The Government of Kenya aims to transform the country into an industrialized middle-income economy by 2030 and it is on this basis that the Affordable Housing agenda was launched. This is one of the pillars of the Big 4 Agenda. The programme has received mixed reviews with the biggest questions on most Kenyans minds being if and how they will benefit. There has been uproar over the Finance Bill 2018, which introduced a 1.5% mandatory levy on worker’s gross salary as contribution for the program. The matter is still in court and seems to be the massive hurdle that the government needs to overcome. We had a look at the proposal and tried to address some of the concerns from the buyer’s point of view.

The Economic Times defines affordable housing as housing units that are affordable by that section of society whose income is below the median household income. Affordable housing projects are important for developing countries as they address the housing needs of middle and lower income households who can’t otherwise afford to buy houses at the market price. The Indian Government has been successful in implementing various affordable housing projects in conjunction with the private sector. Currently about 32% of Kenya’s population lives in urban areas, this number is bound to increase significantly with Kenya Country Private Sector Diagnostic (CPSD) Report – 2019 estimating that by 2050, half of Kenya’s population will live in cities. From this report, the target number of individuals for the affordable housing program has been estimated at around 97% of the formally employed population (close to 17 Million individuals or 4 Million households). The provision of the targeted 500,000 affordable housing units by 2022 will definitely go into satisfying a significant portion of the projected demand for housing in the country. The target beneficiaries are Kenyans who are unable to access long-term housing finance. Most local banks have products that are targeted at providing house finance for households that earn above Kes. 100,000 per month. The government is hence targeting households that earn below Kes. 100,000 per month. In a report produced by the SDHUD, the targeted beneficiaries are as indicated in sections 2 – 4 below:

How will It Work?

Once an individual contributes to the housing fund for 6 months and has accumulated 2.5% of the value of the home they wish to purchase, they become eligible for the allocation process. The allocation process relies on a lottery process which is independent and automated with no human interface. There have been concerns over what happens when you contribute and do not get picked. However, our focus is assessing the affordability while taking into consideration the target market. The sizes and price of the houses are represented below:

Once selected, the individual can purchase a unit through mortgages or a national tenants purchase scheme (TPS). The National Housing Corporation (NHC) defines a tenant purchase scheme as a scheme where house allottees occupy the houses and the monthly payments made goes to redeeming the sale price over an agreed period and interest rate. The property in such a scheme is owned by developer until the sale price is fully paid. NHC has been successful in implementing TPS in some of their historical projects.It is important to note that while there is provision for social housing as well, we have focused on the affordable housing category.

Who is this for?

We computed the projected TPS amounts for the different unit components while making two assumptions; that the TPS duration would be 15 years, which mirrors the tenure of most local banks, and that the interest rate is 7% as provided for by Kenya Mortgage Refinance Company (KMRC).

* we have matched the unit components to the assumed targeted household income bracket
**is based on the 28/36 rule that states that a household should spend no more than 28% of its gross (before taxes) monthly income on housing expenses and no more than 36% on total debt. We have assumed that the income bracket is stated gross of taxes and hence we applied 28% on the highest amount on each income bracket. We have worked backwards to find out what the minimum income will be in order to qualify for TPS for the different units

We compared the maximum monthly debt amounts to the estimated TPS amounts to confirm whether the units will be afforded by the targeted groups. From the analysis, it was clear that:

• Social Housing – this income group mainly contains individuals earning around the minimum wage up to Kes. 14,999 per month. They probably live in a single room or a bedsitter in Kawangware and are paying between Kes. 3,000 – 4,000 per month. The rent coupled with the ever-increasing cost of food and the daily commute expenses has really thinned their disposable income. With little to no amounts to save every month, their priorities would be mostly on getting enough money for rent and food and hence will not be able to pay for the units. The individuals will need to grow their monthly income to a minimum of 21,000 per month in order to qualify for the 1 room and Kes. 33,000 per month for the 2 rooms
• Affordable Housing (Low Cost – Kes. 15,000 – Kes. 49,999 per month) – the individuals within this bracket are mostly straight from school and have gotten their first job. With this income, they want to move out from their parents’ house and start becoming independent as well as commence the repayment of their HELB loan. Things are tight for them, between impressing their supervisor by doing crazy late hours in the office and catching up with friends from their alma mater. They leave in bedsitters at secure areas close to the office to avoid spending too much on fare and pay between Kes. 8,500 to 15,000 per month. Their priority might not be to own a bedsitter or a 1 bedroom at this point, but to hit the hottest joint in town over the weekends to celebrate the passing of a week with crazy hours in the office. The affordable housing option might be a better option for them compared to renting since they can afford if they squeeze themselves a bit and they end up owning the units. However not everyone within this income bracket can afford the bedsitters and 1 bedroom, only those earning a minimum of Kes. 26,000 per month can qualify for the bedsitters and Kes. 33,000 per month for the 1 bedroom. Further, some of those who can afford it have aspirations and would prefer to buy a 2 or more bedroomed houses to accommodate their families as they move to the next stage of life.

• Affordable Housing (Mortgage Gap- Kes. 50,000 – Kes. 99,999 per month) – most individuals within this bracket have been working for about 2 – 3 years and have more disposable income compared with the first two levels and can hence afford the units. They live in a one or two bedroom in Jamhuri and Ruaka paying 20,000 to Kes. 35,000 every month. They do not mind spending a few coins on tickets to that latest movie over the weekend and they have a preference for where they would like to live which then raises the issue of location for the affordable housing units as they have to be strategically placed in order to be attractive for this group. The issue of how big the units, the number of parking lots per unit, the designs for the building are all key factors for this group. It is good to note that, if one is within this income bracket, they will need to earn at least Kes. 65,000 every month to qualify for the 2 bedrooms and Kes. 97,000 per month to qualify for the 3 bedrooms.

What does this mean for the Buyers?

While the levy matter is being debated, the World Bank has approved USD. 250 Mio loan to the Kenya Mortgage Refinance Corporation (KMRC), a largely private sector-owned and non-deposit taking financial institution supervised by the Central Bank of Kenya (CBK). The KMRC loan will be used to finance the local banks who will then give mortgages to individuals to finance their units. There are some questions around who will be in-charge of the credit scoring process for TPS buyers, this could be where the banks come in as they already have an existing scoring process for mortgages?

That being said, most Kenyans, especially low and middle income earners, might not have housing as one of their priorities at the moment. “Kung’ang’ana tu! Hakuna kazi”, loosely translated to just struggling since there is no work, is perhaps the most common answer you will get from a Kenyan after asking them how they are doing. In an economy where the cost of living is constantly rising, the key question is whether affordable housing should rank as a top priority at this point. It will remain to be seen whether the system can be implemented within the next 3 years and still deliver 500,000 units before 2022.

This article was written by David Ndung’u, a financial analyst at InVhestia Africa. David has worked on several real estate and energy assignments and is a FAST Standard Certified financial modeller.