Developers scout for alternative path to financing home buyers

As the demand for housing in urban areas continues to grow, developers are now seeking alternative ways of financing home hunters.

Property investors want the government to come up with policies to enable potential home owners to access affordable credit.

One of their suggestions is to have securities-backed mortgages that would stimulate the market and increase use of pension funds to lend to home buyers at lower rates.

The new push comes at a time when a task force appointed by the Central Bank is studying the interest rate regime in the country with a view to reducing the cost of borrowing.

“The banks mostly rely on short- to- medium-term funds that are not in sync with the mortgage cycle. This has made borrowing expensive.
Find sources

“We need to find sources for long-term borrowing that will enable lending at low interest rates,” The Mortgage Company’s managing director, Ms Caroline Kariuki, said last week.

Property market tracker, HassConsult Ltd, said that only 50 per cent of people living in urban areas can service a Sh700,000 mortgage.

Worryingly, only one per cent can afford a Sh5.7 million home loan at the current interest rates that range between 15 and 18 per cent. Only four per cent are able to take up a Sh3.9 million mortgage.

Sky-high interest rates on mortgages have forced some developers to seek financing from foreign sources while others have turned to equity investments in their projects.

“With the finance blockage also impacting landlords in acquiring new properties and the rental yields on houses still at less than mortgage interest rates, the race is now on to get rents up to a level where landlords can cover finance costs and not end up making losses,” said Hassconsult’s head of marketing and research, Ms Sakina Hassanali.

Property development experts say high interest rates have dampened uptake of mortgages in Kenya, which has only 20,000 home loans against a potential of one million.

“We are seeing a growing trend of foreign developers, who have a huge head-start over their Kenyan counterparts since they can access cheap financing from their home nations. In China, for instance, the benchmark interest rate for mortgages from banks is six per cent,” Ms Kariuki said.

The foreign developers, however, are grappling with low moving stock due to expensive loans for potential property buyers.

About 200,000 units are required every year, particularly in the middle and lower classes in Nairobi to meet housing needs. However, only 15,000 are supplied, leaving a huge deficit, which experts warn could turn into a housing crisis if not checked.

Government statistics show that only 14 per cent of Nairobi residents own homes.

“There is a massive need for housing but 90 per cent of approvals are in apartments, which indicate low financing for own house construction,” Ms Hassanali said.

Despite these setbacks there were increased sales in March, mostly at the high end of the market. In the middle and lower segment, activity was slow, just like it was last year.

The demand was, nonetheless, strong enough across all segments to trigger increase in prices, which had remained subdued in the second half of last year.

The price for both detached and semi-detached houses rose by 1.8 per cent from January to March compared with the fourth quarter of 2013, while apartment prices jumped by 2.3 per cent.

“This surge in rents is one of the most visible signs of the problems that are now deepening and even beginning to distort the property market as a result of the bottleneck in mortgages,” said Ms Kariuki.

And with most middle class Kenyans unable to afford mortgages at the current interest rates, she added, some are opting to rent semi-detached houses. The financing woes have reduced the rate of construction of new units and buyers are hard to come by.

“It’s a nasty cycle and one that we will do well to break as soon as possible,” Ms Kariuki said.

Experts said the high interest rates are hampering both the building and uptake of mid-level and low-cost houses, while the high-end market is dominated by cash purchasers.