Bond to finance housing projects

By Lydia Limbe

Shelter Afrique, a Pan–African Nairobi-based urban housing development financier floated its last tranche of the Sh3 billion bond in 2011.

The Sh500 million bond, which began trading on the Nairobi Stock Exchange on January 2, last year, will attract a fixed rate of 12.5 per cent, and is expected to mature on December 14, 2015.

The funds raised will be used to finance housing projects in Nairobi, Kisumu and Mombasa, at a total cost of Sh9.4 billion, most of the projects having commenced in 2010 and 2011.

Many of the projects approved for financing are residential housing units (apartments, townhouses and maisonettes) targeting the low and middle-income segment.

Of the projects being financed, the minimum project cost is about Sh205 million, while the maximum is Sh2.2 billion. In addition, the minimum loan advanced for various projects that will utilise the financing raised ranges from Sh172 million to Sh647 million. A total of 1,212 houses will be put up with this financing.

Investor appetite

Shelter Afrique’s outgoing Managing Director, Alassane Bâ, says that the success of the bond demonstrates a robust local investor appetite for bonds and strong investor’s faith in Shelter Afrique.

“This is the fourth time Shelter Afrique is issuing a bond in the market, hence the positive market perception of our past offerings, which led to an increase in local investor confidence and our longterm value propositions,” says the MD.

He adds that the future for corporate bonds is exciting and the rising demand for the housing and construction sector in Kenya makes a strong case for innovative ways of raising longterm financing to support the sector.

“The bond market will continue to thrive over the coming years and offer an optimal avenue for mobilising such resources for the sector,” he adds.

This observation is also echoed by Aly-Khan Satchu, a financial analyst. Aly-Khan notes that infrastructure bonds are an important development for our capital market and that their performance and continued adoption within the East African region and the African continent is the best way to marshal funds for the housing sector.

Bond market

He also points out that the bond market is currently predominantly Government of Kenya bond market. The advantage of these types of securities is that they offer investors a yield pick up, and will lead to a more sophisticated bond market, as well as attract offshore investors into our currency, which increases matched currency funding in the economy.

“I think infrastructure bonds (and even corporate issuers) will allow for a more sophisticated and nuanced credit market to develop,” says Aly-Khan.

“I would prefer for these bonds to be properly securitised on clearly segregated assets. Some bonds have been characterised as infrastructure bonds but without the securitisation element,” he adds.

Shelter Afrique’s interventions on Real Estate Investment Trusts (Reits) are, however, limited.  The Capital Markets Authority is yet to implement the framework, which will guide real estate financiers to develop effective strategies to respond to the Reits model. It is anticipated that Reits will create an enormous value to the real estate sector, and will be a great tool for the capital market.

Caution

There are countries that have successfully used bonds to raise funds for development. A case in point, US housing crash, which was fuelled by leveraging sub-prime mortgages was a salutary lesson that Kenya can learn from.

“We are nowhere near that level of maximum complexity and financial engineering the US is at. We need to keep it plain and simple,” cautions  Aly-Khan.