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State housing project an excellent deal for low-income earners

By Ben Mokamba | Mar 12th 2020 | 3 min read

Like other real estate developments projects, the Government’s Affordable Housing Programme (AHP) has its inherent risks. One of them is establishing the end buyers of the houses being developed. No doubt, investing capital without a clear sight of recovery presents the market risk that a real estate developer seeks compensation for.

The programme needed to craft a solution that would identify home-buyers while giving confidence to developers of their existence and willingness to buy homes. Addressing market risk was important so to attract private sector funding to such a mammoth project.

Identifying a cluster of buyers early in the project allowed developers to access cheaper funding. Financiers, understandably, do not always share the sense of adventure that developers have, and tend to view developments that do not have clear buyers unfavourably.

In such cases, the cost of financing is high. Good developers want to get cash, build housing projects, sell the units, then get a tidy profit on top of their recouped investment, which can then be redeployed into the next project; and the cycle continues. Without ready buyers, this cannot happen and developers are locked into a project.  

Access to cheap financing is not the only problem that market risk presents to developers. Hitherto, few developers were willing to take on the market risk associated with low-income earners. Consequently, only about 1,000 units were produced annually for this income bracket against an annual demand for 170,000 units. After the AHP came into play, it created the boma yangu ecosystem under which over 280,000 Kenyans are currently registered.

Besides demonstrating that Kenyans are interested in owning homes, it is hoped that this ecosystem – that has been key in identifying potential buyers and establishing the aggregate demand for housing – will push down market risk. From the interested folks who have registered under Boma Yangu, those who are actively contributing to the cost of the housing units are the ones who can give developers comfort that market risk has been addressed.

Developers need assurance that potential buyers have access to home financing. Unfortunately, for low-income market, this is difficult. Accessing mortgages even for employed or self-employed Kenyans is hard, as the threshold by most banks for mortgage applications is a salary of not less than Sh150,000 a month. Only three per cent of Kenyans in formal employment earn over Sh100,000 a month, hence 97 per cent of Kenyans in formal employment cannot access home financing from banks.

Consequently, developers have always been edgy about responding to the housing needs of this market. As a result, decent housing for those who need it is not always available. This is where AHP ought to step in. This will go along way in taming the proliferation of slums, indecent housing and predatory rental markets.

Banks, saccos and employer schemes have attempted to bridge the gap but only solved this problem for a small subset of Kenyans. Even though employer schemes are more affordable, the financing products by banks and saccos are costly due to their short-term nature and interest rates, currently set over 14 per cent per annum, hence, repayments are quite hefty.

AHP, therefore, ought to improve housing access for the excluded. With seed funding from government, pooled contributions and investment from development finance institutions and impact investors, the housing fund extends tenant purchase scheme (TPS) financing. This model enables the housing fund to buy housing units from developers, which they then allocate to home buyers, who sign an agreement with the fund for monthly payment over a long period of time.

The tenure for the affordable housing scheme is 20 to 25 years, at an interest rate of 7 per cent. The housing units remain the property of the housing fund until the buyer completes payments in 20 to 25 years. This model provides confidence to developers by addressing the market risk. Home buyers are also comfortable with TPS as their repayments are as low as the rent they would otherwise pay.

Ultimately, the housing fund partial guarantee programme and the Kenya Mortgages Refinancing Company will unlock cheaper mortgages for lower income home buyers.

Mr Mokamba is a communications consultant.

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