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 …
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:
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.