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Why low cost housing remains a tricky game for most developers

By Nashon Okowa | Published Sun, October 22nd 2017 at 14:10, Updated October 22nd 2017 at 14:13 GMT +3

The Kenyan annual housing deficit stands at 200,000 units against an annual supply of 50,000 units, according to statistics. The World Bank housing report released in April 2017 further expands that there’s an estimated accumulated housing deficit of over two million units, and nearly 61 per cent of urban households live in slums.

This is aggravated by an urbanisation rate of 4.4 per cent equivalent of 500 thousand new city dwellers every year.

It is evident that the government’s goal through its principal agency, National Housing Corporation (NHC), tasked with increasing the formal supply of affordable housing is far from being met. According to World Bank Housing Report April 2017, Kenya’s first medium term plan (MTP I, 2009-2012) of the Vision 2030 strategy had an initial target of providing 200,000 housing units annually for all income levels by 2012, but fell short of this projection. Only 3,000 units were provided between 2009 and 2012.

A second medium term plan for 2013-17 has a similar target, particularly focused on lower income households. With the available market niche in this tier, why are private developers shy of exploiting it?

Hidden to many, majority of construction projects in Kenya experience cost and/or time overruns. Developers have been privately grappling with how to deal with implications of time and cost overruns. To their rescue, most of these projects have been for the high-end market where unit sale or letting prices can easily be adjusted to absorb the variations.

This luxury of price adjustment is unavailable for the low-cost developments. An increase in sale price, however little, has significant impact on sales since the buyer profile for this market cannot afford it.

With the expected obvious cost and time overruns and the unavailable luxury of price adjustments, most developers find it tricky to enter the murky territory of low cost housing development. I watched in awe as our MPs, during the last budget speech, applauded the Cabinet Secretary for introducing incentives to developers who can build 1,000 units in a year. This was in oblivion of the fact that between years 2009 and 2012, the government, with all the resource, only built 3,000 units through the medium term plan, translating to 750 units a year.

It’s obvious that our conventional construction methods and technology is an impediment to the realisation of this incentive. Perhaps a robust investment by the government in new construction technology or even land, tax incentives would be more realistic to private developers.

The low cost market is essentially a buyers’ market even though this trend is rapidly shifting to middle and a high tier market. In this market, the buyers set the price at which they can afford a house. A developer must work their feasibility backward from the set sale price unlike in other markets where the project cost guides the developer on the sale price.

In most instances, the developers find it unfeasible to proceed with construction since it may result in unrealistic costs. Low cost tier market is predominantly mortgage-buyer oriented. Capping of interest rates in the last quarter of 2016 has negatively impacted on the construction industry, especially the lower cost market.

To bridge this deficit the government has to think outside the box including more of public private partnerships (PPPs) on top of addressing the challenges highlighted above. If not this deficit will continue to rise due to the constraints of demand and supply aggravated by the high urbanisation rate.

 

- The writer is chairman of Association of Construction Managers of Kenya


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