Tenant purchase schemes offer easier path to owning a home

The National Government affordable housing for civil servants housing scheme project construction in Embu County on February 24, 2020. [Joseph Muchiri, Standard]

Adoption of Tenant Purchase Schemes (TPS) by financiers and developers has the potential to unlock demand for affordable housing in the country, a real estate think tank has said.

The Centre for Affordable Housing Finance (CAHF), through its Open Access Initiative, by analysing studies has the opinion that with adequate finance, more Kenyans can access housing at affordable prices through TPS.

With a down payment of 10 per cent towards ownership, Kenyans earning below Sh150,000 can be included in the bracket of homeowners for houses priced between Sh1.07 million and Sh4.7 million.

The details of this affordability matrix were created by CAHF analysing income segments corresponding to the housing unit they can afford.

Those in need of social housing being individuals earning Sh14,999 and below a month, low-cost housing between Sh15,000 and Sh49,999, mortgages between Sh50,000 and Sh99,999, and middle high-income are those above Sh100,000. TPS targets these individuals with the first three income bands being good candidates for this scheme.

Those in need of low-cost housing (Sh14,999 and below monthly income) will need government support to afford units through TPS. Those who qualify for affordable housing (Sh15,000 to Sh49,999) are considered unlikely to secure a mortgage but good candidates for the private development TPS scheme.

Those earning Sh50,000 to Sh99,999, though within the mortgage gap, are unlikely to access these loans but are good candidates for TPS through private development. Those making Sh100,000 and above are likely to secure a mortgage and also be eligible for a private TPS scheme.

Earning less

Based on these purchase profiles, CAHF then developed an affordable housing matrix of a standard TPS market product which the think tank expects would guide the development and financing of housing units that are within the reach of a majority of Kenyans.

"The analysis yields an outcome that for households earning less than Sh150,000 per month, the cheapest affordable house ought to start from Sh1.07 million to Sh4.76 million which is largely in line with the government's definition of low-cost housing," reads the analysis titled Overview of Tenant Purchase Schemes in Kenya.

The interest rate for these TPS is between 10 and 15 per cent, with the repayment period being between 10 and 15 years.

Those households making Sh150,000 would then be able to afford a Sh4.769 million unit at 10 per cent interest for 15 years. At 15 per cent interest the monthly payable of the total price unit would be Sh3.2 million for 10 years. A household making Sh100,000 can pay Sh30,000 monthly at a 15 per cent interest rate for 10 years to own a Sh2.14 million unit.

This same unit can be purchased at an interest rate of 15 per cent to eventually cost Sh2.4 million for 15 years.

Affordability is subject to a 10 per cent deposit. CAHF notes that TPS offers several advantages to end buyers as means of home ownership.

These include easier eligibility, lower up-front fees, faster sales process, structured and fixed monthly payments and affordable housing tax relief.

"TPS products also preclude the buyer from using the home as collateral for borrowing purposes during the period the TPS contract is outstanding, which is an added advantage," it adds.

The task however is how the government would ensure the availability of long-term finance for TPS to thrive. "Financial intermediaries, and in particular Pension Funds need to be harnessed to remedy the existing asset-liability mismatch, lengthen the maturity of loans, and improve affordability," says CAHF.

"With such pools of long-term capital in place, then developers will focus on what they know best, which is constructing, while financial intermediaries will assume their role in providing financial instruments that facilitate home ownership while earning them a return."

The analysis notes that TPS has been fronted more by developers - and not financial institutions- who have taken up the home financing role.

The analysis notes that while private sector developers have the financial muscle to raise long-term capital and are providing TPS, these players have been previously slow to adopt due to cash flow constraints.

This is because the majority of them need to recycle their capital as fast to pay construction debts, realise profits and put up more units and the best way to do so, is to sell.

"However, with increasing competition among housing developments within Nairobi and its environs, more developers, especially pension schemes, are looking to adopt the structure and offer flexible payment plans," the analysis reads.

TPS however is also disadvantageous for developers as they have to shoulder credit and interest rate risk. "However, in a housing finance system where traditional housing financing instruments are suboptimal, then such TPS structure are better than nothing," CAHF says.

CAHF raises the question on how far developers, who have taken up the financing role, are willing to hold on to this responsibility owing to the market dynamics.

Ideally, CAHF says, the nature of developers is to have shorter cash conversion which happens well when units are sold. "Lengthening this cash conversion cycle from three to five years to a longer period of 10 to 15 years implies that they may not be able to construct as many projects as they would have as cash slowly trickle in. This would ultimately impact the delivery of housing the entire ecosystem," it adds.