The bottlenecks of Big Four’s affordable housing


Majority of Kenyans are willing to own a house now than before thanks to the government’s move to work closely with private developers, financial institutions as well as cooperatives to deliver affordable housing, which is now part of the “Big Four Agenda”.

Housing is affordable when those whose income is below the median of, say Sh30, 000 to Sh50, 000 can afford it. The median income in Kenya, according to Cytonn, comprises of those earning from Sh30, 000 to Sh49, 999 a month.

A household that has two working adults with a maximum total income of Sh100, 000 can afford a rent of Sh30, 000 and a mortgage of Sh3.6 million. On the other hand, the low-income household earns Sh35, 000 per month on average. Assuming each house has two working adults in this category, it means they can afford a rent of Sh10, 500 for a house. But whether to buy or rent equals the income that a household can afford, begging the question, what’s the strategy that stakeholders will use?

Apart from the government’s move to review the public-private sector partnership framework to enable fast tracking of approval processes, it will set up a Mortgage Refinancing Company (MRC) to finance homebuyers. In reality, home buyers financing is manageable if, and only if, extension of lines of credit from institutions such as World Bank to enable borrowing for as low as 5% interest rate are made easier. Extension of background checks to include the informal sector, incentives to first-time buyers such as a waiver on stamp duty, tenant-purchase scheme for social housing, setting up of National Housing Development Fund as well as a MRC, are some of the strategies that will turn around things.

Analysts say that the uptake of affordable housing will explode big time since the government is not only expected to provide infrastructure (both offsite and social) but also work on proposed deductions of 25.0% of the cost, from taxable income, where infrastructure has been provided by a developer.

Patricia Wachira, Cytonn senior research analyst, gave a presentation couple of weeks ago that helped paint the bigger picture on the inadequate supply, and why affordable housing is not a pipe dream. If ever there are developers eyeing this bottom of the market, development of smaller apartments may very well be it.

As real estate expert, Ms Wachira says that there is an inadequate supply of serviced land at affordable prices due to soaring land prices in urban areas. In Nairobi alone, for example, land prices have been growing with a 6-year compound annual growth rate of 17.4%. This has subsequently led to increased development costs as land costs in Nairobi account for about 25% to 40% of development costs, which consequently impacts on end-user prices. In fact, mid-level construction costs in Kenya range from Sh44, 000 to Sh64, 000 per square metre with lower costs for low-rise developments and higher costs for high-rise developments, and account for 50% to 70% of development costs.

“Cheaper houses can be manageable,” says Wachira. “It’s construction cost and costs of financing that should be worked on. These are things that grow by inflation making it tough for private developers. In terms of funding, there should be alternative funding options. To achieve the costing of Sh1.8m to Sh2 million is hard. It won’t be easy to sell a one-bedroom unit for Sh600, 000 and a two bedroom at Sh1 million. The cost will still be high going by the fact that a developer will add fee of administration, pay its creditors and be able to re-coup their money. You can’t sell houses at a loss. Within the years that Kenyans will be paying for the affordable houses, things should not be tough for the developer.”

Real estate development is a capital-intensive investment and thus developers have to explore alternative sources of capital, which come at a high cost ranging from 14% to 18% per annum. Perhaps partly the reason as to why developers are proposing smaller units. That the government is giving out serviced land, and developers doing just the building, the cost of housing will reduce but not to the 30% that the government is pushing for. The buying prices are actually increased by costs of infrastructure such as proper access roads, power connection and sewerage services, which developers are forced to incur, and passed on to buyers. There has also been a decline in credit being given to the private sector since the interest rate cap was implemented with banks preferring to lend to low risk institutions like the government. This is made worse by the fact that 90% of all funding is from banks, with only 10% from non-bank funding, limiting the supply of capital to developers.

Although government has previously enlisted the help of private sector for financing and development of affordable housing, things have failed to look up mainly due to regulatory hindrances such as transfer of land to a special purpose vehicle (SPV) to facilitate access to private capital, lack of clarity of returns, and the extended time frame of Public-Private Partnerships while private developers prefer to exit within a window of three to five years.

Bank charges such as administration, legal, insurance and other related fees increase the cost of lending to a region of 18% to 22.0%. In most banks, a borrower is required to raise at least 10% to 20% of the house price as the deposit, while the bank pays the rest in form of a loan. This discourages potential buyers.

According to data by the Kenya National Bureau of Statistics 2017, 74% of employees in the formal sector earn less than Sh50, 000 per month, and thus mortgages are out of reach to the lot given the average mortgage size was Sh9.1 million as at 2016 which requires monthly repayments of Sh106, 000.

Property prices have been increasing in Nairobi corresponding to the increase in land and construction costs, which further accentuates the affordability of houses to many. In addition, homebuyers are required to pay additional fees such as stamp duty and legal conveyance fees, which make owning a home quite expensive.Mortgages are mainly accessible to employees in the formal sector due to insufficient credit risk information regarding informal sector employees. Notably, 83.2% of Kenyans are employed in the informal sector and thus the lack of sufficient credit risk information leads to a low penetration of mortgages in Kenya at a time when the country needs 250,000 housing units annually with the gap mainly being in the lower middle to low-income segment.

According to the National Housing Corporation, Kenya has a housing deficit of 2 million units. Locally, housing demand grows by 250,000 units annually whereas supply only grows by 50,000 leaving a deficit of 200,000 units. The ministry of Housing estimates that out of the existing supply, 83% is for the high and upper income segments, 15% for lower middle segment, and only 2% for low-income segment, an indication that the housing demand is mainly for under-served lower middle and low-income segments.

A majority of people in Nairobi metropolis, according to Cytonn’s research of 2016, earn a salary ranging between Sh30, 000 and Sh100, 000 per month. Assuming this lot spends a maximum of 30% of their salary on rent, then majority of residents in Nairobi pay rent of between Sh10, 000 and Sh30, 000 per month.

According to the study, 88% of Nairobi residents live in rented houses with 81% of the respondents living in apartments, 9% and 8% living in maisonettes and bungalows, respectively. While 5% bought their houses, those who had the financial muscle to build their own houses account for a 6%. The fact that majority are renting highlights the fact that Nairobi is largely a renters’ market. This can be attributed to the relatively low incomes with which many cannot afford to buy a house. On the Nairobi residents monthly rent, the study shows that above 75% of the respondents were paying rent below Sh20, 000, while 42.7% respondents are paying rent of between Sh10, 000 and Sh20, 000, only 24% of the sample were paying rent above Sh20, 000 per month. Citing the cost of developing two-bed apartments on one acre in Athi River where the government intends to deliver 150,000 homes, Ms Wachira says that currently, the average size of a two-bedroom unit in Athi River is 77 square metres to 80 square metres with prices ranging from Sh4.8 million to Sh6 million. Their model assumes project funding is obtained from presales and debt at a 50:50 ratio

“To achieve the affordable house unit, we have assumed a smaller unit size, so as to achieve higher density, but in line with the minimum set standards according to the Ministry of Housing for low to middle-cost house, size ranges from 36 square metres to 60 square metres for units with 2 to 3 habitable rooms,” she says, adding that exemption of value added tax on construction costs, for example, will reduce the construction cost by at least 13.8%.

South Africa 

Since 1994, South Africa has built more than 2.8 million units (approximately 133,000 units annually) thereby managing to reduce the housing deficit from 3 million units to 2.1 million units. The country has been able to address the problem through subsidies for low income populations: through the Reconstruction and Development Programme (RDP) where all households with a gross income of $295 (Sh30, 000) or less are entitled to housing subsidies worth $13, 515 (Sh1.4 million) with a preference given on individual above 40 years and the disabled.

Since South Africa has the highest mortgage penetration currently at 30% thanks to access to finance for house purchase, things are looking up. Access to finance is fuelled by low lending rates of 10%, presence of secondary mortgage market, longer tenors by the government employees scheme providing 30-year mortgage, pension backed housing loans, and high private credit bureau coverage at 64% of adults compared to Kenya at 30%.Minimum occupancy period is also another factor that is backing the success of low cost housing in South Africa. Government-subsidized houses cannot be sold in the first 8 years. This limits speculative purchases and encourages ownership. Apart from building compact units which results in lower prices, the South African government has partnered with private developers to enhance the delivery of affordable housing


Singapore is said to have the best housing solutions in the world. Here, the government promotes home ownership through the Housing Development Board (HDB), equivalent of the National Housing Corporation of Kenya.

Going by the World Bank report, 80% of Singaporeans live in houses built by the government yet when they attained independence only 9% lived in public housing Singapore provides three major types of housing that include Build to Order (BTO), Design Build and Sell Scheme (DBSS) and Executive Condominiums (EC). BTO are flats constructed by HDB and are sold off-plan with a tender for construction only called when the number of applicants reaches 70% of the total number of units on offer. DBSS are houses that are developed and sold by private developers who upon completion hand over the houses to HDB for management. EC on the other hand are executive apartments developed and sold by private developers to buyers who can exceed HDB income ceilings but cannot afford private homes. Singapore has managed to meet the housing requirements mainly through strong policies on home ownership, minimum occupation period policy, and use of social security payments to pay for housing. The country also has efficient urban planning and green building requirements as well as proper land ownership.

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