The President’s housing agenda will not make progress unless we fix our Capital Markets
Edwin H. Dande  |  Oct 30, 2020

Today we deliver Phase 2 of The Alma to the respective buyers. Simply put, The Alma is Nairobi’s most Comprehensive Lifestyle Development packed with amenities - a retail centre, a daycare centre, a fitness club with a gym and aerobics studio, a heated swimming pool, back-up power and water supply – the residents will never know the regular blackouts or water shortages in Nairobi, elevated gardens for children to play away from cars, rooftop terraces as social spaces, and a laundry cafe.

I am so proud of this development for several reasons: First, it sets higher standards in terms of development in Kenya.

Second, it is good to see a journey that started with negotiating with 14 landowners and amalgamating into 5 acres come to fruition, but third and which I want to focus on today is the financing of this development.

This Kshs 5 billion development would not have been possible without the ability to raise capital from private capital markets; Kshs 105 m, roughly 2% of the capital, was raised from our regulated capital markets, Kshs 650 million, roughly 13% of the capital, was raised from bank debt, and the balance of Kshs 4.2 billion, roughly 85% of the capital, from unregulated private capital markets.

This development would not have been possible without the ability to tap private capital markets.

The reason why the vast majority of Nairobi Metropolitan residents live in substandard housing, without reliable power, without reliable water and comprehensive lifestyle amenities is mainly due to lack of capital to put up large scale developments. The reason the president’s housing agenda has not taken off is due to a lack of development capital. The reason why we have a housing deficit of 2 million houses, growing by 200,00 annually is due to lack of development capital. There is a compelling demand for housing. Kenya Mortgage Refinance Company, KMRC, is working on financing uptake. We need to figure out how to finance the development side.

Because of the scarcity of capital, the majority of residential developments in Kenya are small scale. When you develop say a 50 units apartment block, you can only offer a basic roof over the head; to offer people a comprehensive lifestyle, you need large scale developments, which will need significant amounts of capital, and to get significant amounts of capital, you have to go beyond conventional bank funding hence we need to develop both our regulated and private capital markets to solve the housing problem.

Take for example the President’s agenda of 500,000 affordable houses, even if we each house were to cost 2 million to construct we would need Kshs. 1 Trillion! to deliver on that agenda. It cannot be done from the banking sector alone, we need capital markets funding.

According to World Bank data, in well-functioning economies, businesses rely on banks for just 40% of their funding with the larger percentage, 60%, coming from capital markets. However, in Kenya businesses rely on banks for 99% of their funding, with less than 1% coming from capital markets. This makes funding difficult to access, and when accessed, it's expensive. The solution is not more regulation of banks, no. It is to stimulate capital markets as a complementary alternative to banking markets. However, more often we stifle rather than stimulate capital markets.

We must first solve our capital markets problem before we solve our housing problem. To solve our capital market problem, we have to address this 6 key impediments to the growth of capital markets.

  1. We need to allow the setting up of real estate sector mutual funds.
  2. Reducing the minimums required to invest in regulated real estate development funds, the current Kshs. 5 million minimum is too high for a country where the median household income is just Kshs. 50,000, why require a minimum that is 100 times the median income?
  3. Expand eligibility of trusteeship for mutual funds beyond banks; which tend to be comfortable with investments back into the banking sector rather than into the real estate sector
  4. Allow investment funds to open collections accounts with as many banks as is comfortable for their clients; the current restriction to one receiving bank for each mutual funds is constrictive
  5. Encourage the coexistence of both public and private capital markets. The current attitude of the Capital Markets Authority that all capital has to be regulated is misplaced and can only impede market development. It can even be argued that Kenyans have lost more funds in regulated capital markets compared to unregulated markets
  6. Get rid of the intense conflicts of interests in our capital markets; where market participants also hold key governance roles such as sitting on boards

MY POINT IS: We need to be clear in our minds that we shall not solve the housing problem without first solving the housing development finance problem, and we shall not solve the housing development finance problem until we first solve the problem in our capital markets, and we shall not solve our capital markets problem until we have a capital markets regulator that acknowledges the problems in our capital markets and is keen to resolve.