Financing for Affordable Housing

For the past two-years, affordable housing has been at the forefront of discussion given the Kenyan Government’s Big 4 Agenda. As it is, the nation has a huge housing demand of 200,000 units per annum, driven by rapid population growth and urbanization pressures, as well as a proliferation of informal housing due to unaffordability. As a result, the government has been heavily engaged in policy and fiscal reforms aimed at making the affordable housing initiative a reality.

However, with the current devolved system, there is a lack of clarity on the roles of both County Governments and the National Government in provision of housing and implementation has been slower than expected. This is attributable to lack of sufficient engagement with local private developers evidenced by lack of a successful track record for public private partnerships (PPPs) in Kenya. The main reasons for this are: (i) regulatory hindrances such as lack of a mechanism to transfer public land to a Special Purpose Vehicle (SPV) to facilitate access to private capital through the use of the land as security, (ii) lack of clarity on returns and revenue-sharing, and (iii) extended time-frame of PPPs while private developers prefer to exit projects within 3-5 years. Additionally, insufficient access to financing for both developers and homebuyers as a result of the tough economic environment has affected the supply-demand dynamics, with developers unable to provide for the low-end markets due to high costs of financing, lack of infrastructure in areas where land is affordable, and tight lending practices by banks following the cap on interest rates. On the other hand, as home values rise, the pool of potential homebuyers continue to shrink, exacerbated by relatively low wages and growing unemployment.

To curb the situation, and enable developers to provide the needed supply and buyers to afford buying homes, a lot needs to be done. For instance, in developing markets such as Kenya, capital markets remain under developed, hence businesses are forced to source up to 95% of funding from banks, while only 5% from capital markets. As such, real estate development and investment is not being provided with adequate access to this source of capital, which if provided at competitive rates can increase the development of affordable housing. This can be achieved through revitalizing the Real Estate Investment Trusts (REITs) market. Essentially, REITs serve as an alternative financing vehicle structured like unit trusts in that it allows all types of investors the opportunity to diversify their portfolio by investing in income-generating properties, commercial or residential, as they would in traditional asset classes – through the purchase and sale of liquid securities. In Kenya, we have a single listed REIT, the Stanlib Fahari I-REIT. With this in mind, in addition to public sensitization, a strong REITs policy framework is needed to allow speedier development of properties by allowing private developers to access public funding which is more efficient and better priced to finance their projects. In addition, strengthening the capital markets to allow for growth of structured products which can serve as an alternative to bank products for businesses seeking capital for growth, and the same can be channeled towards real estate financing.

Strategic policies are also needed to link the informal sector, who make up 83.4% of Kenya’s workforce according to KNBS, with the mortgage sector. This can be achieved through special mortgage underwriting standards for their undocumented incomes, which can be relatively high, albeit irregular. 

With clear structures and policy reforms for private developers, it is possible to achieve the government’s goal of 500,000 affordable housing units, and despite fears of low returns, the initiative portends attractive returns for the private sector, as affordability is the key to faster sales velocity, especially considering that the huge existing demand will keep on growing. Additionally, enabling end-buyer financing will create liquidity for developers to fund more projects.