Accelerating funding to the affordable housing

According to the National Housing Corporation (NHC), the housing deficit stands at 2m and has been growing annually by approximately 200,000 units. The Government introduced ‘Provision of affordable housing’ in 2017 as one of its four key pillars for the following five years with the aim of delivering 500,000 units to alleviate the housing crisis. Three years later, it has only delivered approximately 228 housing units, an indicator that the target units might just be a pipe dream. The slow momentum is largely attributable to unavailability of financing for developers and buyers alike.

To alleviate the housing issue, the Government has made tremendous progress by implementing various policies and fiscal reforms for the past three decades with the aim of enhancing house ownership. 

Notable incentives and tax exemptions aimed at driving homeownership for homebuyers include tax exemption on funds deposited under a registered Home Ownership Savings Plan (HOSP) subject to a maximum of Sh8, 000 per month or Sh96, 000 per annum, for 10 years; affordable housing relief of 15.0% of gross emoluments up to Sh108, 000 per annum or Sh9, 000 per month for Kenyans buying houses under the Affordable Housing Scheme; tax exemption for interest on mortgage repayments up to Sh25, 000 per month or Sh300, 000 per annum provided that the taxpayer occupies the property.

Others include formation of the National Housing Development Fund to bridge the gap for affordable housing. The fund enables end-buyer uptake by providing affordable financing solutions such as the anticipated nationwide Tenant Purchase Scheme (TPS), allowing mortgage and cash buyers to save towards the purchase of an affordable home through the Home Ownership Savings Plan and extending mortgage loans to members at an interest rate of up to 7% p.a.

The Government also established the Kenya Mortgage Refinancing Company with the aim to to grow Kenya’s mortgage market by providing long-term funding to primary mortgage lenders. The facility is set to lend money to local financial institutions at an annual interest rate of 5%, enabling them to write home loans at 7%, 6% points lower than the market rate of approximately 13%.

Then there is the waiver on stamp duty for first-time homebuyers under the affordable housing programme and; allowing the use of 40% of accumulated pension benefits for the purchase of a residential house in addition to the previous use of 60.0% as mortgage collateral.

For developers, there is the reduction in corporate tax by 50% from 30% to 15% for developers of over 100 affordable housing units annually; exemption from Value Added Tax for supplies imported or purchased for direct and exclusive use in the construction of affordable houses by licensed Special Economic Zones (SEZ), subject to recommendation of the Cabinet Secretary for Housing, and a minimum of 5,000 units to qualify; a 25% tax exemption for investors in commercial property, who spend on social infrastructure such as power, water, sewer lines, and roads to allow recovery of their expenses within 4-years, and; the waiving of building approval fees for all affordable housing projects in Nairobi, under the Nairobi City County Sessional Paper Number 1 of 2018.


Despite the above incentives, Kenya has failed to develop a robust housing finance system leading to relatively low homeownership rates. According to the 2015/16 Kenya Integrated Household Budget Survey (KIHBS), only 26.1% of Kenyans living in urban areas own the homes they live in.

Those who own homes rely mainly on savings and other sources of financing including commercial bank loans, and local investment groups commonly referred to as chamas, and Savings & Credit Co-operative Societies (SACCOs). Mortgage loans uptake remains relatively low totaling to 26,554 as at December 2018 out of an adult population of 23m.

On the supply end, the Kenya residential market has continued to witness increased activities within the high-end markets fueled by the relatively good returns as investors can charge a premium on units within these submarkets. However, the highest demand for housing remains within the low and mid-end markets, which have suffered low supply. The main challenges facing housing include;

Inadequate supply of affordable development class land – This is due to soaring land prices in urban areas, which has led to increased development costs. Land costs account for 25% – 40% of development costs in urban areas, which consequently impacts on end-user property prices.

Costs of construction – Mid-level construction costs in Kenya range from Sh44,000 – Sh64,000 per square metre (SQM) depending on the level of finishes, height and other related factors, which account for 50% – 70% of development costs. Considering a mid-level 2-bed house of 70 SQM, the construction cost alone would be at least Sh3m using a rate of Sh44,000 per SQM, meaning the total development cost will range from Sh4m – Sh6m, limiting the affordability of such a house.

Inadequate infrastructure Several parts of Kenya lack the requisite infrastructure for development such as proper access roads, power and sewerage services. Developers are thus forced to incur these costs, which are then passed on to the end buyer.

Access to finance  Real estate development is a capital-intensive investment. Developers have to explore alternative sources of capital, which come at a relatively high cost ranging from 14% – 18% per annum.

Access to and affordability of mortgages– Access to mortgages remains low mainly due to low-income levels that cannot service a mortgage; soaring property prices; high interest rates and deposit requirements which lockout many borrowers; exclusion of employees in the informal sector due to insufficient credit risk information and; lack of capital markets funding towards real estate purchases for end buyers. 

Underdeveloped Capital MarketsInfrastructure – In developed economies, businesses depend on banks for only 40% of the funding with the balance coming from alternative channels such as capital markets. However, in Kenya businesses rely on banks for over 95% of the funding with only 5% of funding coming from capital markets. To increase funding from capital markets, we will need to open our capital markets from the current restrictive rules and regulations, which serve to constrain capital markets development. 

Ineffectiveness of Public-Private Partnerships for housing development (PPPs)– The government has previously enlisted the help of the private sector for financing and development of affordable housing. This has however not achieved the intended objective as a result of regulatory hindrances; lack of clarity on returns and revenue-sharing, the extended time-frame of PPPs while private developers prefer to exit projects within 3-5 years, and, bureaucracy and slow approval processes.

Case study

In 1960, just after acquiring independence, Singapore had a cumulative housing requirement of 147,000 units for the 10-year period that ended in 1969 for a population of 1.6m people, which was growing at 6.4% per annum. The private sector could only provide approximately 2,500 housing units per year and at price levels out of reach for the low-income segment.  The government, therefore, put in place policies and strategies to promote home-ownership for its residents. 

According to the World Bank, as at 2018, 80% of Singaporeans lived in houses built by the government, through the Housing Development Board (HDB, the equivalent of the National Housing Corporation), with 90% being owner-occupied, yet when they attained self-government in 1959 only 9% lived in public housing.

Some of the initiatives that have led to the fruition and sustenance of affordable housing in Singapore are the establishment of the Singapore Improvement Trust (SIT) in 1927 by the British colonial government to carry out town planning, slum clearance and to provide low-cost housing for resettled residents and low-income earners, and, the establishment of the Housing and Development Board in 1960 by the Singapore Government whose top priority was to ramp up a large-scale public housing program that would be able to house the majority of the population.

The public housing program in Singapore has been enabled predominantly by the availability of funds from the general government tax revenue and the Central Provident Fund (CPF), initially installed as a vehicle for housing finance. A major policy innovation was later implemented to allow withdrawals from the fund to finance the purchase of houses sold by the Housing Development Board. When the CPF was established in 1955, both employers and employees contributed 10% (5% each by employees and employers) of the individual employee’s monthly salary toward the employee’s personal and portable account in the fund. The contribution rates in 2016 were 20% of wages for employees (the portion of pay withheld by an employer to go into the CPF account) and 17% of wages for employers (an amount an employer is required to pay into an employees’ CPF account out of their own pocket, above and beyond the stipulated salary), up to a monthly salary ceiling of an equivalent of Sh44, 000.

The Housing Development Board (HDB) receives government loans to finance its mortgage lending and pays interest at the prevailing CPF savings rate. The HDB uses the loans to provide mortgage loans and mortgage insurance to buyers of its leasehold flats (both new and resale). The typical loan represents 80% of the price of the flat. The maximum repayment period is limited to 25 years. In Singapore, every household can apply for a maximum of two HDB loans. The mortgage interest rate charged by the HDB is pegged at 0.1% points above the CPF ordinary account savings interest rate. The latter is based on savings rates offered by the commercial banks, subject to a minimum of 2.5%. The use of CPF savings for the purchase of public housing has been an important factor in making the homeownership program in Singapore possible and successful.

These are the financing options for each type of housing as provided by the Housing Development Board:

Build to order: These are apartments that HDB sells off-plan financed by the HDB loan by banks that lend at a fixed rate of 2.6%. Accessibility to this loan requires individuals to pay a very little amount of cash or none provided they have enough CPF savings.

Design, build and sell scheme: Units built under this scheme were for public housing but were developed by private developers. The scheme was however suspended after 2015 due to the unsatisfactory spaces of units and high prices charged by developers which led to poor reception, and,

Executive condominiums: These are more executive apartments built and sold by private developers to buyers who can exceed Housing Development Board income ceilings but cannot afford private homes. Individuals pursuing these developments get bank loans and get to choose a floating rate package.

From the foregoing, It will be challenging for Kenya to deliver affordable housing without a comprehensive urban plan and hence, to meet housing demand sustainably, there is a need to have efficient urban planning measures in place. Two, without adequate incentives, the private sector will not be empowered enough to significantly contribute to the housing supply, and there is a need to consider the use of social security payments as a down payment for housing.

Borrowing lessons from the case study in Singapore, the private sector is also a key player in resolving the housing deficit. Majorly, its participation in the development of affordable housing in Kenya has been crippled by the unavailability of financing in the wake of tough economic times, bank dominance and the relatively high cost of funding in Kenya. Learning from developed countries such as Singapore and the United Kingdom, capital markets play a key role in the mobilization of commercial financing mainly to boost housing. Therefore, there is a need for consideration of ways of deepening capital markets and access to non-bank funding. Some of the ways of achieving this include:

Reduced minimum amount investable in REITs – The hefty minimum investment required for a REIT has continued to push away potential investors. To attract capital into capital markets vehicles such as REITs to develop affordable housing, there is a need to conduct a review on the REIT. The current regulations, which define the minimum subscription amount per investor at Sh5m for a D-REIT) is too high to attract significant interest from a diverse set of investors. An amount of approximately Sh1m ensures the investor is sophisticated while also allowing a larger pool of investors to participate.

Development of structured products – Structured products have been a welcome alternative to banks for businesses seeking capital for growth, and the same can come in handy in the funding of affordable housing projects. The market lacks favorable options, which would otherwise be availed through structured products at competitive rates thus increasing the development of affordable housing.

Review of the regulations of pension schemes funds – According to the Retirement Benefits Regulations, citizens can utilize a proportion up to 40% of their accumulated benefits subject to a maximum of 7 million towards the purchase of a house, in addition to using up to 60% of the same as mortgage collateral. However, as is the 40% may prove to be insufficient for some members, hindering the ambitions of becoming a homeowner. There is need for a review of the same and we propose matching what already exists as an allowable limit for mortgage loans guarantees. Members should also be allowed to select the developer they would wish to buy the house from.

General bureaucracy and ineffective policy actions – The process of land and real estate transactions need to be much faster and less susceptible to rent collection by gatekeepers. Policy actions, such as the reduction of income tax for developers producing 100 affordable units annually from 30% to 15%, need to be clear and accessible.

Lastly, to allow for the mobilization of funds specifically for affordable housing projects, there is need for the Capital Markets Regulations to allow for the formation of a Collective Investment Scheme that invests in a single asset class or is formed for a specific purpose or specific sectors such as affordable housing, technology or financial fund. 

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