Financing mismatch impeding affordable housing

A setion of Nyayo Estate, Embakasi, Nairobi. [Wilberforce Okwiri, Standard]

High returns on government paper and mismatch in financing are some of the disadvantages the Kenyan market has which impede investments in the housing sector, as noted in review of the sector’s legal and policy framework.

The review, which also recommends streamlining of incentives already provided in the law for the delivery of affordable housing units, notes there have been no tangible fruits on the tax reliefs offered by the government.

These recommendations are contained in an online book prepared by FSD Kenya first published November 1, 2022 and updated on September 5, 2023.

It is titled Legal, policy and Institutional Review of the Affordable Housing Sector in Kenya.

The book looks at 140 statues, polices and regulation against 48 cases. It was produced in partnership with Centre for Affordable Housing Finance (CAHF) Africa.

This review covers critical sectors like land, finance, physical planning, institutions involved in regulation and taxation.

On finance, while the book speaks of the efforts initiated by the government through the Kenya Mortgage Refinance Company (KMRC), there is a mismatch with between what the industry is offering and what exists in the market.

The book notes that uptake of KMRC financing has been low, largely due to a lack of a suitable supply in the defined criteria, specifically for loans funded under the World Bank.

It notes that the criteria earlier set a maximum household for beneficiaries to be Sh150,000 a month and their corresponding benefit was a Sh4 million home in Nairobi or Sh3 million out of the city.

In September 2022, this mismatch caused the price limits for KMRC financed loans supported by World Bank financing to be increased to Sh6 million for Nairobi homes and Sh5 million outside the city, to reflect the market realities of available housing stock.

“It is worth noting that a Sh6 million house is affordable only to an estimated 17 per cent of urban Kenyans,” the book reads.

This is while the ‘cheapest newly built house’ as identified by CAHF in their 2021 Yearbook as costing Sh1.1 million would be affordable to about 79 per cent of the urban population.

“Very few of these units are built,” the book adds.

The problem of the country’s housing sector is however, according to the write-up, constrained by the wider macroeconomic state. This reduces the amounts investors, including financial institutions, can put into the sector with expectation of a good return.

“For instance, heavy domestic borrowing by government at attractive interest rates has crowded out credit to individuals and the private sector,” the book states.

The book notes that while both public and private land is available for housing, capital to invest in infrastructure and construction has been limited as seen by the limited refinancing of units to the KMRC.

“A key hurdle is the high interest rates payable on government paper which sets a high benchmark for returns required for investment in housing, which inherently has more risk. This suggests that housing objectives must be accommodated also in Kenya’s wider economic policy,” the book recommends.

The book notes that as the government contemplates measures to improve financial sector functioning for housing, it should address this key issue and improve the investment context for affordable housing.

“This would involve promoting efficiency, transparency and data sharing in the housing value chain to attract impact capital while introducing measures to de-risk such investments,” it adds.

And the various measures implemented notwithstanding, it goes on, there is still inadequate financing for affordable housing on both the demand and supply sides. 

This inadequacy, it says, is in terms of both the quantum of finance available, and the target of what is available

“On the demand side, few products can accommodate informal sector workers, while on the supply side, construction finance favours established companies, with little available for small-scale contractors,” it says.

“While these product developments are, of course, the prerogative of lenders, the policy and regulatory framework in which they function is critical. “

The book emphasises the importance of data adding that the regulatory and institutional framework already creates multiple opportunities for data.

“This data could and should be leveraged beyond the regulatory function to support greater market transparency, which would reduce risk in support of increased investment.

“A commitment to sharing data as a key enabler to drive patient impact capital to invest in housing is necessary and should be promoted,” it adds.

There is also a clarion call for more direct and enforceable consumer protection measures to protect household investment into housing and particularly in off-plan housing.

“Further, incentives to promote savings for housing are currently missing from the regulatory framework,” it states.