By Research Team, Feb 25, 2024
During the week, T-bills were oversubscribed for the eighth consecutive week, with the overall oversubscription rate coming in at 154.1%, albeit lower than the oversubscription rate of 177.8% recorded the previous week. Investors’ preference for the shorter 91-day paper persisted, with the paper receiving bids worth Kshs 9.9 bn against the offered Kshs 4.0 bn, translating to an oversubscription rate of 247.6%, significantly lower than the oversubscription rate of 654.1% recorded the previous week. The subscription rates for the 182-day paper decreased to 74.2% from 112.3% recorded the previous week, while the subscription rates for the 364-day paper increased significantly to 196.5% from the 52.8% recorded the previous week. The government accepted a total of Kshs 23.1 bn worth of bids out of Kshs 37.0 bn of bids received, translating to an acceptance rate of 62.4%. The yields on the government papers continued to rise, with the yields on the 364-day, 182-day, and 91-day papers increasing by 0.1 bps, 1.9 bps, and 3.6 bps to 16.9%, 16.7%, and 16.6%, respectively;
We are projecting the y/y inflation rate for February 2024 to come in at the range of 6.6%-6.8% mainly on the back of reduced fuel prices, the upward revision of the CBR to 13.0% from 12.5%, and the strengthening of the Kenyan shilling against the US Dollar;
Yields on the Government securities have been on an upward trajectory with the 91-day paper now yielding 16.6% from 9.4% in January 2023. Going forward, we anticipate a very modest increase in yields on the government papers before they stabilize in the remaining months of FY’2023/24. The increase will be muted going forward due to the positive investor sentiment brought about by the successful offering of the Eurobond, which helped alleviate the fears of possible default by the government. There also has been adequate liquidity in the financial markets as can be seen from the high subscriptions in the last infrastructure bond;
During the week, the equities market was on an upward trajectory, with NSE 10 gaining the most by 3.4%, while NSE 25, NASI, and NSE 20 gained by 3.1%, 1.9%, and 1.0% respectively, taking the YTD performance to gains of 0.9%, 1.8%, 3.7%, and 3.8% for NASI, NSE20, NSE 25 and NSE 10 respectively. The equities market performance was driven by gains recorded by large cap stocks such as Equity Group, Co-operative Bank, and NCBA of 8.0%, 6.6%, and 3.6% respectively. The gains were, however, weighed down by losses recorded by large-cap stocks such as EABL, BAT, and DTBK of 3.4%, 1.0%, and 0.1% respectively;
During the week, Shelter Afrique, a pan-African finance institution that exclusively supports the development of the housing and Real Estate sector in Africa, signed a partnership with the government aimed at facilitating the sale of apartments and masionettes totaling Kshs 1.6 bn to senior civil servants. This partnership is poised to aid Shelter Afrique, in offloading units that have remained unsold for extended periods;
On the Unquoted Securities Platform, Acorn D-REIT and I-REIT traded at Kshs 24.4 and Kshs 21.7 per unit, respectively, as of 23rd February 2024. The performance represented a 22.0% and 8.3% gain for the D-REIT and I-REIT, respectively, from the Kshs 20.0 inception price. In addition, Cytonn High Yield Fund (CHYF) closed the week with an annualized yield of 19.3%, remaining relatively unchanged from the yield recorded in the previous week;
Housing is guaranteed as an Economic and Social right by the Constitution of Kenya 2010, as outlined in section 43(1)(b) - “every individual has the right to accessible and adequate housing, as well as to reasonable standards of sanitation”. Therefore, the government has a responsibility to provide adequate housing to its citizens and is obligated to implement policies and initiatives aimed at addressing housing needs as well as the living standards across the country. World Bank data shows that Kenya’s population and urbanization growth rates are at 1.9% and 3.7% respectively, above global averages of 0.8% and 1.5%, as of 2022. With a rapidly growing population and an increasing middle class, demand for housing is set to increase. In response to the escalating demand, the government has implemented a variety of strategies through various agencies, including the introduction of several housing initiatives geared towards tackling the housing shortage in the country. Given this context, it becomes imperative to analyze the diverse agencies and initiatives geared towards addressing the pressing need in Kenya. In our topical this week, we discuss in depth various agencies involved in the implementation of the government’s agenda and their interrelationship, their formations and histories, mandates, challenges, existing gaps in Kenya’s affordable housing landscape and propose solutions. The agencies and initiatives covered in this report are National Housing Corporation (NHC), Kenya Mortgage Refinance Company (KMRC), Capital Markets Authority (CMA), Affordable Housing Bill 2023, State Department of Housing and Urban Development, and, Kenya Revenue Authority (KRA);
Investment Updates:
Real Estate Updates:
Hospitality Updates:
Money Markets, T-Bills Primary Auction:
During the week, T-bills were oversubscribed for the eighth consecutive week, with the overall oversubscription rate coming in at 154.1%, albeit lower than the oversubscription rate of 177.8% recorded the previous week. Investors’ preference for the shorter 91-day paper persisted, with the paper receiving bids worth Kshs 9.9 bn against the offered Kshs 4.0 bn, translating to an oversubscription rate of 247.6%, significantly lower than the oversubscription rate of 654.1% recorded the previous week. The subscription rates for the 182-day paper decreased to 74.2% from 112.3% recorded the previous week, while the subscription rates for the 364-day paper increased significantly to 196.5% from the 52.8% recorded the previous week. The government accepted a total of Kshs 23.1 bn worth of bids out of Kshs 37.0 bn of bids received, translating to an acceptance rate of 62.4%. The yields on the government papers continued to rise, with the yields on the 364-day, 182-day and 91-day papers increasing by 0.1 bps, 1.9 bps and 3.6 bps to 16.9%, 16.7% and 16.6%, respectively. The chart below shows the yield growth rate for the 91-day paper over the period:
The chart below compares the overall average T-bill subscription rates obtained in 2018, 2022, 2023, and 2024 Year-to-date (YTD):
Money Market Performance:
In the money markets, 3-month bank placements ended the week at 13.5% (based on what we have been offered by various banks), and the yields on the 364-day and 91-day papers increased by 0.1 bps and 3.6 bps to 16.9% and 16.6%, respectively. The yields of the Cytonn Money Market Fund remained unchanged at 16.7% recorded the previous week, while the average yields on the Top 5 Money Market Funds increased by 13.6 bps to 16.6% from the 16.5% recorded the previous week.
The table below shows the Money Market Fund Yields for Kenyan Fund Managers as published on 16th February 2024:
Cytonn Report: Money Market Fund Yield for Fund Managers as published on 23rd February 2024 | ||
Rank | Fund Manager | Effective Annual Rate |
1 | Etica Money Market Fund | 17.5% |
2 | Lofty-Corban Money Market Fund | 17.2% |
3 | Cytonn Money Market Fund (Dial *809# or download the Cytonn App) | 16.7% |
4 | GenAfrica Money Market Fund | 16.1% |
5 | Apollo Money Market Fund | 15.8% |
6 | Kuza Money Market fund | 15.7% |
7 | Nabo Africa Money Market Fund | 15.7% |
8 | Madison Money Market Fund | 15.3% |
9 | Enwealth Money Market Fund | 15.0% |
10 | Jubilee Money Market Fund | 15.0% |
11 | Co-op Money Market Fund | 14.8% |
12 | AA Kenya Shillings Fund | 14.7% |
13 | Absa Shilling Money Market Fund | 14.3% |
14 | GenCap Hela Imara Money Market Fund | 14.0% |
15 | Mayfair Money Market Fund | 14.0% |
16 | Mali Money Market Fund | 13.9% |
17 | Sanlam Money Market Fund | 13.8% |
18 | Old Mutual Money Market Fund | 13.5% |
19 | Orient Kasha Money Market Fund | 13.0% |
20 | Dry Associates Money Market Fund | 12.7% |
21 | KCB Money Market Fund | 12.6% |
22 | CIC Money Market Fund | 12.5% |
23 | ICEA Lion Money Market Fund | 12.0% |
24 | Equity Money Market Fund | 11.5% |
25 | British-American Money Market Fund | 10.0% |
Source: Business Daily
Liquidity:
During the week, liquidity in the money markets marginally tightened, with the average interbank rate increasing by 0.6% points to 14.0% from 13.4% recorded the previous week, partly attributable to the tax remittances that offset government payments. The average interbank volumes traded decreased significantly by 41.9% to Kshs 23.6 bn from Kshs 40.5 bn recorded the previous week. The chart below shows the interbank rates in the market over the years:
Kenya Eurobonds:
During the week, the yields on Eurobonds were on a downward trajectory, with the yields on the 7-year Eurobond issued in 2019 and the 6-year Eurobond issued in 2024 decreasing the most by 0.2% to 9.1% and 9.8%, from 9.3% and 10.0% respectively, recorded the previous week, attributable to the recent June maturity buyback, indicating improved investor perception on the country. The table below shows the summary of the performance of the Kenyan Eurobonds as of 22nd February 2024;
Cytonn Report: Kenya Eurobonds Performance | ||||||
| 2018 | 2019 | 2021 | 2024 | ||
Tenor | 10-year issue | 30-year issue | 7-year issue | 12-year issue | 12-year issue | 6-year issue |
Amount Issued (USD) | 1.0 bn | 1.0 bn | 0.9 bn | 1.2 bn | 1.0 bn | 1.5 bn |
Years to Maturity | 4.1 | 24.1 | 3.3 | 8.3 | 10.4 | 6.0 |
Yields at Issue | 7.3% | 8.3% | 7.0% | 7.9% | 6.2% | 10.4% |
01-Jan-24 | 9.8% | 10.2% | 10.1% | 9.9% | 9.5% | - |
01-Feb-24 | 10.6% | 10.6% | 11.3% | 10.5% | 10.1% | - |
15-Feb-24 | 9.5% | 10.4% | 9.3% | 10.1% | 9.8% | 10.0% |
16-Feb-24 | 9.4% | 10.4% | 9.2% | 10.0% | 9.8% | 9.9% |
19-Feb-24 | 9.4% | 10.4% | 9.2% | 10.0% | 9.8% | 9.9% |
20-Feb-24 | 9.5% | 10.4% | 9.1% | 10.0% | 9.8% | 9.9% |
21-Feb-24 | 9.5% | 10.4% | 9.2% | 10.0% | 9.8% | 9.9% |
22-Feb-24 | 9.4% | 10.3% | 9.1% | 9.9% | 9.8% | 9.8% |
Weekly Change | (0.1%) | (0.1%) | (0.2%) | (0.1%) | (0.0%) | (0.2%) |
MTD Change | (1.2%) | (0.3%) | (2.2%) | (0.6%) | (0.3%) | 9.8% |
YTD Change | (0.4%) | 0.2% | (1.0%) | 0.0% | 0.2% | 9.8% |
Source: Central Bank of Kenya (CBK) and National Treasury
Kenya Shilling:
During the week, the Kenya Shilling appreciated against the US Dollar by 1.2%, to close the week at Kshs 144.1, from Kshs 145.9 recorded the previous week. On a year-to-date basis, the shilling has appreciated by 8.2% against the dollar, a contrast to the 26.8% depreciation recorded in 2023.
We expect the shilling to be supported by:
The shilling is however expected to remain under pressure in 2024 as a result of:
Key to note, Kenya’s forex reserves increased by 2.7% during the week to USD 7.2 bn from the USD 7.0 bn recorded the previous week, equivalent to 3.9 months of import cover, an increase from the 3.8 months of import cover recorded the previous week, and remained below the statutory requirement of maintaining at least 4.0 months of import cover. The chart below summarizes the evolution of Kenya's months of import cover over the years:
Weekly Highlights
We are projecting the y/y inflation rate for February 2024 to come in at the range of 6.6%-6.8% mainly on the back of:
Going forward, we expect inflationary pressures to ease in the short term, while remaining in the CBK’s target range of 2.5% to 7.5% aided by the easing in fuel prices and a further strengthening of the Kenya shilling against the US Dollar. Additionally, the upward revision of the CBR to 13.00% in the latest MPC meeting, from 12.50%, is meant to continue reducing money supply, in turn easing inflation in the short to medium term. We also expect the measures taken by the government to subsidize major inputs of agricultural production such as fertilizers to lower the cost of farm inputs and support the easing of inflation in the long term.
Yields on the Government securities have been on an upward trajectory with the 91-day paper now yielding 16.6% from 9.4% in January 2023. Going forward, we anticipate a very modest increase in yields on the government papers before they stabilize in the remaining months of FY’2023/24. The increase will be muted going forward due to the positive investor sentiment brought about by the successful offering of the Eurobond, which helped alleviate the fears of possible default by the government. There also has been adequate liquidity in the financial markets as can be seen from the high subscriptions in the last infrastructure bond.
Most recently the government successfully issued a Eurobond buyback, which was used to repay 72.0% of the 10-year issue which was maturing in June 2024, thereby reducing the credit risk associated with the country by international investors. With the above positivity, yields on all Kenyan Eurobonds eased over the past week, with the June 2024 maturity ending the week at 9.4%, down from 10.3% recorded the previous week, while the new issue maturing in 2031 closed this week at 9.8% from 10.0% recorded the previous week.
The Yield curve has shifted upwards from the beginning of last year with the short term experiencing the largest increase. The chart below shows the changes in the yield curve over the period:
The chart below shows a trend analysis of the 91-day T-Bill yield curve:
Going forward some of the key things that will affect the performance of the interest rates will include:
Our view: Owing to the above, we anticipate yields of government papers in the domestic market to increase modestly before stabilizing.
Going forward, we expect the government to start issuing medium-term to long-term dated papers to reduce the proportion of Treasury bills in domestic debt, which will help spread the government debt over a long period as opposed to short maturities. Additionally, the 2024 Medium-Term Debt Management Strategy (MDTS) proposes to adjust the ratio of domestic borrowing to external borrowing to 45:55 in FY’2024/25, from the current 50:50, by cutting down net domestic borrowing to Kshs 377.7 bn in FY’2024/25 from the current Kshs 471.4 bn. A reduction in domestic borrowing, coupled with the easing of CBR in the medium term, will result in a decline in yields on government securities.
Rates in the Fixed Income market have been on an upward trend given the continued high demand for cash by the government and the occasional liquidity tightness in the money market. The government is 5.0% ahead of its prorated net domestic borrowing target of Kshs 310.8 bn, having a net borrowing position of Kshs 326.3 bn out of the domestic net borrowing target of Kshs 471.4 bn for the FY’2023/2024. Therefore, we expect a continued upward readjustment of the yield curve in the short and medium term, with the government looking to maintain the fiscal surplus through the domestic market. Owing to this, our view is that investors should be biased towards short-term fixed-income securities to reduce duration risk.
Market Performance:
During the week, the equities market was on an upward trajectory, with NSE 10 gaining the most by 3.4%, while NSE 25, NASI, and NSE 20 gained by 3.1%, 1.9%, and 1.0% respectively, taking the YTD performance to gains of 0.9%, 1.8%, 3.7% and 3.8% for NASI, NSE20, NSE 25 and NSE 10 respectively. The equities market performance was driven by gains recorded by large cap stocks such as Equity Group, Co-operative Bank, and NCBA of 8.0%, 6.6%, and 3.6% respectively. The gains were, however, weighed down by losses recorded by large-cap stocks such as EABL, BAT, and DTBK of 3.4%, 1.0%, and 0.1% respectively.
During the week, equities turnover increased by 32.4% to USD 8.7 mn from USD 6.5 mn recorded the previous week, taking the YTD total turnover to USD 39.7 mn. Foreign investors remained net sellers for the seventh consecutive week with a net selling position of USD 1.5 mn, from a net selling position of USD 1.7 mn recorded the previous week, taking the YTD foreign net selling position to USD 4.7 mn.
The market is currently trading at a price-to-earnings ratio (P/E) of 4.9x, 58.9% below the historical average of 12.0x. The dividend yield stands at 9.6%, 5.1% points above the historical average of 4.5%. Key to note, NASI’s PEG ratio currently stands at 0.6x, an indication that the market is undervalued relative to its future growth. A PEG ratio greater than 1.0x indicates the market is overvalued while a PEG ratio less than 1.0x indicates that the market is undervalued. The charts below indicate the historical P/E and dividend yields of the market;
Universe of Coverage:
Cytonn Report: Universe of Coverage | ||||||||||
Company | Price as at 16/02/2024 | Price as at 23/02/2024 | w/w change | YTD Change | Year Open 2024 | Target Price* | Dividend Yield | Upside/ Downside** | P/TBv Multiple | Recommendation |
KCB Group*** | 19.9 | 20.5 | 3.3% | (6.6%) | 22.0 | 31.2 | 9.8% | 62.0% | 0.4x | Buy |
Jubilee Holdings | 180.0 | 180.0 | 0.0% | (2.7%) | 185.0 | 260.7 | 6.7% | 51.5% | 0.3x | Buy |
Sanlam | 6.8 | 7.0 | 2.7% | 16.0% | 6.0 | 10.3 | 0.0% | 47.8% | 2.0x | Buy |
NCBA*** | 36.3 | 37.6 | 3.6% | (3.2%) | 38.9 | 48.3 | 11.3% | 39.8% | 0.8x | Buy |
Diamond Trust Bank*** | 45.6 | 45.5 | (0.1%) | 1.7% | 44.8 | 58.5 | 11.0% | 39.6% | 0.2x | Buy |
Kenya Reinsurance | 1.9 | 2.0 | 5.9% | 5.9% | 1.9 | 2.5 | 10.2% | 38.3% | 0.2x | Buy |
ABSA Bank*** | 12.1 | 12.3 | 1.2% | 6.1% | 11.6 | 14.6 | 11.0% | 30.2% | 1.0x | Buy |
I&M Group*** | 17.4 | 18.9 | 8.6% | 8.0% | 17.5 | 22.1 | 11.9% | 29.2% | 0.4x | Buy |
CIC Group | 2.0 | 2.1 | 3.5% | (9.6%) | 2.3 | 2.5 | 6.3% | 27.1% | 0.7x | Buy |
Stanbic Holdings | 114.0 | 114.8 | 0.7% | 8.3% | 106.0 | 132.8 | 11.0% | 26.7% | 0.8x | Buy |
Standard Chartered*** | 163.5 | 164.0 | 0.3% | 2.3% | 160.3 | 185.5 | 13.4% | 26.5% | 1.1x | Buy |
Britam | 5.0 | 4.7 | (5.2%) | (8.0%) | 5.1 | 6.0 | 0.0% | 26.2% | 0.6x | Buy |
Co-op Bank*** | 12.1 | 12.9 | 6.6% | 13.7% | 11.4 | 13.8 | 11.6% | 18.6% | 0.6x | Accumulate |
Equity Group*** | 38.0 | 41.0 | 8.0% | 19.9% | 34.2 | 42.8 | 9.8% | 14.1% | 0.9x | Accumulate |
Liberty Holdings | 5.5 | 5.5 | 0.0% | 42.5% | 3.9 | 5.9 | 0.0% | 7.6% | 0.4x | Hold |
HF Group | 3.9 | 4.1 | 7.0% | 20.0% | 3.5 | 3.9 | 0.0% | (5.8%) | 0.2x | Sell |
We are “Neutral” on the Equities markets in the short term due to the current tough operating environment and huge foreign investor outflows, and, “Bullish” in the long term due to current cheap valuations and expected global and local economic recovery. With the market currently being undervalued to its future growth (PEG Ratio at 0.6x), we believe that investors should reposition towards value stocks with strong earnings growth and that are trading at discounts to their intrinsic value. We expect the current high foreign investor sell-offs to continue weighing down the equities outlook in the short term.
During the week, Shelter Afrique, a pan-African finance institution that exclusively supports the development of the housing and real estate sector in Africa, signed a partnership with the government aimed at facilitating the sale of apartments and maisonettes totaling Kshs 1.6 bn to senior civil servants. This partnership is poised to aid Shelter Afrique in offloading units that have remained unsold for extended periods, in some cases spanning years. Among the properties earmarked for sale are units situated in various locations including Athi River's Everest Park, Nakuru Meadows, Kisumu's Translake Estate, Serene Valley in Rironi, KMA Mtwapa, and Pine City in Machakos.
Priced between Kshs 2.7 mn and Kshs 19.0 mn, these residences are being made available to Members of Parliament, judicial officers, employees of State corporations, and constitutional commissions. Eligible individuals can opt for government-backed financing to facilitate their purchases, leveraging their respective housing mortgage schemes or independent public mortgage schemes, where applicable.
Charles Hinga, Principal Secretary of the State Department for Housing and Urban Development, emphasized the government's commitment to facilitating additional financing for affordable housing purchases through entities like the Kenya Mortgage Refinance Company (KMRC) and partner banks and SACCOs. KMRC's mandate to provide long-term fixed-rate funding at single-digit interest rates is anticipated to enhance the accessibility and affordability of mortgage loans, thereby bolstering the housing market and addressing challenges associated with poor sales attributed to economic constraints such as high interest rates and stiff competition from other developers.
We expect the deal with Shelter Afrique to significantly boost the residential real estate sector in Kenya. By facilitating the sale of apartments and maisonettes to senior civil servants, this partnership addresses the challenge of unsold units, thereby injecting liquidity into the market. The availability of government-backed financing options for eligible individuals further enhances affordability and accessibility to housing, aligning with the government's commitment to promoting affordable housing initiatives. Overall, this collaboration is expected to stimulate demand, alleviate housing shortages, and contribute to the overall growth and stability of the residential real estate market in Kenya.
In the Unquoted Securities Platform, Acorn D-REIT and I-REIT traded at Kshs 24.4 and Kshs 21.7 per unit, respectively, as of 23rd February 2024. The performance represented a 22.0% and 8.3% gain for the D-REIT and I-REIT, respectively, from the Kshs 20.0 inception price. The volumes traded for the D-REIT and I-REIT came in at 12.3 mn and 30.7 mn shares, respectively, with a turnover of Kshs 257.5 mn and Kshs 633.8 mn, respectively, since inception in February 2021.
REITs provide various benefits like tax exemptions, diversified portfolios, and stable long-term profits. However, the continuous deterioration in performance of the Kenyan REITs and restructuring of their business portfolio is hampering major investments that had previously been made. The other general challenges include; i) inadequate comprehension of the investment instrument among investors, ii) prolonged approval processes for REITs creation, iii) high minimum capital requirements of Kshs 100.0 mn for trustees, and, iv) minimum investment amounts set at Kshs 5.0 mn, continue to limit the performance of the Kenyan REITs market.
Cytonn High Yield Fund (CHYF) closed the week with an annualized yield of 19.3%, remaining relatively unchanged from the yield recorded in the previous week. On a Year-to-Date (YTD) basis, the performance represents a 1.3% increase from the 18.0% yield recorded on 1st January 2024 and a 3.6% Inception-to-Date (ITD) increase from the 15.7% yield. The graph below shows Cytonn High Yield Fund’s performance from November 2019 to 23rd February 2024;
Notably, the CHYF has outperformed Acorn I-REIT a regulated Real Estate fund with an annual yield of 19.3%, as compared to Acorn I-REIT with a yield of 2.8% respectively. As such, the higher yields offered by CHYF makes the fund one of the best alternative investment resource in the Real Estate sector. The graph below shows the yield performance of two Regulated Real Estate Funds;
*H1’2023
Source: Cytonn Research
We expect that Kenya’s Real Estate sector will receive backing from the following factors: i) a rise in initiatives and the development of affordable housing projects, which are projected to invigorate the residential sector, ii) favourable demographics in the country, driving the demand for housing and Real Estate, and, iii) ongoing infrastructural enhancements that will unlock fresh investment opportunities in new areas. Nonetheless, challenges such as escalating construction costs, insufficient investor familiarity with REITs, and prevailing oversupply in specific Real Estate segments will persist, constraining the sector's performance by curbing development and investment opportunities.
Housing is guaranteed as an Economic and Social right by the Constitution of Kenya 2010, as outlined in section 43(1)(b), “every individual has the right to accessible and adequate housing, as well as to reasonable standards of sanitation”. This provision underscores the entitlement of every individual to accessible and adequate housing. Therefore, the government has a responsibility to provide adequate housing to its citizens and is obligated to implement policies and initiatives aimed at addressing housing needs as well as the living standards across the country.
To address the housing shortage, both the Jubilee and Kenya Kwanza governments initiated their housing agendas through The Big Four and the Bottom-Up Economic Transformation Agenda (BETA) plans respectively. Under The Big Four, which was launched in 2017, the Jubilee government aimed at delivering 1,000,000 units by 2022. Jubilee government aimed to tackle housing needs by addressing both the supply and demand sides. On the supply side, the government aimed to raise 60.0% of funding from the private sector, facilitate off-plan sales by regulating escrow accounts, create incentives for private landowners to encourage development, facilitate Public-Private Partnerships (PPPs) to encourage private sector participation, and streamline permits and approvals for developers. On the demand side, the government planned to establish a Tenant Purchase Scheme (TPS) for social housing, reduce the cost of mortgages and increase the repayment period to 25 years, remove stamp duty for first-time homebuyers, establish multi-generational mortgages, establish a mortgage refinance company, provide a credit line for financial mortgages, and, streamline background checks with banks to expand the bankability of customers.
Through the aforementioned initiatives, the Jubilee Government achieved the following milestones; i) establishment of the Kenya Mortgage Refinance Company (KMRC), a non-deposit-taking financial institution mandated to provide long-term loans to Primary Mortgage Lenders, ii) removal of stamp duty for first-time homebuyers purchasing homes under the Affordable Housing Program (AHP), iii) developed 13,529 affordable units, iv) implementation of the Tenant Purchase Scheme (TPS) under the National Housing Corporation, and, iv) elimination of VAT tax for affordable housing programs among others.
Housing remains a key pillar under the Kenya Kwanza regime, as per the Bottom Up Economic Transformation Agenda BETA. The government aims to deliver 250,000 housing units annually. Consequently, the government wants to achieve this ambitious target through; i) structuring affordable long-term housing finance scheme, including a National Housing Fund and Cooperative Social Housing Schemes, that will guarantee the offtake of houses from developers, ii) growing the number of mortgages from 30,000 to 1,000,000 by enabling low-cost mortgages of Kshs 10,000 and below, and, iii) giving developers incentives to build more affordable housing. With the aforementioned, the government has embarked on implementing its housing agenda laying foundation for various Affordable Housing Projects across the country. Furthermore, the regime has intensified its efforts to pool more funds for Affordable Housing, as evidenced by the proposed Affordable Housing Bill 2023.
World Bank data shows that Kenya’s population and urbanization growth rates at 1.9% and 3.7% respectively, above global averages of 0.8% and 1.5%, as of 2022. With a rapidly growing population and an increasing middle class, demand for housing is set to increase. Simultaneously, Kenya’s housing deficit is expected to persist. To bridge this gap, the current regime, against a backdrop of an estimated 50,000 units being delivered currently on annual basis, aims at facilitating the delivery of an additional 200,000 houses per year to meet the set target of 250,000 units. If achieved, this would result in an increase in affordable housing supply from the current 2.0% to 50.0% by 2027.
Considering the aforementioned points, housing is a dire need in the country. It is also evident that housing has been a major priority in the country. Moreover, numerous approaches have been undertaken by various agencies, along with the introduction of several housing initiatives to address the housing needs in the country. Given this context, it becomes imperative to analyse the diverse agencies and initiatives geared towards addressing the pressing need in Kenya. In our topical this week, we focus on examining various agencies and initiatives in the affordable housing scheme by covering the following;
Section I: Key Affordable Housing Agencies and Initiatives
In this section we shall delve into the various agencies and initiatives involved in implementation of the government’s affordable housing agenda and cover the following areas; formation and history, mandates, achievements, and challenges;
National Housing Corporation (NHC) is a statutory body that was established by an Act of Parliament, with its mandate contained under the Housing Act Cap 117 laws of Kenya. NHC was previously referred to as the Central Housing Board (CHB) which began its operations in June 1953. The primary function of the CHB included; promoting low-cost housing, stimulating the building industry, encouraging and assisting in housing research, and, availing loans to local governments. In 1964, the United Nations recommended to Kenya the establishment of a separate corporation that would operate with greater independence from the Ministry of Housing and be capable of providing support to a broader range of initiatives beyond local authorities, including initiating its own projects. By 1965, the Board was empowered to directly initiate construction projects in the event local authorities were unable or unwilling to undertake such projects. In the same year, through an amendment to the Housing Ordinance of 1953, the National Housing Corporation (NHC) was established, replacing the Central Housing Board.
National Housing Corporation (NHC) mandate is stipulated by Housing Act Cap 117. The mandates of the Corporation are well outlined in sections 8,9,10,11, and 12 of the Housing Act.
Section 8 provides for loans and grants by the Corporation and repayments of loans. Under this section; the Corporation may from the Housing Fund and from time to time as provide by the act;
Section 9 of the Housing Act accords the Corporation power to guarantee loans for the purpose of purchasing or constructing approved dwellings or carrying out approved schemes.
Section 10 provides for “Others powers of the Corporation” which include;
Section 11 provides for the charge of loan on rates and revenues of local authorities.
Section 12 provides powers of the Corporation in the event local authority is in default.
NHC has managed to develop a number of affordable housing projects across the country. According to the Draft NHC Strategic Plan 2023-2027, the Corporation completed the development of 550 housing units during the period between 2023 – 2027, out of a target of 185,000 housing units. This was in addition to 465 housing units the Corporation had developed in the 2019-2023 plan period. During the same period, a total of 5,365 units were also sold. Currently, the development of a further 734 units is underway and at different levels of completion. During the current plan period, the Corporation also took over the management of 1,370 units under the Affordable Housing Project at Parkroad. To finance the strategy, the Corporation mobilized Kshs 7.1 bn through internal funding, borrowing and government funding. NHC also received approval from the National Treasury to borrow Kshs 3.8 bn to support housing.
Additionally, NHC implemented various resource mobilization initiatives geared at raising funds towards implementation of the strategic plan during the 2019-2023 period including signing a Financial Advisory Services Agreement (FASA) with IFC in an effort to source for developers for the construction of 3,500 affordable houses at the Stoni Athi Waterfront City at an estimated cost of Kshs 7.0 bn.
The Kenya Mortgage Refinance Company (KMRC) is a financial institution, backed by the treasury, that does not accept deposits. It was established in 2018 under the Companies Act 2015 and received its license from the Central Bank of Kenya (CBK) to start its main operations in September 2020. KMRC holds the exclusive license for conducting Mortgage Liquidity Facility (MLF) activities in Kenya. Typical of all MLFs, the KMRC acts as an intermediary between Primary Mortgage Lenders (PMLs) and thus does not lend directly to individual borrowers. These activities involve supplying long-term funds to PMLs, including banks, microfinance institutions, and SACCOs at 5.0% with a repayment period of up to 25 years. As a result, this has boosted the funds available for subsequent lending to borrowers at single-digit rates. Correspondingly, KMRC has increased the supply of housing finance in Kenya’s housing market by refinancing mortgage loans of its member PMLs.
KMRC’s mandate is to provide long-term funds to Primary Mortgage Lenders (PMLs) for purposes of increasing availability of affordable home loans to Kenyans. KMRC provides concessional, fixed, long term finance to the Primary Mortgage Lenders who include Banks and SACCOs so that they can transfer the same benefits to ‘wananchi’, making home loans more accessible to especially the moderate to low-income earners in the country.
Here are the key achievements by KMRC;
Albeit, the aforementioned success, KMRC has faced numerous challenges which include;
We shall primarily focus on Real Estate Investment Trusts (REITs) in the affordable housing sector. In 2013, both Kenya and South Africa joined the growing number of African countries embracing Real Estate Investment Trusts (REITs) as a viable investment mechanism, following the examples set by Ghana and Nigeria. Currently, in Kenya, there are only four authorized REITs: i) ILAM Fahari I-REIT, ii) Acorn Student Accommodation I-REIT, iii) Acorn Student Accommodation D-REIT, and, iv) LAPTrust Imara I-REIT. A REIT, is a regulated investment entity, that facilitates pooled investments to offer third-party financing opportunities for the real estate sector. In Kenya, REITs operate under the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations of 2013. Unlike companies, REITs are structured as trusts. They can be classified as either listed or unlisted. Listed REITs have their units traded on the Nairobi Securities Exchange (NSE), providing investors with a liquid real estate investment akin to ordinary company shares. In Kenya, there are three main types of REITs including Income REITs (I-REITs), Development REITs (D-REITs) and Islamic REITs. Typically, in I-REITs, investors gain through capital appreciation and rental income. For D-REITs, investors gain from sale profits once an asset is sold in a commercial arm’s length transaction. An Islamic REIT is a unique type of REIT that invests primarily in income-producing Shari’ah-compliant Real Estate developments. For more information, please see our recent topical Real Estate Investments Trusts (REITs) Progress Update in Kenya.
In this section, we will categorize the role of REITs, analyzing their role in catalyzing both the demand and supply aspects of housing;
Kenya adopted REIT regulations in 2013, in the same year as South Africa, however the country lags behind South Africa, which boasts 33 listed REITs. In Kenya there are only four authorized REITs: i) ILAM Fahari I-REIT, ii) Acorn Student Accommodation I-REIT, iii) Acorn Student Accommodation D-REIT, and, iv) LAPTrust Imara I-REIT. Until its delisting on February 12th 2024, ILAM Fahari I-REIT stood as the sole actively traded REIT on the NSE (Nairobi Securities Exchange). This section shall highlight some of the recent achievements and activities in the REITs segment which includes;
The Affordable Housing Bill 2023 is among the initiatives introduced by Kenya Kwanza government aimed at establishing a fund dedicated to facilitating the provision of affordable housing within the country. On December 7th 2023, the National Assembly Majority Leader Kimani Ichung’wa introduced the Affordable Housing Bill in Parliament as a response to a ruling by the High Court. The bill aims at addressing the grey areas initially proposed in the Finance Bill 2023 under Section 84. In November 2023, the High Court declared the levy unconstitutional and discriminatory, citing its lack of a comprehensive legal framework and its violation of articles 10 and 201 of the Kenyan Constitution regarding principles of public finance on equity. Moreover, the court noted that the levy unfairly targeted only formal sector employees, excluding those in the informal sector.
In an urgent effort to address these concerns, the government, led by the Majority Leader, aims to regularize the levy through the Affordable Housing Bill 2023. Additionally, the bill aims to clarify fiscal ambiguities highlighted by the court. The bill proposes a mandatory deduction of 1.5% from an employee’s gross monthly salary, with employers required to match this contribution with another 1.5% on behalf of each employee from their monthly payroll. We note that the Bill has passed the First Reading and was referred to Senate for further consideration. The Second Reading has been set for 23rd March 2024.
The mandates of the Affordable Housing Bill 2023 are well spelt out in Section 3(i) which includes; i) give effect to Article 43(1)(b) of the constitution on right to accessible and adequate housing, ii) impose a levy to facilitate the provision of affordable housing, and, iii) provide a legal framework for the implementation of affordable housing programs and projects.
Furthermore, the bill goes ahead to provide for the establishment of the Affordable Housing Fund aimed at providing financial support to housing initiatives. Section 11 of the bill highlights the allocation plan, specifying designated percentages of collected monies through the Housing Levy for various purposes to specified agencies, including; i) 30.0% to the National Housing Corporation, ii) 25.0% to slum upgrading, iii) 36.0% to institutional housing programs, iv) up to 2.0% to the levy collector, and, v) up to 2.0% to the Board for administrative tasks. For a more detailed analysis of the Bill please see our topical on the Review of the Affordable Housing Bill 2023.
The proposed Bill has sparked several concerns including:
The State Department is under the Ministry of Lands, Public Works, Housing and Urban Development. The Department has five Divisions namely: Housing Policy Management and Implementation, Human Settlements, Housing Finance and Incentives, Appropriate Building Materials and Technology (ABMT), and Housing Sector Monitoring and Evaluation. Each department has its designed responsibilities.
The State Department is responsible for providing policy direction and coordination of all matters related to housing and urban planning and development. Its functions include; i) Housing Policy Management, ii) Development and Management of Affordable Housing, ii) Management of Building and Construction Standards and Codes, iii) National Secretariat for Human Settlement, iv) Management of Civil Servants Housing Scheme, v) Development and Management of Government Housing, vi) Shelter and Slum Upgrading, vii) Building Research Services, viii) Registration of Contractors and Materials Suppliers Building Research Services, ix) Registration of Civil, Building and Electro-Mechanical Contractors, x) Registration of Architects and Quantity Surveyors, and xi) Urban Planning and Development.
The state department is one of the key promoters of the Affordable Housing Program by facilitating the Boma Yangu initiative. However, there is need of a robust oversight structure for policies management and housing program development. This will ensure that projects are implemented in the set time frame and policies are followed.
The Kenya Revenue Authority was established by an Act of Parliament, Chapter 469 of the laws of Kenya, which became effective on 1st July 1995. KRA is charged with collecting revenue on behalf of the government of Kenya.
The core functions of the Authority are:
We consider the Kenya Revenue Authority to play a crucial role in advancing the housing agenda due to its involvement in numerous housing initiatives. These include;
Section II: Existing Housing Agency Gaps in Kenya
In this segment, we will analyze the existing gaps within the Affordable Housing Agencies in the country;
The National Housing Corporation's (NHC) mandate covers approximately 15 diverse areas, including property development, management, research, and financing. However, the core mandate remains ambiguous. Although the mandate appears to emphasize lending upon initial review, the actual focus appears to be predominantly on construction activities. This discrepancy highlights a notable gap in clarifying NHC's primary mission and priorities. In addition, there is existence of overlapping research mandates between the National Housing Corporation (NHC) and the State Department of Housing and Urban Development which indicates a potential inefficiency and duplication of efforts within the government's housing sector. This overlap suggests a need for better coordination and collaboration between the NHC and the State Department of Housing and Urban Development to streamline research efforts thus avoiding duplication.
In addition, Audit findings on the National Housing Corporation (NHC), as reported by the Office of the Auditor General, highlighted a concerning gap. The audit revealed a lack of a comprehensive inventory list of houses signed by the Accounting Officers of both transferring and receiving entities. The failure to maintain such a detailed inventory list indicates a significant lapse in accountability within the NHC. Moreover, the National Housing Corporation (NHC) has faced considerable negative publicity due to incidents involving senior executives such as the managing director, finance director, and company secretary. These cases point to a history of mismanagement within the organization. Consequently, the reputation of the NHC has been significantly tarnished, leading to widespread concerns regarding its governance and ethical standards .Additionally, there seems to be a degree of overlap in the lending functions between NHC and KMRC.
Only in February 2024 did KMRC revise its loan size limit, raising it to Kshs 10.5 mn nationwide. This delay in adjusting loan size limits had notable consequences. The previously low qualifying amounts meant that a considerable number of loans did not meet KMRC's criteria for refinancing. As a result, many potential borrowers were excluded from accessing KMRC-backed mortgages, leading to lower absorption rates for these products.
Based on the challenges outlined above regarding Real Estate Investment Trusts (REITs), several gaps become apparent:
From the above discussions its evident that there are existing gaps in the Affordable Housing Bill 2023 which include;
The State Department of Housing and Urban Development faces a need for a robust mechanism to evaluate its policy management processes. Additionally, there is need to re-evaluate its mandate in order avoid overlap with other Affordable Housing Agencies such as National Housing Corporation.
Kenya Revenue Authority (KRA) offers incentives to developers and grant tax exemptions on primary construction materials for approved projects under the Affordable Housing Program (AHP) only. There is thus need for KRA to assess ways to offer additional incentives within the larger housing sector, including considerations such as tax exemptions on all primary construction materials and incentives aimed at fostering sustainable housing practice beyond just the AHP. Additionally, even the existing incentives are difficult to access.
The State Department of Housing appears to be encroaching on the mandate of NHC, instead of focusing on policy, its engaging in development, the very mandate that also falls under NHC.
Finally, the most significant gap lies in the absence of support or funding for developers on the supply side. We propose the establishment of an agency dedicated solely to facilitating developers and the supply side, mirroring KMRC's exclusive focus on enabling the demand side
Section III: Recommendations to Key Government Initiatives and Agencies
Summary of Analysis
The table below presents a summary of the above detailed analysis on the various affordable housing agencies and initiatives;
Cytonn Report: Affordable Housing Agencies and Initiatives | |||||
Agency/Initiative | Formation and History | Mandate/responsibilities | Achievements | Challenges | Recommendations |
National Housing Corporation (NHC) | Was established by an Act of Parliament, with its mandate contained under the Housing Act Cap 117 laws of Kenya |
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Kenya Mortgage Refinance Company (KMRC) | It was established in 2018 under the Companies Act 2015 and received its license from the Central Bank of Kenya (CBK) to start its main operations in September 2020. KMRC holds the exclusive license for conducting Mortgage Liquidity Facility (MLF) activities in Kenya |
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Capital Markets Authority/ (REITs) | In 2013, both Kenya and South Africa joined the growing number of African countries embracing Real Estate Investment Trusts (REITs) as a viable investment mechanism . In Kenya, REITs operate under the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations of 2013 |
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Affordable Housing Bill 2023 | The Affordable Housing Bill 2023 is among the initiatives introduced by Kenya Kwanza government aimed at establishing a fund dedicated to facilitating the provision of affordable housing within the country. |
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Kenya Revenue Authority (KRA) | The Kenya Revenue Authority was established by an Act of Parliament, Chapter 469 of the laws of Kenya, which became effective on 1st July 1995. KRA is charged with collecting revenue on behalf of the government of Kenya |
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State Department of Housing | The State Department is under the Ministry of Lands, Public Works, Housing and Urban Development |
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Section IV: Conclusion
In conclusion, the aforementioned recommendations hold significant potential in enhancing the housing band thus increasing the effectiveness of affordable housing agencies and initiatives nationwide. It's crucial to acknowledge, however, that these recommendations complement rather than overshadow the ongoing governmental efforts to tackle the housing shortage. Despite progress, there remains a substantial gap within the housing sector that demands joint efforts from all stakeholders. Learning from successful housing delivery models in other nations is important. Moreover, a thorough re-evaluation of housing agencies is necessary to streamline mandates and minimize fragmentation of responsibilities. These measures are vital steps toward realizing the nation's housing agenda.
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.