Oct 15, 2023
For several years, the Kenyan Real Estate industry has been marred by controversies of land and housing companies, as well as unscrupulous developers and Real Estate agents who have swindled buyers through failed promises, and undelivered projects. Despite the Real Estate sector being a major contributor to the country’s Gross Domestic Product (GDP), and surpassing perennial major contributors to GDP such as transport to become the second largest contributor to the economy, there is still the lack of proper regulation and oversight over developers activities and other stakeholders in the sector. This poses significant challenges that could claw back the gains.
In our topicals namely, Real Estate Developers Regulatory Framework and Off-Plan Real Estate, we highlighted the urgent need for Kenya to establish a regulatory framework that is anchored in law, addressing the unique needs of Real Estate developers, financiers and other stakeholders in the sector including buyers. Additionally, we highlighted the lack of a competent regulatory framework in the off-plan investment sector, as the existing provisions do not fully encompass the specific regulatory needs and protections required for off-plan investments. These gaps in regulation have allowed some developers to exploit the system, leading to various challenges and risks for buyers.
In light of the above concerns, it became imperative to institute legislation that effectively addresses these challenges, thereby ensuring robust consumer protection and the mitigation of a diverse array of risks and uncertainties such as developer non-compliance, fund mismanagement, and unethical practices within the Real Estate and construction sectors. In response to these critical industry issues, the tabling of Real Estate Regulation Bill of 2023 before Senate in August emerged as the culmination of collective efforts of lawmakers to restore order, transparency, and sanity in the sector. Sponsored by Trans-Nzoia Senator Allan Chesang, the Bill aims to establish regulatory measures for Real Estate developers, agents, and projects.
Acknowledging the importance of regulating the sector and recognizing that the Bill is a significant step towards introducing a structured and accountable regulatory framework within Kenya's Real Estate domain, we assert that the Bill suffers from substantial shortcomings, particularly concerning its compatibility with existing Real Estate and construction industry regulations. Therefore, it is of utmost importance that these discrepancies are harmonized with current laws and regulations, necessitating a thorough redrafting of the Bill and further deliberation before its formal enactment. In support of this, key industry stakeholders, including the Estate Agents Registration Board (EARB), the governing body for Real Estate agents in Kenya, and the Institution of Surveyors of Kenya (ISK), have strongly opposed the Bill noting that the proposal to regulate Real Estate professionals alongside developers and land buying companies, who are primarily business entities, is unreasonable and impractical. In our topical this week, we review the Real Estate Regulation Bill 2023 by covering the following;
Section I: Overview of Kenya’s Real Estate Sector
The Kenyan Real Estate sector has been a major contributor to the country’s Gross Domestic Product (GDP) in recent years, expanding at a 5-year Compounded Annual Growth Rate (CAGR) of 5.7% to Kshs 521.1 bn in Q2’2023, from Kshs 394.6 bn in Q3’2018. The positive performance can be attributed to several factors such as; i) rapid population and urbanization rates facilitating demand for Real Estate developments, ii) government and the private sector focus to facilitate the provision of affordable housing, iii) collaborative initiatives by public and private stakeholders to enhance the country’ infrastructure, resulting in the creation of new opportunities for property development in previously untapped areas, iv) increased expansions by international hotel chains in the hospitality sector, v) provision of long-term accessible low-interest home loans to potential buyers by the Kenya Mortgage Refinance Company (KMRC), and, v) rapid expansion drive by both local and international retailers boosting the retail sector.
Additionally, the Real Estate and construction sectors collaboratively contributed 15.5% to the total GDP in Q2’2023, only behind the Agricultural sector that contributed 19.6%. This impressive performance of the sectors in Q2’2023, which surpassed perennial major contributors to GDP such as financial services and insurance at 9.6%, transport at 9.4%, manufacturing at 8.0% and trade contributed at 7.6%, underscores the growing importance of these two sectors to the Kenyan economy and signifies a positive outlook. The graph below shows the trend of Real Estate and Construction sectors contribution to GDP between FY’2020 and Q2’2023;
Source: Kenya National Bureau of Statistics (KNBS)
The graph below shows the top sectoral contributors to GDP during Q2’2023, with Real Estate being the second-largest contributor;
Source: Kenya National Bureau of Statistics (KNBS)
However, the Real Estate sector’s growth rate over the years has been fluctuating, registering downward growth trends in FY’2020 on the back of the entry and prevalence of COVID-19 pandemic in the country. Nevertheless, in 2021, the sector experienced a significant rebound in activities following the gradual reopening of the economy majorly occasioned by the lifting of travel restrictions, lockdowns and bans initially instituted to mitigate spread of the virus. The sector’s growth rates experienced a shocks in 2022, declining from 5.0% in Q2’2022 to 2.9% in Q4’2022. This was attributed to the anticipation of the August 2022 elections which saw investors adopt a ‘wait-and-see’ attitude. Notably, the sector rebounded in Q1’2023, growing at a rate of 5.2% on the back of enhanced investor confidence owing to the peaceful conclusion of August polls. Other factors that continued to weigh down on the optimal performance of the sector include an oversupply of 5.8 mn SQFT of commercial office space in the Nairobi Metropolitan Area (NMA), 3.3 mn SQFT in the Nairobi Metropolitan Area (NMA) retail market, 2.1 mn SQFT oversupply in the overall Kenyan retail market as at 2023, and, a subdued REIT market due to limited investor awareness of the investment instrument among other factors. The graph below shows the Real Estate Sector Growth Rate between Q1’2020 and Q2’2023;
Source: Kenya National Bureau of Statistics (KNBS)
Challenges Faced by Various Stakeholders in the Real Estate Sector
The following presents a summary of challenges faced by developers and other key stakeholders during Real Estate development in Kenya. These challenges underscore the need for a regulatory body that will help supervise development activities in a manner that enhances the efficiency of the Real Estate sector in Kenya. These include;
Source: Capital Markets Authority (CMA), World Bank
The graph below shows the Gross Loans advanced to the Real Estate sector against Non-Performing Loans in the sector from Q1’2019 to Q2’2023;
Figure as of: *(2020) ** (2021)
Source: Centre for Affordable Housing Finance Africa (CAHF)
Section II: Real Estate Regulatory Bill 2023 Framework in Kenya
This section discusses key aspects, including the establishment and operation of the Real Estate Board, the role and functioning of the Registrar and register, the process for registering and licensing Real Estate agents in Kenya, the procedures for registering Real Estate projects, the specific duties assigned to Real Estate developers, and the rights and obligations of Real Estate buyers designed to enhance consumer protection mechanisms. Additionally, we shall address potential offences and the corresponding penalties for those who violate the proposed regulations, along with the repeal of the existing Estate Agents Act, Cap 533.
The Bill proposes the establishment of a national Real Estate Board under Part II, Section 4 of the proposed Act. The Board will have the powers of; i) suing and can also be sued, ii) acquiring, holding and disposing of movable and immovable property, iii) entering into any contract or other transaction, and doing all such other acts and things which a body corporate may lawfully do, and, iv) exercising the powers and performing the functions conferred to it under the Act.
Composition of the Real Estate Board
The management of the Board shall vest in a Board of Directors consisting of;
The Act will also allow the Cabinet Secretary to appoint a relevant and qualified Chairperson and the members of the Board of Directors, with the notice of the appointments being communicated through the Kenya Gazette. The appointees will hold office for a period of three years and be eligible for reappointment for one further term.
Some of the functions conferred to the Board under the Act include;
Additionally, the Board will be assigned roles in coming up with recommendations to the relevant government agencies to facilitate the growth and promotion of an efficient and competitive Real Estate sector. Such recommendations will be on; i) guidance to protection of the interests of purchasers, Real Estate agents and developers, ii) creation of a single window system for processing time bound project approvals and clearances to ensure timely completion of projects, iii) creation of an independent, transparent, and robust mechanism for addressing complaints, iv) measures to encourage investment in the Real Estate sector by the private sector, v) measures to encourage construction of affordable buildings and in line with environmentally sustainable and green building standards, and, vi) measures to facilitate amicable conciliation of disputes between the developers and Real Estate buyers through dispute settlement forums set up by the buyers, Real Estate agent or developer associations.
The Act will allow the formation of a Registrar of Real Estate Agents and Projects who will be appointed by the Board of Directors and will hold the office for five years and eligible for re-appointment.
The functions of the Registrar under the Act include;
Additionally, the Registrar will be required to record details such as the date of entry, address, qualifications, and other particulars of each registered person and update on any changes in these details. The registered persons will be issued a Certificate of Registration that will be in force for one year upon which a renewal of the certificate will be made on payment. The Registrar will also have the authority to remove any name from the register as ordered by the Board of Directors. Furthermore, the Registrar will be required to publish in the Gazette the name, address, and qualifications of every person registered under the Act, where the publication will serve as evidence of registration.
One great achievement that has been highlighted by the Act is that the Registrar will be responsible for establishing and maintaining an online digital Real Estate portal. This portal will facilitate the registration of Real Estate agents and projects, providing a platform for; i) interaction between various stakeholders, ii) access to finance, information, innovation, and the global market for Real Estate agents and developers, iii) providing information on clearances, approvals, and registration requirements for Real Estate agents and projects, iv) receiving complaints and comments from the public and other industry stakeholders, and, v) serving as a gateway to all Real Estate services offered by the National and County governments, and, vi) for discharging any other duties as required by the Board.
The Bill outlines the process for registering as a Real Estate agent and obtaining a practicing license in Kenya. The process will begin with an application for a practicing license by a Kenyan individual which shall be submitted to the Board of Directors within 28 days of receipt. The Board will thereafter issue a practicing license if the applicant is registered in accordance with the Act, has complied with any relevant continuing educational and professional development standards for that year, and has met all other requirements prescribed by the Board. Such requirements include; a Kenyan citizenship, and a degree certificate in Real Estate or equivalent from a university recognized in Kenya. The practicing license will be valid from the day it is issued to the 31st day of December of that same year. If issued during the first month of any practicing year, it should be valid from the first day of that month. The Board of Directors will have powers to suspend or cancel a practicing license on several grounds issued under the Act. However, the affected licensees will be accorded opportunities to be heard before suspension or cancelation of their practicing licenses.
Upon making the Bill into law, the Board will be required to operationalize a web-based online system for submitting applications for project registration within a year of its establishment. The process of registration of Real Estate project will start with the developer applying to the Board. The application must include details such as the developer’s name, address, registration particulars, and past projects. This is in addition to an authenticated copy of approvals and commencement certificates from the relevant Board for the project, sanctioned plans, layout plans, and specifications of the proposed project. The application should also contain details about development works to be executed in the proposed project, proposed facilities, and location details of the project with clear demarcation of land dedicated for the project along with its boundaries. Finally, the application should include proforma of the allotment letter, agreement for sale, and the conveyance deed proposed to be signed with the purchasers; and the number, type and the carpet area of apartments or plots, as the case may be, in the project.
Notably, a developer will not be able to advertise, market, book, sell, offer for sale or invite persons to purchase any plot, apartment or building in any Real Estate project that is not registered in accordance with the Act. If a Real Estate project is to be developed in phases, each phase must be considered a separate Real Estate project and therefore, the developer must obtain registration for each phase separately.
Additionally, a statutory declaration by the developer or an authorized person by the developer will also be needed on regards to the specific Real Estate project or phase of a Real Estate project. The statutory declaration should indicate that;
Grant or Rejection of the Registration
Upon receipt of an application, the Board will have 14 days to either grant or reject registration. The registration will be valid for the period declared by the developer for project completion. In cases of force majeure, which include natural calamities like war, flood, drought, fire, cyclone, earthquake, et cetera, that affect the regular development and completion of the Real Estate project, the Board will be able to extend the registration for not more than one year.
Revocation of Registration of a Developer Executing a Real Estate Project
The Board will be able to revoke the registration of a developer if the developer defaults on any requirements under the Act, violates any terms or conditions of approval given by the competent authority, is involved in any unfair practice or irregularities, or indulges in fraudulent practices. The Board must give the developer at least 30-days’ notice before revoking the registration. With such, developers will have no opportunity or excuse to deliberately under-develop or totally stall projects.
Upon revocation, the Board will have the powers to; i) debar the developer from accessing its website in relation to that project, their name listed as defaulters, and other government entities are informed about the revocation, ii) consult the appropriate level of government to take action including carrying out the remaining development works by a government entity or by the association of purchasers, and, iii) direct the bank holding the project bank account to freeze the account, or subsequently issue directions to de-freeze the account if necessary for project progress. However, it has to be noted that the association of purchasers will have the first right of refusal for carrying out the remaining development works on the project by the deregistered developer.
The Bill has gone ahead to clearly specify detailed responsibilities to be followed by every developer in Kenya from across the construction life of a project. These duties include;
Other notable regulations that have been stipulated by the Act to control the activities of the developers and protect the interests of the purchasers include;
The Act has also specified the rights and duties bestowed on a property buyer of a Real Estate property from a developer that enhance consumer protection. Such duties include;
The Real Estate Regulations Bill 2023 encompasses a range of offenses and corresponding penalties aimed at safeguarding compliance with its provisions and upholding the ethical conduct within the Real Estate industry. Moreover, they serve as a deterrent against any illicit activities or practices within the Real Estate sector, thus safeguarding the interests of both industry stakeholders and the general public. Among the key violations delineated in the Bill are the following:
This section of the Real Estate Regulation Bill, 2023, addresses the transition from the existing Estate Agents Act, Cap. 533, to the new regulatory framework established by the Bill. It outlines several key provisions to ensure a smooth transition and continuity of operations. The Act begins by declaring the repeal of the Estate Agents Act, effectively ending its legal validity and relevance under the new regulatory framework, and immediately ceasing the operations and existence of the Estate Agents Registration Board (EARB) upon the appointment of the new regulatory Board. The new Board of Directors shall be appointed within 3 months of the commencement of the Real Estate Regulation Act. This new Board will assume the responsibilities and authority outlined in the Bill.
However, to ensure continuity in the retention of staff, the Bill notifies that existing staff and employees of the EARB who were not under notice of dismissal prior to the commencement of the new Act will be deemed to be employees of the newly established Board. Any actions, regulations, directives, instructions, administrative measures, contracts, or obligations that were initiated, issued, taken, entered into, or incurred by the EARB before the commencement of the Act will continue to remain in force. This is because these regulations and measures will be considered as if they were made, issued, taken, entered into, or incurred under the new Act. Moreover, all assets and liabilities of the EARB which will be existing before the commencement of the Act will be transferred and managed by the newly established Board under the Real Estate Regulation Act. All ongoing legal matters involving EARB will not be disrupted by the change in regulatory authority as the Real Estate Regulation Board will take over as the responsible party.
Section III: Concerns Raised by Existing Regulatory Authorities and Our View
This section engages in a comparative analysis, contrasting the provisions of the proposed Bill with the roles and functions of existing Real Estate regulatory authorities in Kenya, such as and the Estate Agency Registration Board (EARB) and the Institute of Surveyors of Kenya. The comparative examination aims to identify areas of alignment, potential overlaps, and discrepancies in the responsibilities and functions of these regulatory bodies within the Real Estate sector's regulatory framework. The objective is to ensure clarity and coherence in the regulatory landscape of Kenya's Real Estate industry.
The proposed Real Estate Regulation Bill 2023 has sparked varying reactions from various existing Real Estate regulatory authorities. While some clauses have received positive recognition, most have been met with dismissal. The Bill 2023 has essentially targeted only three major players in the sector including; Real Estate agents, Real Estate developers and property buyers. Other stakeholders in the Real Estate industry have their own regulatory mechanisms such as;
It is worth noting that concerns have been raised about the effectiveness of the existing Estate Agents Regulatory board in addressing the persistent rise in fraudulent Real Estate transactions in the country, often involving numerous unscrupulous estate agents. Additionally, there is currently no independent and well-structured board or authority responsible for regulating Real Estate developers in Kenya, nor is there an entity dedicated to registering Real Estate development projects or advocating for the rights and interests of property buyers in the country especially those based in diaspora.
The Estate Agents Registration Board (EARB) proudly stands as the sole regulatory authority for estate agency practices in Kenya, operating under the legal framework of the Estate Agents Act, 1984, Cap 533. This legislation grants EARB its mandate, which includes the registration of estate agents and the crucial duty of ensuring that practicing estate agents meet stringent standards of competence and conduct. The overarching goal is to promote sanity, transparency and accountability in the Real Estate agency and safeguard the interests of the stakeholder in the industry and the public in general. Consequently, only estate agents who are duly registered with EARB, hold valid licenses, and possess current practicing annual certificates are permitted to engage in estate agency activities.
On September 27, 2023, the Estate Agents Registration Board (EARB) issued an official statement in response to the proposed Real Estate Regulation Bill, 2023. The EARB expressed its reservations regarding the Bill, emphasizing that they were not consulted or involved in its preparation. Their key contention revolves around the existing regulatory framework that already governs real estate agents through the Estate Agents Act, Cap 533. They argue that the Bill should primarily focus on regulating property developers and land trading companies, as real estate agents are adequately regulated under the current legal provisions.
However, it is worth noting that the Real Estate agency sector has faced challenges associated with unscrupulous agents and brokers, with these individuals registering real estate agency companies in total disregard of the laws. These individuals continue to conduct their business operations without proper licenses, despite the oversight of the EARB. In some instances, directors of such unlicensed companies engage in fraudulent activities and when found guilty, charged and fined, they re-enter the industry by rebranding their companies and essentially carry on with their deceitful Real Estate dealings. Regrettably, the legal and regulatory actions taken against these individuals often yield minimal results in deterring them from defrauding the public and circumventing government systems. Recognizing these challenges, the EARB has acknowledged the need for legal and institutional reforms to enhance its efficacy in regulating estate agency practices in Kenya. However, the limited progress observed in addressing these issues has led to the formulation of the proposed Bill.
The concerns raised by the EARB regarding their lack of involvement in the formulation of the Bill should not be a major issue. In Kenya's legislative process, public participation comes into play after a Bill has been introduced in the House and is subsequently referred to the relevant committee during the First Reading stage. The committee places advertisements in the media requesting for public views on the Bill. The relevant committee facilitates public participation on the Bill through appropriate mechanisms which include: Inviting submission of memoranda, holding public hearings, consulting relevant stakeholders, and consulting experts on technical subjects. The committee's role is to take all these inputs into account while examining the Bill and preparing its report to the House. This means that there is still an opportunity for the Estate Agents Regulatory Board to have their concerns and views heard by the committee that will be formed during this process. So, despite not being part of the initial formulation, there is a mechanism in place for their input to be considered in shaping the final Bill.
On 21st September, 2023 Institution of Surveyors of Kenya (ISK) also issued their statement on the proposed Bill. ISK is a professional organization that unites various disciplines in the Real Estate sector. The body believed that regulated the whole sector with one Act and under one board is a hard task for the government and hence every stakeholder in the sector should be handled and regulated separately to make the regulation effectively and efficiently. The body underscored the presence of the EARB under the Estate Agents Act, tasked with regulating the Real Estate agency sector and hence with a few additional in the Act and allocation of more resources to the EARB by Ministry of Lands to empower its operations countrywide, there is no need additional regulatory framework for estate agents.
Furthermore, ISK raises concerns about the composition of the proposed board. They point out that the board consists of principal secretaries and individuals nominated from associations that are not governed by government laws, leaving out qualified individuals from existing regulatory boards highlighted above in running the Board. With this setup, ISK contends that professional individuals in the sector might end up being regulated by unprofessional individuals, rendering the board inefficient in fulfilling its mandates.
A significant concern expressed in the statement is the proposal to regulate professionals in the sector through a non-professional board under the new Bill. ISK finds this proposal alarming and insists that professionals and Real Estate developers, who are primarily business-oriented, should be subject to separate regulatory mechanisms.
In our view, we believe that initiating a roadmap for regulating a sector that has long faced challenges is a positive step. The Real Estate sector has received limited attention despite being the second-largest contributor to the country's economy for over a decade. Addressing these longstanding issues should enhance sustainability, accountability, and transparency in the sector, thereby restoring the trust and confidence that many Kenyans have in investing in the Real Estate market. However, we raise crucial issues in the Bill such as:
Therefore, addressing these concerns and issues is crucial to ensure that the proposed Real Estate Regulation Bill aligns with the diverse needs and complexities of the Real Estate sector in Kenya.
Section IV: Recommendations and Conclusion
To address the concerns inherent in the proposed Real Estate Regulation Bill 2023 and make it more workable, we given the following recommendations to the Kenyan government;
In conclusion, the Real Estate sector in Kenya presents attractive prospects for both local and international investors and developers. As such, a proposed law to regulate the entire Real Estate and construction sectors is a welcome move, geared to protect consumers and mitigate the diverse array of risks and uncertainties such as developer non-compliance, fund mismanagement, and unethical practices. However, the proposed Real Estate Regulation Bill 2023 has generated varied reactions from existing regulatory authorities within the industry. While the Bill primarily targets Real Estate agents, developers, and property buyers, it has raised concerns among these regulatory bodies about its scope, potential implications, and the need for collaboration. By considering the concerns of existing regulatory authorities, and incorporating various recommendations we have offered, the government through the Real Estate Regulation Bill 2023 can pave the way for a more transparent, efficient, and accountable Real Estate sector in Kenya.
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.