Kenya has consolidated its place as the largest economy in the East and Central African region while Nairobi, its capital city, is regarded as the business hub and main port of entry into this region. After rebasing of its GDP in September 2014, Kenya has been classified as a middle-income country. Rebasing increased the size of the economy by 25.3 percent and made Kenya Africa’s ninth largest economy, up from 12th, surpassing Ghana, Tunisia and Ethiopia. In fact, over the last 10 years, with the exception of 2008 and 2009, Kenya has sustained an economic growth above 4.5 percent in each of the years. Subsequent to the economic deterioration of 2008, Kenya’s economy started on a recovery trajectory which climaxed in 2010 when the economy expanded by 8.4 percent – its highest performance in 37 years. Kenya registered GDP growth rates of 6.1 percent in 2011, 4.6 percent in 2012, 5.7 percent in 2013 and 5.3 percent in 2014. According to a recent Economic Update published by the World Bank, Kenya has just
Kenya has consolidated its place as the largest economy in the East and Central African region while Nairobi, its capital city, is regarded as the business hub and main port of entry into this region. After rebasing of its GDP in September 2014, Kenya has been classified as a middle-income country. Rebasing increased the size of the economy by 25.3 percent and made Kenya Africa’s ninth largest economy, up from 12th, surpassing Ghana, Tunisia and Ethiopia. In fact, over the last 10 years, with the exception of 2008 and 2009, Kenya has sustained an economic growth above 4.5 percent in each of the years. Subsequent to the economic deterioration of 2008, Kenya’s economy started on a recovery trajectory which climaxed in 2010 when the economy expanded by 8.4 percent – its highest performance in 37 years. Kenya registered GDP growth rates of 6.1 percent in 2011, 4.6 percent in 2012, 5.7 percent in 2013 and 5.3 percent in 2014. According to a recent Economic Update published by the World Bank, Kenya has just joined the club of fastest growing economies in the world and has emerged as one of Africa’s key growth centers with sound economic policies in place to ensure future improvement.
It is widely expected that economic gains made in 2014 will be sustained and possibly improve in 2015 into 2016 and 2017. The World Bank projects that Kenya’s GDP will grow by six percent in 2015, 6.6 percent in 2016, and by seven percent in 2017. However, the strength of the Kenyan Shilling, the size of the public debt, vulnerability to external shocks caused by the recent entry into the sovereign bond market, security situation, current account deficit and unstable oil prices remain key challenges in 2015. In fact, the Shilling has deteriorated significantly since the beginning of 2015 resulting into a liquidity mop-up by the Central Bank which is likely to constrain credit.
Access to finance
Kenya’s financial sector is highly developed and is regulated by the Central Bank of Kenya (CBK). By the close of 2014, the CBK’s Banking Supervisory Report pointed out that Kenya had 44 banking institutions (43 commercial banks and one mortgage finance company), eight representative offices of foreign banks, 13 Microfinance Banks (MFBs), two Credit Reference Bureaus (CRBs), 13 Money Remittance Providers (MRPs) and 87 Foreign Exchange (forex) Bureaus. Out of the 44 banking institutions, 30 were locally-owned banks while 14 were foreign-owned. The number of financial institutions providing mortgage finance was 37 from 36 institutions in the previous year.
Kenya has a dynamic mortgage industry, which is growing rapidly and becoming increasingly competitive. For two years in a row, Housing Finance Kenya has remained the leading mortgagee, followed by KCB. Together, these institutions have provided 52.8 percent of outstanding mortgage loans by value and 53.3 percent of existing mortgage accounts in 2014. Other major mortgage lenders include: Standard Chartered; CFC Stanbic; Equity; Co-operative; Barclays and Commercial Bank of Africa; Development Bank and I & M bank. These ten banks had contributed 85.5 percent of the value of outstanding mortgage loans by the end of 2014. As of 31 December 2014, the total mortgage book stood at Kshs164 billion (about US$1.8 billion) thus showing a growth of 18.8 percent on the previous year. There were 22 013 mortgage loans in the market by December 2014, an increment from 19 879 in the previous year.
Nevertheless, mortgage lending is still accessible to only a minority of the population. The average loan size has risen from Ksh6.9 million (US$79 945) in 2013 to Ksh7.5 million (US$82 924) in 2014. By December 2013, the average mortgage interest rate offered by banks was 15.8 percent, a drop from 16.4 percent in the previous year. Interest rates charged by the banks ranged from 8 to 21.3 percent. Some of the lowest interest rates are provided by KCB (12.9 percent) and Standard Bank (10.9 percent). Higher rates were offered by Equity Bank (18 percent), Consolidated Bank (18 percent) and Housing Finance Kenya (16 percent). These bank rates fluctuate, depending on the borrower and central bank rate. This rise and fall in interest rates appear to be the major reason for NPLs swelling to Ksh10.8 billion (US$119.4 million) in 2014 from Ksh8.5 billion (US$97.9 million) in December 2013 because nearly 92.5 percent of mortgage loans are on variable interest rates basis.
Based on a ranking of mortgage market constraints, the 2013 Survey on the demand side of the market revealed that high cost of houses, high interest rates on mortgages, high incidental cost of mortgages, low levels of income and difficulties with property registration and titling are the major inhibiting factors to the growth of the Kenyan mortgage market. To this end, policies such as the adoption of the Kenya Banks’ Reference Rate (KBRR) in July 2014, is expected to increase transparency and promote pricing competition. In addition, the automation and digitization of the land registries are likely to be helpful.
Similarly, to address affordability challenges, supporting growth of the microfinance movement has been another focal point of monetary policies. Kenya has a strong microfinance sector, with 13 Deposit Taking Microfinance Institutions from nine in 2013. The coming-into-force of the Microfinance (Amendment) Act, 2013, has allowed the former Deposit Taking Microfinance institutions (now ‘Microfinance banks’) to operate current accounts, issue third party cheques and engage in foreign exchange trading. Regulations for Non-Deposit Taking Microfinance Institutions are yet to be put in place. The Ministry of Finance is in the process of discussing the best way forward for regulating the non-deposit taking microfinance businesses. Mix Market, an online self-reported source of microfinance data, reports on 51 MFIs in Kenya representing 10.6 percent of the accounts, 1.5 million active borrowers with a gross loan portfolio of US$ 3.3 billion. Most Microfinance Banks and Non-Deposit Taking MFIs provide HMF in one form or another. For instance, Rafiki Microfinance Bank provides a Rafiki home savings account through which one can access Rafiki Housing Microfinance, Landlords HMF and Home ownership starter HMF. On the other hand, Kenya Women Microfinance Bank provides a ‘Water Tank’ loan and a roofing loan called ‘Mabati’ loan.
Similar to the microfinance institutions, the cooperative movement has also been another important avenue to creating affordable housing finance and providing decent shelter. Housing cooperatives are mainly engaged in community mobilization to build support and participation of individuals, groups, and cooperatives to work towards affordable housing. The primary housing cooperatives have formed a national union – NACHU. As of now, NACHU has over 600 member housing cooperatives and has become a leading organization in the provision of housing micro-finance, capacity building and technical services. NACHU has supported various community housing and real estate project. One such project is the 80 units, two-roomed house and toilet Ngasemo Housing Scheme located on the outskirts of Nairobi with an asking price of Ksh4.5 million (US$44 500).
Altogether, access to finance has been improving. Key statistics, such as domestic credit from the banking sector indicate a significant positive change. According to CBK, credit to the private sector grew by 22.2 percent in 2014 following growth of 20.1 percent in 2013. Private households (at 26.2 percent) and real estate (at 18.8 percent) were the main activities to which credit to the private sector was allocated. These statistics are provided by financial institutions in the annual depository surveys conducted by the CBK. When access to finance and financial inclusiveness in Kenya is estimated from the demand side, statistics still suggest a significant improvement. Global Financial Inclusion Survey (Findex) conducted by the World Bank is one of such demand side surveys. According to Findex, 74.6 percent of Kenyans above 14 years say that they have accounts, including mobile money accounts. Furthermore, between 2011 and 2014, the number of Kenyans that attest to having bank accounts has increased by 30.4 percent from 42.3 percent to 55.2 percent while those that report to having borrowed from a financial institution rose by 53.2 percent from 9.7 percent in 2011 to 14.9 percent in 2014. The Findex survey of 2014 confirms that 12.1 percent of Kenyans above 14 years have used their loans for housing purposes. Despite an improvement in the access to finance, these statistics, together with the doing business statistic shows that Kenyan is ranked at position 116 out of 189 countries in terms of ease of getting credit, which means that much still needs to be done.
As with most African countries, affordability is a major constraint to the growth of the housing and mortgage markets in Kenya and a key challenge to access decent housing. Given an average loan size of Ksh7.5 million (US$82 924), average mortgage interest rate of 15.8 percent, 90 percent loan-to-value and assuming a 25-years loan, repayment of such loan will be Ksh100 740.4 (US$1 113.8). Unfortunately, statistics show that a high numbers of people will not afford such repayment due to poverty. In fact, going by an income and expenditure survey conducted by the World Bank in 2005, 99.9 percent of Kenyans will not afford this average mortgage loan. Specifically, the Kenya National Bureau of Statistics (KNBS) defines ‘middle income’ households as those whose monthly incomes fall between Ksh23 671 (US$321.1) and Ksh119 999 (US$1 628) based on the rates of October 2005. Seen this way, none of the middle income earners will be able to afford the average mortgage loan unless the distribution of income has changed significantly since 2005.
These statistics shows that affordability is a major challenge in Kenya’s housing and mortgage markets. This is indeed manifested in the large informal housing and proliferation of slum dwelling. This, together with a high urbanisation rate (urban population grew at 4.3 percent in 2014) indicates that rental housing, incremental construction and use of alternative building materials and technologies are likely to remain a feature of housing in Kenya. A highly speculative property market and the high demand for housing has driven Kenya’s residential property price inflation up steadily over the last 13 years, resulting to over 80 percent rental housing (homeownership was established at 17.7 percent in 2009 by the KNBS).
In an attempt to overcome the affordability problem, lenders, developers, borrowers, cooperatives and NGOs have come up with different strategies. For instance, providing credit products that match cash flows of the poor such as the home improvement loan (Rafiki MFI and Bank of Africa) and incremental financing (‘Ujenzi Kwa Hatua’ meaning an incremental building loan by Humanity for Habitat). Another creative way to obtain affordable housing involves the use of joint land purchases by groups of low-income households which makes land affordable and reduces the risk to the lenders. A good case to illustrate this is where 2 000 slum dwellers in Nairobi purchased 23 acres of land in Mukuru slum. Through the help of Akiba Mashinani Trust (AMT), a Kenyan NGO working closely with slum dwellers across the country, they organized themselves into 49 groups of 40 and started saving in 2007. The land was purchased in 2011 for Ksh81 million (US$953 000). Eventually, all 2 000 slum dwellers will have homes there and an additional 1 000 middle income homes will be built to subsidize the cost.
According to the 2009 Population and Housing Census, Kenya had 8 738 097 dwellings. Out of which, 3 385 308 were urban dwellings. At the same time, the United Nations placed the proportion of slum dwelling in Kenyan urban centres at 54.7 percent in 2009 and 56 percent in 2014. If this is accurate, then the stock of decent housing in 2009 was only 1 533 545 units, and 1 851 763 units that constitute dwelling units in slum areas form the backlog by then. Considering that urban population between 2009 and 2014 had grown at an average rate of 4.4 percent per annum, at an average urban household size of 3.4 persons, Kenya would need about 132 000 units per annum to meet urban population growths. If production remains at 50 000 units a year, as put by the ministry in charge of housing in 2011, a recurrent gap of about 82 000 units is added to the existing deficit annually.
Statistics on investment into housing indicates that there is a growing interest in this sector. According to the annual economic survey of KNBS, about Ksh127.7 billion (US$1 585 million) was invested into housing production in 2010. Accordingly, the amount injected into housing production has grown by 15.2 percent, 17.2 percent, 14.6 percent and 17.3 percent in 2011, 2012, 2013 and 2014, respectively. Similarly, the number of outstanding mortgage loans has also been on the rise from 13 220 loans in 2009 to 22 013 loans in 2014. Relative to the size of the economy, outstanding mortgages to GDP had risen from 2.3 percent in 2009 to 2.4 percent in 2010, followed by 3.1 percent in 2011, then 3.5 percent in 2012 and 2013, before hitting 3.6 percent in 2014. This indicates that the supply and demand of housing in Kenya are increasing despite being insufficient to meet the existing deficit.
According to Knight Frank, which reports on the high end residential market, the prime residential market has recorded a reduction in activity in the second half of 2014. This is possibly due to reduced international investor confidence due to the insecurity concerns experienced towards the end of 2014, and the mismatch between demand and supply. As a result of reduced demand in the high end market, most developers in the Nairobi prime apartment market appear to be shifting focus from three- and four-bedroom apartments and mansions to smaller units, such as: studios, one- and two-bedroom apartments, due to oversupply in the former and the affordability challenges (for instance, in the Karibu homes project among others). On the whole, the Kenya Bankers Association (KBA) Housing Price Index shows that house prices have risen significantly in 2014 compared to similar periods the previous year. Prices for apartments and bungalows recorded the highest increases at 12.2 percent and 10.25 percent between 2013 Q3 and 2014 Q3 while maisonettes, which represents a niche in the high end market, documented a mere 5.7 percent growth. According to the hedonic model estimated by KBA, house prices in this period were driven mostly by size, neighbourhood and access to land. In their view, demand for bungalows was on the rise because bungalows, though old, are situated on spacious and on prime land, therefore these sites are fit for redevelopment. Indeed, the scarcity of land continues to push up property prices. Going by the Land Index (LI) based on advertised land prices, prepared and published by HassConsult and Stanlib, this is inevitable. As presented by this land index, land in the inner city suburbs have increased fivefold since 2007, while land prices in the satellite towns around Nairobi have increased six folds.
Policy and Regulation
The adoption of a National Land Policy in 2009, as well as the new Constitution in 2010, was a positive step towards resolving the protracted question of reliability, accuracy and legitimacy of the land administration system in the country. The National Land Commission (NLC) was created in 2012 with a range of functions including advising the national government on a comprehensive programme for the registration of land titles, management of public land, implementing settlement programmes, developing an effective land information system, and managing a land compensation fund. Even before the NLC stabilizes and the new land laws take root, stakeholders are asking for a national policy on slum upgrading and prevention, land readjustment, a legal framework for forced evictions and squatter settlement or amendments of the existing law. On the other hand, large scale developers are of the view that the New Land Act (2012) and the Sectional Title Act (1987), as currently set up, are cumbersome, difficult, slow and ineffective for registration of more than 20 units. For one to obtain sectional title for a project with many units, such as 10 000 units; to hasten the registration process and to cater for large scale multi-use and controlled communities projects; the amendments to the Sectional Act of 2014, Sectional Titles Gated Communities Act of 2014 and the Shared Communities Act of 2015 have been proposed. These are further discussed below.
- The Land Registration Act (2012): To revise, consolidate and rationalize the registration of titles to land, to give effect to the principles and objects of devolved government in land registration, and for connected purposes.
- The Land Act (2012): Provides guidance for the sustainable administration and management of land and land based resources. Classifies land as public, private and community land.
- The Land Control Act (2012): To control transactions of agricultural land. It also sets up the Land Control Areas and Land Control Boards.
- The Sectional Properties Act (1987): Deal with the registration of units in high-rise buildings and/or flats.
- The Distress for Rent Act: Rent disputes and distained goods.
- Amendments to the Sectional Act (2014) – proposed: Designed to simplify the registration process and enable developers to create all necessary individual titles of the units during the early stages of development.
- Sectional Titles Gated Communities Act (2014) – proposed: To control any uncontrolled developments in the neighbourhood.
- The Shared Communities Act (2015) – proposed: Create individual Sectional Title Units for undeveloped land and enable the transfer of villas on individual parcels of land from the onset.
- The National Land Commission Act (2012): To establish the National Land Commission.
Globally, urban populations are growing at a rate much faster than can be absorbed and managed, placing a high demand on services and infrastructure. Kenya is no exception. Kenya requires the construction of at least 132 000 units per annum to cater for new urban dwellers and has a backlog of 1.85 million units of backlog. Going by changes in house prices, the demand for housing has shifted to apartments and smaller units often attributed to the middle and lower income groups. The middle and upper class sectors are the most populous population segments despite affordability challenges. Providing more affordable homes and housing finance in Kenya is not impossible and there are a growing number of groups who are making strides in this direction. They are taking risks and testing new models. For instance, on end-user finance, products that match cash flows of the middle and low income earners such as home improvement loans, incremental construction financing, group loans and joint-income loans are likely to be appealing to many customers.
On the supply side, developers will be able to make a significant impact by constructing small units (studio, two-bedroomed and one-bedroomed houses), making joint purchase of land to reduce overall cost of completed units, sourcing concessionary loans at lower interest rates and by using alternative building materials. For these reasons, exciting opportunities exist in the mortgage and housing markets of Kenya.
Arvanitis, Y. (2013). African Housing Dynamics: Lessons from the Kenyan Market.
Central Bank of Kenya, (2014). Bank Supervision Annual Report 2014. In CBK (Ed.). Nairobi.
Central Bank of Kenya, (2015). Monthly Economic Review. In CBK (Ed.). Nairobi.
Gaye, D. (2014). Kenya Economic Update Anchoring High Growth: Can Manufacturing Contribute More? World Bank (11 ed.).
Kenya National Bureau of Statistics. (2013). Kenya National Housing Survey: KNBS.
Noppen, A. V. (2014). The ABCs of affordable housing in Kenya. Acumen Organization Report. Retrieved on, 1
Suraya Property Group Ltd. (2015). Review of the Proposed Amendments to the Sectional Properties Act 1987 and Proposed Shared Communities Act 2014. Paper presented at the KPDA CEO Morning Learning Sessions, Nairobi.
Knight Frank (2015). Kenya Market Update Quarter 2, 2015
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