Feb 26, 2023
The performance of Kenya’s Real Estate sector has been on a positive trajectory, with the sector’s contribution to the country’s GDP recording a 5-year Compounded Annual Growth Rate (CAGR) of 6.0% to Kshs 749.7 mn in Q3’2022 from Kshs 560.8 mn in Q3’2017. Additionally, the sector contributed 10.5% to the total GDP in Q3’2022, coming in as the second largest contributor to Kenya’s GDP, only behind the Agricultural sector that contributed 14.8%. This impressive performance of the Kenyan Real Estate sector in Q3’2022, surpassing perennial major contributors to GDP such as transport at 10.3%, both financial and insurance and product taxes at 8.9% each, while both manufacturing and trade contributed 8.5% each, points to the increased significance of Real Estate to the economy and paints a positive outlook. However, the lack of proper regulation and oversight over developers and other stakeholders poses significant challenges that could claw back the gains. One pertinent issue is that despite the existence of laws regulating players in the Real Estate sector, there are currently no specific regulations governing Real Estate developers. Without a developer regulatory framework in place, the sector is vulnerable to various risks and uncertainties, including non-compliance, lack of coordination during market turbulence, mismanagement of funds and unethical practices. Therefore, there is urgent need for Kenya to establish a regulatory platform, anchored in law, that addresses the unique needs of Real Estate developers, financiers, and other stakeholders in the sector.
We have previously covered a topical on the Kenya Real Estate Developers Regulatory Board (REDRB), after a committee appointed by the then Principal Secretary of the State Department for Housing and Urban Development recommended the establishment of a developers regulatory Board by October 2020, through an executive order that was subject to the Cabinet's approval. However, that plan was not implemented. Therefore, to address the regulatory gap, this week we will analyze the performance of the Real Estate sector over the years, identifying key challenges faced by developers, financiers and stakeholders during Real Estate development, and highlighting the existing legal frameworks that are regulating the Real Estate sector in Kenya. Additionally, we will provide recommendations on a regulatory framework for developers in the sector by drawing insights from different countries that have successfully developed concrete legal bases for regulating developers and other stakeholders in Real Estate developments. This we shall cover through the following;
Section I: Overview of Kenya’s Real Estate Sector
Over the past few years, the Kenyan Real Estate sector has been expanding its activities, with its contribution to the country's GDP growing at a positive Compounded Annual Growth Rate (CAGR) of 6.0% to Kshs 749.7 mn in Q3’2022 from Kshs 560.8 mn in Q3’2017. This growth can be attributed to various factors such as; i) rapid population and urbanization rates leading to demand for Real Estate developments, ii) focus by the government and private sector on providing affordable housing, iii) increased mergers and acquisitions in the hospitality sector, iv) provision of long-term, low-interest home loans to potential buyers by the Kenya Mortgage Refinance Company (KMRC), v) increased popularity in Mixed Use Developments (MUDs) over the period due to their convenience, providing a comprehensive living experience for residents while also attracting more investors through combination of residential, commercial, and retail spaces, vi) rapid expansion drive by both local and international retailers boosting the retail sector, vii) efforts by public and private stakeholders in improving infrastructure across the country hence opening up new locations for property developments, and, viii) reopening and expansion of the hospitality sector and improved investor confidence in the sector on the back of economic recovery in the post-COVID-19 and post-election periods.
Additionally, the sector contributed 10.5% to the total GDP in Q3’2022, coming in as the second largest contributor to Kenya’s GDP, only behind the Agricultural sector that contributed 14.8%. This impressive performance of the Kenyan Real Estate sector in Q3’2022, surpassing perennial major contributors to GDP such as transport at 10.3%, both financial and insurance and product taxes at 8.9% each, while both manufacturing and trade contributed 8.5% each, points the increased significance of Real Estate to the economy and paints a positive outlook. This also presents lucrative opportunities for investors and developers to take advantage of the increasing demand for housing and other properties. The graph below shows the trend of Real Estate contribution to GDP between Q3’2017 and Q3’2022;
Source: Kenya National Bureau of Statistics (KNBS)
The graph below shows the top sectoral contributors to GDP during Q3’2022, with Real Estate being the #2 contributor;
Source: Kenya National Bureau of Statistics (KNBS)
However, the sector’s GDP growth rate over the past 5 years has been lower than the growth rate in the pre-2017 period owing to several factors such as; i) the 2017 general elections and a further repeat election, ii) political instability occasioned in 2018, iii) entry and prevalence of COVID-19 pandemic in the country in 2020, and, iii) the Russian-Ukraine war that broke out in 2022, causing elevated inflationary pressures and supply chain disruptions, consequently increasing the cost of main construction materials both locally manufactured and those imported from abroad. Nevertheless, in 2021, the sector experienced a significant rebound in activities following the gradual reopening of the economy majorly occasioned by the lifting of health-related restrictions, lockdowns, and bans that were put in place due to the prevalence of COVID-19 pandemic. The full operationalization of many businesses and investments in the sector showcased gradual restoration of activity as the country continued to take steps towards a full economic recovery. Other factors that continue to weigh down on the optimal performance of the sector include; i) an oversupply of 6.7 mn SQFT in the Nairobi Metropolitan Area (NMA) commercial office market, 3.0 mn SQFT in the NMA retail market, and 1.7 mn SQFT oversupply in the overall Kenyan retail market as at 2022, and, ii) difficulty in the access of funding due to expensive financing from banks and subdued alternative sources of financing such as the capital markets. The graph below shows the Real Estate Sector Growth Rate between 2016 and Q3’2022;
Source: Kenya National Bureau of Statistics (KNBS)
In addition to the aforementioned factors affecting the Kenyan Real Estate sector, there are specific challenges narrowed down to Real Estate developers in the country. These challenges faced by developers and other stakeholders during Real Estate developments have illustrated the need for a regulatory body to address the impediments and oversee the activities of developers in the way of streamlining the Real Estate sector in Kenya. These challenges include;
Source: World Bank, Capital Markets Authority
Source: Centre for Affordable Housing Africa
Section II: Real Estate Development Regulatory Framework in Kenya
Real Estate development is a highly specialized process which entails division of labour and thus, encompasses multiple professionals. Therefore, it is crucial to establish a comprehensive regulatory framework that helps to regulate the activities of professionals involved as well as ensure that they comply with the laws and regulations governing their profession, thus providing high-quality services. Moreover, Real Estate development is subject to land use regulations which are dictated by zoning regulations, environmental considerations, or community planning efforts. Accordingly, the legal and regulatory framework that governs Real Estate development activities in Kenya and built industry professionals is multifaceted. It encompasses various laws and regulations that cover different aspects of land and Real Estate development through overseeing the activities of built professionals and the implementation of land use regulations enforced through zoning ordinances. The following section highlights the relevant laws and regulations pertaining to Real Estate development in Kenya;
Section 3 (1) of the Act enshrines the establishment of the National Construction Authority (NCA), which regulates the construction industry in Kenya. The Authority is responsible for overseeing the registration and licensing of contractors, supervising construction projects, and enforcing construction standards and regulations. The NCA also regulates the training, certification, subsequent accreditation and registration of construction workers and site supervisors. The Act was assented to on 2nd December 2011 and became effective on 8th June 2012, following the passing of the National Construction Authority Regulations, which operationalized the Act. However, origins of the body date far back as 1972 when the National Construction Bill was first introduced, and sought to register the National Construction Corporation (NCC), that later failed in 1988. NCA is also responsible for a range of other critical functions aimed at enhancing the construction industry's development and growth. These functions include; i) promoting and stimulating expansion of the construction industry, ii) commissioning research on construction-related matters, iii) providing consultancy and advisory services with respect to the construction industry, iv) promoting and ensuring quality assurance in the industry, v) encourage the standardization and improvement of construction techniques and materials, vi) developing and publishing a code of conduct for industry professionals, vii) establishing and maintaining a construction industry information system, and, viii) assist in the exportation of construction services.
The Act which was assented to law on 27th January 2012 provides for the regulation of the engineering profession in Kenya through the training, registration and licensing of certified engineers, and development of the practice thereof. The Act however, became effective on 14th September 2012, through a special issue of the Kenya Gazette 3, repealing the Engineers Registration Act Cap 530 which was enacted in 1969. In section 3 (2), it establishes the Engineers Board of Kenya (EBK), which is a corporate body, created with a mandate of overseeing the registration and licensing of engineers, regulating engineering education and training, and enforcing engineering standards and codes of practice. Main functions of the EBK include; i) to receive, consider and make decisions on applications for registration of engineers, ii) keep and maintain a register of all registered engineers in Kenya, iii) publish the names of all registered and licensed engineers in accordance to the Act, iv) issue licenses to qualified and registered engineers, v) inspect construction sites where engineering works are in progress, vi) monitor professional engineering works, services and goods rendered by professional engineers, vi) establish a code of practice and ethics for engineers, vii) prepare detailed curriculum for registration of engineers and conduct professional examinations for the purposes of registration, and, viii) determine disputes relating to professional conduct or ethics of registered engineers.
Section 4 of the Act establishes the Board of Registration of Architects and Quantity Surveyors (BORAQS) whose mandate is to regulate the professions of Architecture and Quantity Surveying through training, registration and enhancement of ethical practice. The Board constitutes of five committees namely;
The Act, in section 3, establishes the office of the Director of Surveys and such other officers as may be deemed to be necessary for the purposes of the Act. Section 7 further establishes the Land Surveyors Board (LSB) that is chaired by the Director of Surveys, and is responsible for regulating different aspects of the surveying profession in Kenya including professional practicing standards, licensing, and, professional conduct. The core duties of the LSB include; i) to conduct the examination of candidates for admission as licensed surveyors and their licensing thereof, ii) keep a register of all licensed surveyors, iii) oversee disciplinary proceedings brought against licensed surveyors, iv) determine any disputes arisen involving licensed surveyors and the director, or with client in relation to the fees chargeable, and, v) advise the Director on all matters relating to cadastral surveys in connection with the registration of land or of title to land.
It provides the legal framework for the registration of valuers as well as establishing the Valuers Registration Board (VRB), which is mandated to regulate the activities and conduct of registered valuers in Kenya. The Act; i) mandates the registrar of the Board to keep and maintain a register of all licensed valuers and eventually issue them with a certificate of registration in the prescribed form, ii) outlines the requirements and procedures for registration and deregistration of valuers, iii) establishes and highlights schedule of fees chargeable by registered valuers for professional services rendered, and, iv) determines any hearings relating to valuers professional misconduct. In addition, Valuers Rules No 32 of 1987 lays down all that constitutes professional misconduct in the valuation profession in Kenya.
The Act establishes the physical planning system in Kenya, and forms the main component of land use regulations in Kenya, along with zoning regulations which vary across county jurisdictions. It establishes the office of Director of Physical Planning who is the chief Government adviser on all matters relating to physical planning, and prepares regional and local physical development plans. The Act also provides for the establishment of planning liaison committees, whose main responsibility is to determine development applications, and determine appeals lodged by persons aggrieved by their decisions. The Act further confers powers to local authorities to control development through enactment of zoning ordinances as well as approving development projects through permit issuances, and requires that the preparation of land use and subdivision plans in relation to property be done by a registered physical planner and to be approved by the Director. Additionally, the Physical Planning (Building and Development Control) Rules, 1998 govern the construction, planning and development of buildings and structures in the country. These rules are administered by the National Construction Authority (NCA) and the County Governments of Kenya and are designed to ensure that all buildings and structures are structurally sound, and, sustainable.
The Act regulates Real Estate development in Kenya, specifically in relation to environmental issues. It establishes the National Environment Management Authority (NEMA), which is responsible for promoting and enforcing environmental policies and standards in the country. In accordance to EMCA regulations, 2003 Real Estate developers and owners are required to conduct Environmental Impact Assessments (EIAs) before commencing any development projects which generally entail activities out of character with its surrounding, comprise structures of a scale not in keeping with its surrounding and involve major changes in land use. In support of this, the Second Schedule of the Act lists all projects that require an EIA to be conducted before project commissioning.
Section III: Existing Regulatory Gap
The legal frameworks above provide the necessary regulatory oversight to ensure that activities around Real Estate development is done in compliance with standards and regulations, promoting public safety and welfare, protecting the environment, and ensuring the sustainable development of the country. They also establish professional bodies that are responsible for registering and licensing professionals in the built industry, setting standards for their training and certification, and ensuring that they adhere to ethical and professional standards in their practice. However, there is still a gap in the regulatory framework when it comes to the registration and licensing of Real Estate developers, who are the actual drivers and coordinators of development activities. Evidently, the current legal framework under the above Acts covered does not provide for a comprehensive regulatory framework for the regulation of Real Estate developers in Kenya, which makes it difficult to monitor their activities effectively.
As a result, there is a need for enacting legislation / an Act that is Real Estate developers specific, and that will provide for the establishment of a Real Estate Developers Regulatory Board. The Board would be instrumental in enforcing provisions of the Act which would ideally include; i) the registration and licensing of developers in Kenya, ii) development of a code of ethics for developers, iii) consequent enforcement of the developed code of ethics, iv) develop standard practices in the operation of Real Estate developers activities in Kenya such as standardization of sale agreements, trust accounts, disclosure of information among others, v) impose fines and penalties in case of non-compliance, vi) conducting investigation and enforcing disciplinary actions against developers who violate the code of ethics and conduct, vii) determining any disputes that arise in relation to developers, and, viii) regulation, auditing, and monitoring of escrow accounts for development activities, and approval of the banking and financial institutions qualified to manage these accounts.
In addition, the Board can assist in financing through; i) developing approved frameworks for accessing non-bank development finance through structured investment instruments, or, ii) through fostering partnerships and collaboration with other Real Estate stakeholders such as financiers through championing accessibility to financing for developers. Moreover, the Board can; i) commission research on developers related matters, ii) develop training and education programs that would benefit Real Estate developers, iii) champion for legislation geared towards increasing efficiency and optimizing the environment for Real Estate developers, iv) lobby for developers’ rights and concerns to be heard, v) provide consultancy and advisory services to the government, and, vi) promote the development and expansion of the profession in general. Such a framework would ensure that developers are duly regulated and operate within laid down laws, promote transparency and accountability, and ensure that Real Estate development continues to contribute to the overall development goals of the country.
Section IV: Case Studies and Lessons Learnt
Having looked at the legal framework in Kenya’s Real Estate sector and subsequently identifying an existing regulatory gap in regards to developers, we now look at several countries such as India, Jamaica and Malaysia, which have established comprehensive frameworks to oversee development activities. The provisions outlined in these frameworks mandate developers and other parties to conduct themselves in accordance with specific conditions so as to operate in their respective sectors, as follows;
The Real Estate (Regulation and Development) Act is a legislation that was passed by the Indian Parliament in 2016 to regulate and promote transparency in the Real Estate sector of India. The Act provides a comprehensive framework aimed at protecting the interests of parties during Real Estate projects in order to bring accountability and transparency to the sector. Some of the key take-outs from the Act include;
The Real Estate (Dealers and Developers) Act is a landmark legislation in Jamaica that was first enacted in 1987 and subsequently amended in 1996 and 2010. The Act serves to regulate the activities of Real Estate dealers, salespeople and developers in Jamaica, with the aim of creating a level playing field for all stakeholders, thereby promoting the orderly growth of the Real Estate industry. The following are some of the key take-outs from the Real Estate (Dealers and Developers) Act in Jamaica:
The Housing Development (Control and Licensing) Act was enacted in Malaysia in 1966 and has been amended several times to provide for the regulation of housing development and to make housing development a controlled activity. The Act aims to regulate the housing development industry in Malaysia, protect the interests of homebuyers, and ensure the timely completion of housing projects. Some of the key take-outs from the provisions within the Act include;
Section V: Recommendations and Conclusion
From the regulatory frameworks established in the Real Estate sectors of India, Jamaica, and Malaysia, we offer the following recommendations towards promoting development activities in Kenya’s Real Estate sector and ensuring the growth and sustainability of the industry;
In conclusion, the creation of a comprehensive developer regulatory framework, anchored in law, in Kenya's Real Estate sector is essential to ensure sustainable growth and development of the sector. The current legal framework does not provide a comprehensive regulatory basis for the registration and licensing of Real Estate developers in Kenya, leading to challenges in monitoring and regulating their activities effectively. Therefore, it is important to draw from the regulatory frameworks established in the Real Estate sectors of other countries, and formulate an Act specific to developers. This should outline their roles and responsibilities, standards they must adhere to, and consequences of failure to adhere to these standards. The enactment should provide for a Developers Regulatory Board responsible for monitoring and regulating the activities of developers, ensuring adherence to building codes and standards, and imposing penalties on those who violate the regulations. Such a framework will ensure that developers are licensed and operate within the laid down laws, promote transparency and accountability, and ensure that Real Estate development contributes to the overall development goals of the country. With such a developer regulatory framework in place, the Real Estate sector in Kenya can realize its full potential, offering sustainable development projects that meet the targets of the Affordable Housing Programme (AHP) by the government, which will avail decent housing to all Kenyans.
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.