as well as reasonable pricing. For instance, in one of our projects in Nairobi starting at a fixed price of Sh2.5 million, the profit margins for the company are small, given the cost of land is Sh600,000 and construction costs for a two-bedroom bungalow with a solar power system is Sh1.5 million. If developers are willing to support the government through such initiatives, then the affordable housing goal can be achieved.

Have affordable housing projects worked in other countries? What can we learn from them?

Affordable housing projects have been to a good extent, a success in other countries such as Japan, Canada, Singapore and South Africa.

If we look at the latter for instance, which is closer to home: The National Housing Finance Corporation (NHFC) provides financing for housing initiatives throughout the country. It was established in 2001 as the National Housing Fund (NHF), and was renamed in 2016.

The NHFC is responsible for the construction of new housing developments, and is financed by a two per cent levy on the value of all property transactions.

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The South African government has also introduced several subsidies and tax incentives in an attempt to increase the supply of affordable housing through the Department of Human Settlements (DHS).

These include the Housing Subsidy Scheme, which provides subsidies for low and middle-income earners to purchase or rent a home; and the Housing Tax Incentive, which provides tax breaks for developers who build affordable housing.

In 2021, the Social Housing Regulatory Authority (SHRA) delivered a total number of 3,009 housing units. In addition, 6,000 affordable housing units and 2,400 community residential units were delivered under the Rental and Social Housing Programme. 

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