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Homeowners dreams in limbo

By | March 16th 2010

By Kenneth Kwama

Weighed down by debts, inability to cope with the housing needs of a growing urban population, and in some instances, questionable transactions, the National Housing Corporation (NHC) could be in for tough times. Concerns about NHC’s fate peaked when it emerged the corporation was unable to pay some suppliers and contractors detailed to oversee the construction of its latest phase of development of houses in Kileleshwa, Madaraka Phase One, Nairobi West, Kakamega and Kisii, even after collecting initial deposit from prospective house owners.

NHC, an entity founded in 1953, owes creditors in excess of Sh2 billion, figures Financial Journal could not confirm because its Managing Director, James Ruitha, was unavailable for comment.

Financial Journal first contacted Ruitha in November last year, but has been unable to get audience even after several requests including visits to the corporation’s head office in Nairobi. Ruitha did not avail himself for interview even after promising severally that he would do so.

Financial Journal could also not get clarification on the issue from Housing Minister Soita Shitanda, whose mobile phone was switched off.

Project oversubscribed

NHC awarded tenders for the construction of 105 housing units in Kileleshwa, 110 units in Madaraka Phase One, 182 units in Nairobi West, 80 units in Kakamega and another 40 in Kisii.

Prospective house owners in Kileleshwa, where prices ranged from Sh8-13 million per unit were expected to pay in deposits of up to 20 per cent by October 16 last year. Reportedly, the project was oversubscribed by up to 400 per cent, but actual construction has been delayed because of ‘unresolved financial issues’ between suppliers and NHC.

The damning revelations come at a time the corporation was expected to issue a Sh5 billion infrastructure bond, to finance its projects. The corporation has been fighting to fend off long held perception about the fallibility of its balance sheet.

Last year, Treasury agreed to guarantee its bid to raise fresh capital from the debt market, but with a caveat: Its change of heart would largely depend on the corporation’s commitment to prudent financial management.

The bond-issue could as well falter, because what is happening now at NHC falls far short of the prudent financial management required by the Government to guarantee the bond’s issuance. The corporation has been fighting, and is now tinkering on the verge of losing a nasty war with some local authorities.

Industry statistics indicate that by February last year, NHC was being owed a whopping Sh2.3 billion in unpaid loans by local authorities. Initially, the debt was estimated at slightly over Sh3.6 billion before Nairobi City Council repaid Sh1.3 billion.

The debt has accumulated over 50 years and resulted from a botched deal where NHC was mandated to construct low-cost houses for several civic bodies around the country, which have failed to repay the loans.

Consequently, the corporation took over the management of the houses, which are in the councils’ names to recover the debt. The idea was to use the rent to recover outstanding loans.

But this has not yielded much because most of the tenants don’t pay market rates for the houses.

"Some were still paying as little as Sh300 for three-bedroomed houses in big towns like Kisumu, Kisii and even Nairobi, before the City council settled its debt," says an insider who is familiar with the issue, but who requested anonymity to protect his relationship with the corporation.

"How long can you collect Sh2.3 billion in denominations of Sh300 from tenants, some of who have defaulted?" he poses.

NHC dilemma

NHC’s dilemma is heightened by the fact that it can’t sell the houses without consent from the councils, some of which have been fighting to regain possession. For instance, Kisumu Municipal Council owes the corporation up to Sh500 million. NHC has taken over 900 housing units from the council.

In such cases, NHC can’t demolish in order to construct new houses or sell. And even if it wriggles its way to a selling position, the law requires it to give first priority to the occupants, some of whom have spiritedly fought any rent increments.

The project in Kileleshwa had a stormy take off last year when NHC got caught up in Sh816 million muddle in which it was accused of irregularly awarding the construction tender to a company called Erdemann Property Ltd. The tender was for construction of three-bedroom and four flats.

Initially, the tender had been awarded to a Chinese construction company — China Sichuan Corporation for International Techno-Economic Cooperation (Sietco) at Sh736 million.

But Erdemann later wrote to NHC’s MD informing him it had formed a consortium with Sietco and the Industrial Development Corporation to undertake the project. Ruitha awarded the contract to Erdemann, triggering protests from members of NHC’s tender committee who argued the corporation had flouted procurement rules.

During a meeting, which was held at the corporation’s boardroom on May 29 last year, members raised their objections and called for an internal review of the deal. This was never done.

The project cost Sh80 million over and above the original lowest bid price. As a consequence, NHC passed on the extra cost to buyers, defeating its original mission of constructing affordable houses for Kenyans.

NHC has largely relied on Government in its operations and of late, has been struggling for finances because it’s no longer guaranteed grants from the State.

Land allocation for construction of houses has also been dwindling, forcing the corporation to seek partnerships with expensive private landowners.

Currently, housing shortage stands at 150,000 units per year, out of which the private sector has only provided 30,000 units in urban centres.

The deficit has forced the Government to engage other players from the private sector. Last year, the Ministry of Housing engaged a US-based construction company called Lemna International Ltd to construct the first phase of low cost houses in Nairobi’s Shauri Moyo Estate.

Construction has since commenced. During the groundbreaking ceremony, Shitanda said the government would pay the US company Sh400 million in phases once the project is completed.

The sudden mood swing at NHC could sully the dreams of several prospective house owners who have been looking up to it to provide affordable housing.

Before 2002, interest rates on mortgage were prohibitively high, averaging 25 per cent per annum, but the situation changed in 2002 with rates falling to an average rate of 15 per cent per annum.

The reduction in interest rates and the ease in access to mortgage finance have fuelled demand for properties, especially residential units leading to high property prices.

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