affordable housing in Kenya www.businesstoday.co.ke
Supply of affordable housing units has mainly been constrained by the unavailability of financing, especially with the current bank dominance. [ Photo / Liason Homes ]

Kenya’s economy has grown tremendously over the past decade with the GDP per capita increasing to Ksh198,078 in 2019, a 137.5% growth from Ksh83,393 in 2009, according to the Kenya National Bureau of Statistics. This led to the World Bank’s to declare Kenya as a middle- income country in 2014.

The growing economy translates into an expanding middle class, thus increasing demand for goods and services, including decent housing. However, in most areas countrywide and for the majority of urban dwellers, access to decent affordable housing remains a pipe dream.

According to the World Bank, approximately 56.0% of the Kenyan urban population live in slums and poor quality housing in rural areas. Delivery of housing to the low to middle-income citizens is further aggravated by inequality and imbalance in housing supply among income groups.

Currently, more than 80.0% of new houses produced are for high and upper-middle-income earners, driven by the ease of exit by developers as well as high construction costs, ultimately leaving the low-end and lower mid-end income brackets, who make up approximately 75.4% of the population not catered for.

To alleviate the housing issue, the government has made tremendous progress by implementing various policies and fiscal reforms aimed at enhancing house ownership. Some of the incentives include:

For home buyers

(i) Tax exemption on funds deposited under a registered Home Ownership Savings Plan (HOSP) subject to a maximum of Ksh8,000 per month for 10 years.

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(ii) Tax exemption for interest on mortgage repayments up to Ksh25,000 per month or Ksh300,000 p.a provided that the taxpayer occupies the property.

(iii) Formation of the National Housing Development Fund and the Kenya Mortgage Refinancing Company.

(iv) Waiver on stamp duty for first-time home buyers under the affordable housing programme.

(v) Allowing the use of 40.0% of accumulated pension benefits for the purchase of a residential house and 60.0% as mortgage collateral.

For developers

(i) Reduction in corporate tax from 30.0% to 15.0% for developers of over 100 affordable housing units annually

(ii) Exemption from VAT for supplies imported or purchased for direct and exclusive use in the construction of affordable houses by licensed Special Economic Zones (SEZ).

(iii) 25.0% tax exemption for investors in commercial property, who spend on social infrastructure.

(iv) Waiver on building approval fees for all affordable housing projects in Nairobi.

Despite the above incentives, Kenya has failed to develop a robust housing finance system, leading to relatively low homeownership rates, with only approximately 26.1% of Kenyans living in urban areas owning the homes they live in, in comparison to countries like South Africa and the United States with 53.5% and 64.5%, respectively.

The main challenges facing housing include; (i) inadequate supply of affordable development class land (ii) relatively high costs of construction (iii) inadequate infrastructure (iv) unaffordability of financing for development given the relatively high cost ranging from 14.0% – 18.0% interest per annum (v) unavailability and unaffordability of mortgages (vi)underdeveloped capital markets infrastructure hence overreliance on banks for business funding and (vi) ineffectiveness of Public-Private Partnerships (PPPs) for housing development.

Borrowing lessons from developed countries such as Singapore and the United Kingdom, the private sector is a key player in resolving the housing deficit, and capital markets play a key role in the mobilization of commercial financing mainly to boost housing.

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Therefore, while seeking to accelerate funding for affordable housing development, there is need to consider ways of deepening capital markets and access to non-bank funding. This can be achieved through the following measures:

(i) Reduced minimum amount investable in Real Estate Investment Trusts (REIT) from Ksh5 million for a Development REIT (D-REIT) to approximately Ksh1 million to ensure the investor is sophisticated while also allowing a larger pool of investors to participate.

(ii) Development of structured products thus providing favourable financing options.

(iii) Review of the regulations of pension schemes funds to be invested in a residential  house as the allowable 40.0% may prove to be insufficient for some members.

(iv) Review of Public-Private Partnerships (PPPs) to ensure effectiveness

(v) Reduced bureaucracy in land and real estate transactions in addition to ensuring policy actions are clear and accessible.

(vi) Formation of Specialized Collective Investment Schemes that invest in a single asset class or is formed for a specific purpose or sectors such as affordable housing.

In conclusion, the supply of affordable housing units has mainly been constrained by the unavailability of financing, especially with the current bank dominance and thus the need to mobilize alternative sources of funding. Capital markets should be opened up to provide low-cost capital raising mechanisms and fill the existing financing gap in addition to complementing the government efforts aimed at driving the provision of affordable housing.

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About the Author

Cytonn Investments Management PLC is an independent investments management company with offices in Nairobi, Kenya and Metropolitan Washington, DC, United States of America.

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