There is a need for specifics as to how it will be implemented

One of the pillars of  the government’s "Big Four” agenda is providing  affordable housing.

The latest statistics from the National Housing Corporation show that  the country has a cumulative housing deficit of 2 million housing units, which grows by 200,000 units annually.

This is due  mainly to the rapid population growth of 2.6 per cent per annum, compared with  the global average of 1.2 per cent, and an urbanisation rate of 4.4 per cent against the  global average of 2.1 perc ent.

In contrast, supply is inadequate, with Ministry of Housing estimates putting the total annual supply at 50,000 units.

Further, 83 per cent of the houses are for the high-income and upper middle-income segments, with only 15 per cent for the lower-middle income  and 2 per cent for the low-income segment. 

It is against this backdrop that the government intends to deliver 1 million homes in the next five years. Of these, 800,000, (comprising bedsitters, as well as one, two, and three-bedroom) will cost between Sh800,000 and Sh1 million, which is considered affordable.

The remaining 200,000 units will be social housing, which involves upgrading slums. They will comprise one- and two-room units, and will cost between Sh600,000 and Sh1 million. The project is to be implemented on 7,000 acres in five urban centres, namely Nairobi, Mombasa, Nakuru, Kisumu, and Eldoret.

The government plans to achieve affordable housing through private public partnerships (PPPs) by availing land for development and undertaking land swaps, which involves the transfer of public land to private developers in exchange for more suitable land for development – but of equal value.

The government is also looking into the the possibility of  establishing  a land bank, and a taskforce has been set up to set aside excess land from corporations and parastatals, including East African Portland Cement (EAPC), the Kenya Broadcasting Corporation (KBC), Kenya Prisons, and the Ministry of Agriculture and Livestock and Fisheries.

Plans are underway for the approval of an idle-land tax as a way of discouraging people from buying land for speculation,  while also availing land suitable for  developing affordable housing.

Ms Patricia Wachira, a senior research analyst at Cytonn Investments, says these measures will avail strategically located land for investors and other government projects.

“They will enable the development of housing as investors will reallocate funds that would have otherwise been used for land purchase to construction of more units,” she says, adding that this will make it possible to use of land in prime and convenient locations that would have otherwise been inaccessible, which will attract buyers. It will also provide suitable decantation sites for relocating families from slums and other areas targeted for redevelopment.

To reduce costs, the government is considering developing a local construction technology sector, standardising  design , cost-effective procurement through a centralised unit for key construction input materials, in addition to negotiating discounts for key construction inputs for developers.

A recent report by Cytonn says that the government is likely to use alternative building technology (ABT) such as expanded polystyrene panels (EPS), which reduces construction time considerably, because this will make it possible to complete projects on time.

BULK PURCHASES

The government is also likely make bulk purchases in order to benefit from economies of scale, notes the Cytonn report.

However, the key limitation to ABT will seems to be training the required personnel and getting  the public to appreciate it.

To finance the mega housing project, the government is eyeing partnerships with the private sector, which is expected to provide 60 per cent of the  funding. It is also looking to the National Social Security Fund (NSSF) through a review of the RBA Act to allow the NSSF to invest more than 30 per cent of its funds in real estate.

Another strategy will be to operationalise the NSSF Act to increase minimum contributions by employees. The government is also considering off-plan sales through regulated escrow accounts.

Ms Wachira believes that there is a huge opportunity for the government to tap into financing, not only from  the NSSF, but from  the entire pension industry, which had assets worth Sh963.1 billion as at the end of June 2017.

The current allocation to real estate is 21.3 per cent, with only 0.12 per cent in private equity and real estate investment trusts (REITs). Increasing allocations to alternative assets will not only diversify the pension funds’ portfolios and generate stable returns, but also provide the much-needed real estate development financing.

The key limitation to investment in the residential market is the relatively low rental yields, which range between 5 and 6 per cent, but this can be increased by developing compact units that cost less, but  attract higher rents.

“There’s a need to create of a favourable environment to attract funding from the private sector, given the underlying issues such as lack of alternative funding sources, with over-reliance on bank funding, the cost of debt vis-à-vis the long-term nature of government projects, lack of clarity on guarantees to investors and how they will be implemented, and the unfavourable PPP framework,” notes Ms Wachira.

In addition, the government has made arrangements for home-buyer financing to increase  uptake.  These include the extension of lines of credit from institutions such as the World Bank to allow borrowing for at interest rates as  low as 5 per cent, and  including  the informal sector.  The proposal to provide incentives for first-time buyers, such as a waiver on stamp duty and multi-generational mortgages with long tenors that can be passed on to one’s heir, will attract mortgage uptake.

Others measures include the setting up of  a national housing development fund (NHDF), which will manage the funds set aside for planning and providing social housing. The NHDF will also enable potential home-buyers to save for homes and, consequently, encourage people to buy houses.

AFFORDABLE LOANS

To avail longer-term affordable loans, the government is setting up a mortgage refinancing company (MRC), which will provide liquidity to financial institutions, which will allow banks and financial institutions to offer longer term mortgages and lower interest rates.

Mr Johnson Denge, senior manager, Regional Markets, at Cytonn Investments, sees the government’s plans to extend lines of credit and incentives to first-time buyers as positive moves since  they will reduce the financial burden for buyers. But while the proposed MRC will increase liquidity, it might  not necessarily reduce credit costs.

“For the MRC to be effective, the government will have to put more effort on the attainment of a stable and lower interest rates environment, and especially on government instruments, which may crowd out MRC from accessing the needed funding,” notes Mr Denge.

The government intends to review the (PPP) framework to enable the fast tracking of approvals  and to accommodate new approaches such as joint ventures and land swaps.

Cytonn Investment believes that there is still uncertainty regarding the revenue-sharing and the returns for private investors in PPPs, as well as policies that will curtail corruption and the bureaucracy associated with government projects.

Besides, private developers are likely to shy away from projects that last more than five years, given the uncertainty associated with transitioning from one government to the next. 

The government will use its funds to provide off-site and social infrastructure. There is a proposed 0.25 per cent deductions of the cost, from taxable income, where infrastructure has been provided by a developer. According to Cytonn, this will open up underdeveloped areas where land is cheaper and reduce the overall development costs. However, developers are likely to shy away, given the government’s slow approval for compensation.

Further, for projects that take longer than five years, there is the risk of  policies changing with the entry of  a new government.

LESSONS FROM SINGAPORE AND SOUTH AFRICA

Mr Shiv Arora, head of Private Equity at Cytonn, says the government can draw lessons from Singapore and South Africa,  both of which have successfully managed to house their citizens by putting together an integrated framework for  mega housing projects, with the government at the centre as the driver of the initiatives.

This would entail a multisector  approach, with the government, the Capital Markets authority, the NSSF, the Retirement Benefits Authority, the Kenya Revenue Authority, private sector finance and development, all coming together to provide solutions.

 “To increase sources of funding, the government might have to look for ways to deepen capital markets and access to non-bank funding,”  says Mr Arora.

According to the Cytonn report, guaranteed buyers will be an incentive to developers as they will be assured of handing over the projects, and hence spur the development of affordable housing. There is also a need to amend certain laws to allow people to use their pension to guarantee home buying without a minimum deposit.

Currently, Section 38 of the RBA Act of 2009 allows members to attach up to 60 per cent of their accumulated benefits as collateral for mortgage, but this has not had significant impact on mortgage uptake.

In addition, strict housing policies that stipulate eligibility conditions for buying a house, such as minimum occupancy periods and housing-to-income ceilings, will restrict prospective home buyers and ensure equitable allocation of housing, based on income and need. If implemented, this will be the game-changer, and will ensure that the main goal of affordable housing is achieved by availing housing to low and middle-income earners.

Efficient urban planning will ensure that land is used in a sustainable manner to cater for the growing population, with key considerations such as water, electricity, garbage and sewage disposal.

“Master plans with a work-live-play environment should be encouraged to spur the growth of towns, create employment away from the main urban nodes and produce integrated communities,” says MsWachira.

In Nairobi, the average size of a middle-level one-bedroom unit ranges between 45 square metres and 50 square metres, while that of a two-bedroom unit ranges between 70 square metres and 80 square metres. Meanwhile,  according to the Housing ministry, the minimum standards for low to middle-cost housing is between 36 square metres and 60 square metres for units with two to three habitable rooms. The development of compact housing units will enable developers to optimise on unit spaces to the bare minimum in order to charge lower prices but maintain sustainable revenue margins. This will enable them to earn more rent per square metre, which would attract capital investments.

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Pricing model for a two-bedroom house

In Mavoko, where the government intends to put up 150,000 affordable homes, the average size of a standard two-bedroom apartment unit  is 77 square metres, which costs between Sh4.8million and Sh6 million. 

Cytonn Investments drew up a model to estimate the required price for a private developer to make an annual return on investment of 3 per cent  to  develop affordable housing.

Assuming:

1. The government provides serviced land at zero cost to the developer

2. The development of smaller two-bedroom units of 50 square metres

3. Construction costs are Sh35,000 per square metre, with savings due to the provision of infrastructure and use of ABT

4. Lower professional fees at 4.5 per cent of construction costs due to  the standardisation of designs

5.  A fixed Sh6.8 million for disbursements and site personnel costs

6. A contingency amount of 2.0 per cent of project cost; and

7. Funding from pre-sales and debt on a  50:50 ratio.

This puts the minimum exit price for a private developer at Sh2.6 million, compared with the government’s Sh2 million for a two-bedroom house.

This means that there’s still a need to address the construction  and financing costs, which make up 82.9 per cent and 7.2 per cent of the total costs respectively. This calls for further incentives beyond just free land. For instance, exempting construction costs from  VAT will reduce the costs by at least 13.8 per cent.

Mr Edwin Dande, the managing partner and CEO of Cytonn, says there should be a better layout on the assumptions of costs by the government, so that private capital can come on board with reasonable certainty in terms of the risks they are taking.

“The initial government plan has very useful and constructive elements. But some key elements such as an integrated framework, a wider set of solutions, eligibility criteria, flexibility to fit varied incomes, details on how the assumptions are arrived at, private capital participation, a comprehensive urban plan, and such need to be addressed to increase the likelihood of success of the affordable housing initiative,” he says.