KMRC's Sh9.4b sustainability bond signals new era for housing finance

In May this year, Kenya Mortgage Refinance Company (KMRC) issued a sustainability bond on Nairobi Stock Exchange(NSE). The listing attracted investor demand exceeded by 312.8 per cent to hit Sh9.4 billion, way above the targeted Sh3 billion.

According to KMRC’s chief executive Johnstone Oltetia, the successful issuance was a built on the company's inaugural corporate bond floated in 2022, with investor confidence playing a central role in the latest milestone.

"When you look at what drove the investor confidence, it's pretty much about their trust in KMRC, in our governance frameworks and the role that we are playing in the affordable housing finance space in Kenya," Oltetia said during an interview with  Real Estate at his office in Nairobi's Upper Hill.

He added that investors were further attracted by the bond's clear social and environmental objectives.

"They also saw that the money raised will go into supporting housing project that has a clear social, economic and environmental benefit. The fact that there's growing interest and confidence in KMRC and sustainability bonds is a serious investment in Kenya, with some people calling it now a new asset class in the capital markets," he said.

The issuance of the bond marked a first for Kenya's housing finance sector, making KMRC the first-ever issuer of a sustainability bond dedicated to housing.

Unlike sustainability-linked bonds whose proceeds may be used for general corporate purposes provided issuers meet sustainability targets, KMRC's sustainability bond requires that proceeds be ring-fenced and tracked to eligible projects.

“For sustainability-linked bond, the funds are not necessarily ring-fenced for specific projects. It's used to finance general corporate needs, but an institution has to indicate the transition to sustainability, which does not necessarily then ring-fence those funds for that purpose,” explained Oltetia

 He added that KMRC is required to demonstrate exactly how the money will be deployed and utilised through a sustainability roadmap.

 “This means, we will have to demonstrate the utilisation of funds raised and indicate that they will actually go into the intended purpose of financing green or sustainable projects or ones that have met the eligibility criteria.”

Oltetia said the proceeds from the bond are expected to expand access to affordable housing finance while generating returns for the investors who increasingly seek investments that have greater impact on environmental sustainability.

The CEO said KMRC has structured the sustainability bond around two pillars: Green and social financing.

"The green component is meant to finance projects that have environmentally friendly impacts, for example sustainable homes. Homes that are energy efficient, that are climate resilient, including even infrastructure. A social bond, on the other hand, is to support low-income earners, for example, affordable housing for low-income earners," he said.

Oltetia revealed that investor repayments are expected to commence in November this year in accordance with the timetable contained in the bond's information memorandum.

"There is a certain timeline that we have, which was in the information memorandum that we shared with the regulator. We'll obviously abide by that. In fact, it has a whole schedule of the repayments up to the time when we retire the bond," he said.

Beyond raising capital, Oltetia believes the success of the bond demonstrates that robust governance remains the foundation of sustainable finance.

He said institutions seeking to issue sustainability bonds must clearly define how proceeds will be used and establish transparent criteria for identifying eligible green or social projects.

"Governance is very important because it assures investors that the money will be used as promised. Without strong governance, a sustainability bond risks becoming just a label or financing tool," he said.

He added that from the regulatory approval to deployment of funds, issuers must comply with strict monitoring and reporting requirements.

Oltetia said as from when the organisation receives the funds and deploys it, there is a whole tracking mechanism for all the reporting that it has to demonstrate from time to time, not only to the investors, but also to the regulators.

Also, before issuing the bond, KMRC had established an eligibility framework aligned with internationally accepted sustainability standards and subjected it to an independent second-party opinion.

"The reporting framework is transparent enough for investors to see that the funds have been utilised for the intended purpose. We will not co-finance anything that is outside the eligibility criteria that we have already set," Oltetia said.

Maintaining that discipline, he added, is critical to preserving investor confidence.

"The risk of not meeting the promise is that you risk not getting that confidence or trust by investors and therefore going back to the market will become even more challenging."

The KMRC boss said globally, investor demand for sustainability-themed investments continues to rise as institutions seek opportunities that deliver both financial returns and measurable impact.

"Increasingly, investors are looking for investments that provide both financial return and a positive impact. Sustainability bonds appeal to both because they support important areas such as climate resilience, inclusion and long-term development," Oltetia said.

Housing, he argued, has become one of the most attractive sectors for sustainable investment because of its broad economic, environmental and social benefits.

"Housing supports economic growth, improves social stability for the people and can also respond to climate concerns. It cuts across and is one of the most important aspects for sustainability investment because of the kind of social impact it has on people."

For KMRC, the bond has also broadened its investor base by attracting investors specifically seeking measurable environmental and social outcomes.

"We reached a wider group of investors by issuing that kind of bond. These are investors who want their money to support measurable impact. The bond also improved our visibility and broadened investor participation."

Its success is already attracting attention beyond Kenya's borders.

Oltetia said several African countries have approached KMRC to understand the structure, governance and investor response behind the issuance.

Looking ahead, Oltetia said KMRC has plans to integrate sustainability into its main housing finance business by strengthening partnerships with banks, Saccos and professionals across the built environment.