Why low-income earners are now pillars of real estate

Tuesday June 28 2016

Some of the budget homes completed and occupied in Mtwapa. Kenya Projects is one investor taking advantage of the gap created by the focus on expensive housing with a Sh4 billion commitment to build affordable houses in Mombasa and Nairobi.  PHOTO | EDWIN by OKOTH

Some of the budget homes completed and occupied in Mtwapa. PHOTO | EDWIN by OKOTH 

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Real estate market dynamics are now shifting to the unlikely consumer whom many a developer could not previously even give a fleeting look in their plans.

The low-end market has received some level of interest as it is the only segment where there is projected growth in demand.

This change of tack is also largely driven by statistics indicating that the demand for high-end units is almost hitting the ceiling. For a while, the country’s annual shortage of 150,000 housing units, mainly in the low-end market, has been given a wide berth as developers keen on high-yielding quick returns concentrated on the top of the pyramid. But now developers are compelled by market imperatives to look downwards.

Managers and Mentor Management Limited (MML) Managing Director James Hoddell said with increasing government subsidies in the housing sector, prices will come down significantly to capture the lower-income bracket.

“It is important that the government continues to implement its strategy of releasing government land for low-income housing development. Likewise VAT exemption for lower income housing will have a major impact on unit pricing,” Mr Hoddell said.

In an effort to address the housing needs of the poor, the government is trying to spur investment in this segment, through tax incentives for suppliers and easing of mortgage terms for buyers.

Treasury Cabinet Secretary Henry Rotich announced plans to reduce the corporate tax rate from 30 per cent to 20 per cent for developers who construct at least 1,000 units per year in his budget.

He also gazetted a legal notice to provide a window for the National Social Security Fund (NSSF) to invest in financing vehicles for development of affordable housing.

A glut has also hit apartments, malls and office space. These developments rode on Kenya’s construction boom over the last decade. But they are now forced to change tack and focus on the lower market segment.

Several indices have shown a slowdown in uptake and reduced revenues in various sectors of the real estate industry. High-end developers are now turning to small- and medium-sized customers in an effort to fill up retail space that has been coming up every other day.

HassConsult rental prices in Nairobi recorded a drop in the final quarter of 2015 caused by an oversupply of apartments and falling demand.

Cytonn Investment Management in its Nairobi commercial office market report said commercial office space in Nairobi could be headed for a glut after 5.4 million square feet of space were completed in 2015 compared to 3.4 million square feet in 2014.

In 2014, MML predicted that by the end of 2016, there will be over 2.8 million square feet of office space with 19 per cent of the total stock of new buildings delivered since 2009 lying vacant.

Knight Frank reported that mall retailers had developed a wait-and-see approach to gauge performance of their new premises before securing space in up coming developments. The real estate consultant said mall tenancy fell by almost one half in 2015.

Stuck with development coming on stream and which were banking on the high-end customers, realtors are now intensely looking at the ‘small client’.

Some malls are even enticing SMES with loans to finance uptake of space and partnerships to set up shop in these facilities.
“This is a big opportunity for consumerism, but the question is will the people we call exhibition traders outgrow briefcase status?” posed Deacons East Africa chief executive officer Muchiri Wahome at an earlier interview.

“They are very big downtown, they know what their customers want, are they able to push onto the next level?”

High traffic
Waterfront, a real estate behemoth sitting on 66-square metres is set to come on board by 2017. It is in the vicinity of the Hub, that just opened recently, Galleria, Junction, Hardy’s Provisional and Karen Provisional.

According to DataScience Limited, Karen has a projected population of 36,400 in only 9,400 households. This begs the question whether residents can sustain the foot traffic.

With the high-end market almost saturated, the salvation for developers now lies with the ordinary Kenyan.

Last week, Dyer & Blair Investment Bank and MML released a report that showed lower-income housing segment as the next frontier for real estate investors with deep pockets.

The pair said over the past one-and-a-half years, demand for high-end units — which has been driven in part by expatriates — has slowed as a number of foreign missions, companies and international organisations downsize and expatriate family members stay away due to security concerns.

But even as the focus shifts to the bottom of the pyramid, the cost of money for developing the units and mortgages are still sky-high. This raises doubts on the sustainability of the swing in the real estate pendulum in favour of the low earners.

“It’s unfortunate that developers have to pass on the high financing costs to the end users. However lower priced units encourage take up of units and deposits received as the project is under construction help to at least reduce the funding gap that would usually be plugged by expensive debt,” Mr Hoddell said.

Slash interest rates

Cytonn says banks will need to slash their interests rates by more than half to allow nine out of 10 Kenyans to afford mortgages. At the current pricing, apartments can only be affordable to the mass market at 8 per cent with detached houses at 3 per cent.

These figures are way below all available packages in the market with financial institutions currently offering mortgages at between 12 and 21.4 per cent.

Mr Rotich said the government together with development partners want to put in place a Mortgage Liquidity Facility which will provide long-term funding to financial institutions, including saccos, to enable them provide longer tenure mortgages to the wananchi.

Mr Hoddell said interest rates have to come down significantly for more Kenyans to afford houses.

“The mortgage liquidity facility is intended for all financial institutions including saccos. A major stimulant to enhance mortgages in the economy would be a significant rate reduction in lending rates,” Mr Hoddell (above) said.

The MML boss said the proposed mortgage liquidity facility by the government to the saccos will increase uptake of the mortgage products by individuals because of their wide reach and large membership.

Changes will begin to be felt when the actual rollout of the facility happens after the budget is discussed and passed by Parliament.

Currently, the country has only 22,000 mortgages worth Sh164 billion for a country of 44 million people, equating to 2.7 per cent of GDP, compared to South Africa where mortgage values to GDP stand at about 24.2 per cent.

High deposit demands by banks also lock out low-income earners who are unable to service their dream homes.

Mr Hodell said the mismatch in duration between short-term deposits and long-term nature of mortgage loans is largely to blame for the mortgage liquidity crisis.

“This issue is improving since Development Finance Institutions such as IFC are extending credit lines to local banks such as Equity Bank to facilitate on ward lending to mortgage consumers,” he said.

Access to mortgage facilities has grown from 2.5 per cent of GDP in 2007 to 3.5 per cent last year supported by a growing middle class and increased disposable income.