Kenya is the most developed economy in East Africa, with a vibrant housing finance sector and a booming property market. Over the years, macroeconomic reform has led to greater economic stability, and this, together with a focus on infrastructural development and trade, has made the country a prime investment destination in the region. Despite claims of election rigging and an eventual challenge through the Supreme Court, the elections held in March 2013 went smoothly, a new government was sworn in, and the country is back on a solid growth path. In 2011, Kenya faced particular challenges as the global economic crisis and increases in the cost of food and fuel led to a weakening of the Kenyan shilling by 25% against the US dollar, triggering rampant inflation (measured at 19.7% in November 2011). Interest rates consequently surged, and have remained high ever since. As a reactionary measure to high inflation and the volatile foreign currency exchange rate, the Central Bank of Kenya issued a sudden 11% increase to the central bank rate in November 2011, bringing it to 18% for
Kenya is the most developed economy in East Africa, with a vibrant housing finance sector and a booming property market. Over the years, macroeconomic reform has led to greater economic stability, and this, together with a focus on infrastructural development and trade, has made the country a prime investment destination in the region. Despite claims of election rigging and an eventual challenge through the Supreme Court, the elections held in March 2013 went smoothly, a new government was sworn in, and the country is back on a solid growth path. In 2011, Kenya faced particular challenges as the global economic crisis and increases in the cost of food and fuel led to a weakening of the Kenyan shilling by 25% against the US dollar, triggering rampant inflation (measured at 19.7% in November 2011). Interest rates consequently surged, and have remained high ever since. As a reactionary measure to high inflation and the volatile foreign currency exchange rate, the Central Bank of Kenya issued a sudden 11% increase to the central bank rate in November 2011, bringing it to 18% for about seven months until July 2012. By May 2013, the central bank rate was reduced to 8.5%. Annual inflation has decreased substantially, down to 6.02% by July 2013. With stabilising food and fuel prices, growth was 4.4% in 2011, and 4.2% in 2012. A 4.5% GDP growth rate is expected in 2013 and 5.2% is expected for 2014. In line with the Basel Risk Management Frameworks, the Central Bank of Kenya has consistently been implementing Basel guidelines since the mid-2000s. Currently all commercial banks are actively regulated on the Basel II Framework, which ensures greater stability, capital adequacy, liquidity management and loans management, and enhances banks’ resilience to macroeconomic shocks.
Access to finance
Kenya’s financial sector is highly developed, comprising a strong commercial banking sector, non-bank financial institutions, microfinance institutions and building societies, all regulated by the Central Bank of Kenya. Savings and credit cooperatives are regulated by the Commissioner of Cooperatives. Some 43 commercial banks and one mortgage finance company are registered with the Central Bank. Of these, 31 are locally owned and 13 are foreign owned. The locally owned institutions comprise 30 commercial banks of which three have a significant state shareholding and one mortgage finance institution with insignificant state ownership. In terms of real estate finance, a total of 33 financial institutions offer mortgage finance, which comprises 22.6% of total credit to the private sector. Credit to building and construction comprised 13.4% of total credit.
Kenya has a dynamic mortgage industry, which is growing rapidly and becoming increasingly competitive. While all banks offer mortgages to their staff, only 30 offered mortgage loans to customers. About 71% of mortgage lending is offered by five institutions: Kenya Commercial Bank (KCB), Housing Finance, Standard Chartered Bank, CFC Stanbic Ltd and the Cooperative Bank of Kenya. KCB is the market leader with about 30% of the market share, followed by Housing Finance, which held 19% of the market share in 2012 and issued a total of 5 235 mortgages in that year. Critically, the Central Bank of Kenya has begun monitoring the sector on an annual basis. As at 31 December 2012, the total mortgage book was Ksh122.2 billion (about US$1.4 billion) – showing growth of 35.2% on the previous year. This represented 19 177 mortgage loans, up from 16 029 from the previous year, which is an increase of about 19% and suggests a greater growth in loan size. Indeed, the average mortgage loan size increased to KSh6.4 million (US$73 143) in December 2012, up from KSh5.6 million (US$64 000) in the previous year. The Central Bank suggests that this may be partly attributed to an increase in property prices. Nevertheless, whereas general non-performing loans for banks fell, non-performing loans on mortgage lending doubled in value in the year from December 2011 to December 2012, from Ksh3.6 billion (US$41 million), comprising 764 accounts, to KSh6.9 billion (US$78.86 million) over 969 accounts.
By December 2012, the average mortgage interest rate offered by Kenyan banks was 19%, ranging between a high of 25% and a low of 11%. A press report at this time noted that Barclays Bank had the most affordable mortgage at 15.5%, followed by Standard Chartered Bank at 16.9%. Equity Bank had a higher rate at 21%, followed by Chase Bank and the National Bank of Kenya, which at 22% were the most expensive lenders in the mortgage market. Fixed interest rate products were becoming somewhat more popular: 85.6% of loans were on variable interest rates, compared to 90% in 2011. The Central Bank suggests that the predominance of variable rate lending is constraining the growth of Kenya’s mortgage market.
Nevertheless, mortgage lending is still accessible to only a tiny minority of the population – mortgage lending as a percentage of GDP stood at 3.7% in December 2012. New entrants and aggressive marketing has resulted in some newer products. For example, fixed rate mortgages have been made available for between 10-year and 20-year terms. Some banks have recently introduced 100% financing for the full value of a house. One lender has also introduced mortgage insurance against the risk of a loss of income, and another has introduced a rent-to-buy arrangement for those not able to access mortgage finance. The Retirement Benefits Authority in 2009 allowed that pension contributions of up to 60% could be used to secure a mortgage. This has the potential to leverage assets worth Ksh290 billion (US$3.625 billion) and increase access for lower earning people who have accumulated substantial pensions. Pension fund administrators are still reticent, however. In 2013, mortgage financier Housing Finance introduced a pension-backed loan product, but only 11 loans have been extended so far. Housing Finance is also exploring collateral risk insurance, green building finance and housing microfinance.
A Central Bank survey asked mortgage lenders to rank the obstacles to market growth. The primary obstacle raised, with 34 lenders citing this, was access to long-term funds. Facing this challenge head-on, Housing Finance raised KSh5.2 billion (US$61.07 million) on the sale of a second tranche of a seven-year bond to fund its expansion. Other constraints highlighted by mortgage lenders included high interest rates (31 citations), low borrower incomes (29 citations), credit risk (28 citations) and lack of financial literacy with respect to mortgage lending (27 citations). Financial regulatory burdens, the risk of foreclosure and difficulties with land titling received 19, 17 and 15 citations respectively, while lack of new housing supply was mentioned by 18 lenders. Lack of capacity and skills in the banking sector to develop products and underwrite effectively was mentioned by 14 lenders, and only 10 lenders suggested that HIV/Aids was an inhibitor to long-term lending.
Kenya has a strong microfinance sector, with eight deposit taking microfinance institutions. In 2013, 41 MFIs reported to the Mix Market (an online source of microfinance performance data and analysis), representing 1.4 million active borrowers and a gross loan portfolio of US$4.2 billion. The sector also recorded 8.7 million depositors and US$2.5 billion in deposits. Within this, Kenya also has an emerging housing microfinance sector. A number of MFIs, such as Jamii Bora Bank (with US$9.5 million in loans) and Makao Mashinani (with US$412 335 in loans) explicitly offer housing microfinance. Rooftops Canada, together with Homeless International, the Cooperative Housing Federation of Norway, the Swedish Cooperative Centre and other partners, is involved in a programme with the National Cooperative Housing Union (NACHU) to provide technical and financial support to scale up NACHU’s housing microfinance and housing support services. A crucial component of this work involves identifying appropriate and sustainable finance for NACHU to be able to extend housing credit to its members.
In 2012, the World Bank launched the Global Financial Inclusion Database (Global Findex) to explore levels of financial inclusion around the world. According to Global Findex, 37.9% of rural and 76% of urban Kenyans over 15 years of age have an account with a formal financial institution. Use of credit is fairly common: 66.3% of adults over 25 years of age report that they had a loan in the year to 2011. Surprisingly, given the level of financial inclusion, very few Kenyans have an outstanding loan to purchase a home: 1.1% of the top 60% of income earners and 0.6% of the bottom 40% of income earners. However, loans for home construction are more prevalent: 3.4% of the top 60% of income earners and 3.8% of the bottom 40% of income earners had such loans.
In 2010, a credit information sharing mechanism was introduced, improving Kenya’s credit information framework. By 2013, about 4.9% of the population (981 924 individuals and 128 024 firms) were already covered by a private credit bureau. According to the World Bank’s 2013 Doing Business report, Kenya ranks high globally in terms of ease of getting credit: 12th out of 185 countries, although this represents a decline of three positions since 2012. This is mainly due to its high score on the strength of legal rights index, ahead of both Sub-Saharan Africa and OECD countries. The country’s judicial system also allows for non-judicial foreclosure, often considered the most conducive for mortgage lending.
The World Bank estimates that only about 11% of Kenyans earn enough to support a mortgage. This means that most middle income earners cannot afford an average mortgage necessary to buy an entry level house. The Kenya National Bureau of Statistics defines middle income households as those whose monthly incomes fall between Ksh23 671 (US$260) and Ksh112 717 (US$1 330). This is far too little for the average loan size of Ksh6.4 million (about US$73 000), as reported by the Central Bank, where a 16.9% loan over 20 years would require a monthly payment of about US$1 067, and therefore an monthly salary of at least US$3 200.
A highly speculative property market and high demand for housing has driven Kenya’s residential property price inflation up steadily over the last 12 years, especially, more recently in the rental market. According to HassConsult’s Quarterly Property Index, property prices have increased 3.46 times since 2000, and have gone up by 9.9% in the past year. Rentals have also risen rapidly – 10 times the rate of the last two years, as landlords have sought to manage rising costs and deal with increasing demand.
Poverty statistics show high numbers of people living on less than Ksh2 913 (US$34) a person per month in urban areas and Ksh1 562 (US$18.41) in rural areas. Even in Nairobi, 22% of the population falls below this income, and in the city of Kisii, 54.5% fall below this line.
Kenya‘s urban population is growing at a rate of 4.2% a year, putting pressure on its cities to provide housing for this growth. An estimated 50 000 units were produced in 2012, up from previous years but still not enough to meet the estimated annual demand of about 150 000 units. This shortage of supply has been a major contributing factor to the rise in property prices, although more recently an unbalanced supply across market segments has been observed, with broad supply to the upper middle income and high end market, but insufficient supply to the low and lower middle income segments. African Economic Outlook reports that the building and construction sector has been a key driver of economic growth in recent years, with state investment in affordable housing being a key component. The City Council of Nairobi is said to approve an average of 12 000 residential and non-residential building plans each month. Into this mix, the Pan-African Housing Fund (PAHF) announced in January 2013 that it had up to US$24 million in investments lined up, supporting the development of affordable housing.
Formal housing supply is undermined by a number of factors, including the limited availability of serviced plots in urban centres, a problem affecting housing delivery across all income bands, but especially affecting affordability for lower income developments because of the added cost of servicing plots. There are also major question marks over the capacity of local government to ensure good quality residential development. The high profile Tatu City, which promised housing for 62 000 residents, also faced challenges in 2013, with shareholder wrangles, the lay-off of more than half of its staff and the resignation of its CEO.
Most of the population cannot afford housing built by formal developers, and as a result, the majority address their housing needs independently and often informally. This contributes to a growth in slum dwellings and poor quality housing. The housing backlog is estimated to be two million units. Research by a slum dwellers umbrella body, Muungano Wa Wanavijiji, found that 70% of Nairobi’s housing stock comprises single 10m² shacks made of wood, mud, tin galvanised sheets, or wattle. Recreational spaces in Nairobi have a bigger total landmass than the slum settlements.
In a move to meet the demand for housing, the government has continued to explore a variety of strategies. Initiatives under way include the Appropriate Building Technology Programme, the Kenya Slum Upgrading Programme (KENSUP), Civil Servants’ Housing Scheme, Housing Infrastructure and Government Estate Management. In the financial year 2010/2011, funding to these programmes was Ksh2.3 billion (US$26.29 million).
The National Housing Corporation (NHC) is a government institution mandated to deliver affordable housing targeted at low income earners. The NHC has been at the forefront of promoting alternative building technology using Expanded Polystyrene (EPS). An EPS production factory was established in May 2012 at a cost of around KSh1 billion (US$11.4 million), and the NHC expects that the new construction materials will cut the cost of housing construction by between 30% and 50%. A few private sector players have also been active in the provision of building technologies that make housing more affordable.
The National Environmental Management Authority (NEMA) has been actively involved in the vetting and supervising of housing projects that have an impact on the environment to ensure a clean and healthy environment for all. Apart from NEMA’s enforcement of environmental rules, many developers are increasingly more conscious about green buildings. Although such buildings have a cost implication for the end-user, developers are putting up buildings that make provision for the future installation of cost-saving systems such as solar, water harvesting and recycling plants.
NGOs also play an important role in housing delivery, often with the support of international bodies. Homeless International is working with the Pamoja Trust to enable more than 4 000 households to obtain land and/or secure tenure, 172 households to upgrade their homes, and in partnership with the World Bank, relocate 20 000 railway dwelling families to sustainable accommodation. In September 2012, Jamii Bora Makao initiated its second phase of a Ksh5 billion low cost housing project that will deliver 2 200 houses. The first phase of 950 houses has been completed and low cost, two-bedroom units are being sold for US$18 000 (Khs1.58 million) – still out of reach for many. The second phase of 1 250 houses, now initiated, will include housing that costs between US$30 000 and US$65 000. The project is 55km from Nairobi and 20km from a planned city known as Konza City. Habitat for Humanity also works in Kenya, and in 2012 offered loans and construction technical assistance to 968 families.
The residential property market in Kenya has been incredibly strong for the past few years, although the interest rate rise during 2011 led to a slowdown for the year. Real estate consultancy Knight Frank reports a drop in sales values, particularly for the middle market, although housing sales in the high-end market appeared to be unaffected. As a proportion of mortgages, the resale mortgage market constitutes as much as 60% of transactions. It is nevertheless also restricted by the limited supply of good housing stock, given that as much as 50% of the existing structures in urban areas are in need of repair and rehabilitation. Mortgageable stock is also generally geographically restricted to the largest towns of Nairobi and Mombasa.
In the last few years, the government has invested heavily in the development and expansion of infrastructure countrywide, and this has incentivised many investors in real estate who will require financing for various real estate projects.
The recently gazetted Reits Regulations 2013 set the stage for the creation of Real Estate Investment Trusts (Reits) schemes, which will be listed at the Nairobi Securities Exchange. Reits will help developers to access capital markets and boost liquidity for larger projects. They will reduce financing costs by enabling developers to raise more equity and rely less on debt, which can be expensive, as developers experienced in 2012.
Access to land has always been an issue in Kenya, and in September 2012, slum dwellers associations in Kenya lodged a court battle to claim rights to land that their members had occupied for years. Umbrella group Muungano Wa Wanavijiji submitted that landowners have flouted conditions attached to their title deeds, holding the land rather than developing it within the stipulated period, and that in this regard their legal claim was contestable. The lawyer representing the slum dwellers argued that the plots should therefore revert to the government. According to UN-Habitat, 57% of structures in slums globally are owned by ministers, civil servants, government officials or politically connected businessmen, who are the main beneficiaries of the continued existence of slums. Slum dwellers in Nairobi have sought and in some instances succeeded in buying the land they occupied. Some 10% of slums are located on uncontested public land, 40% on riparian and utility reserves and the remaining 50% on private land that was previously public property.
Policy and regulation
Housing is recognised as a basic right in the Constitution. The introduction of the Housing Bill will see the creation of the Kenya Housing Authority which will be mandated to monitor and evaluate the housing sector, conduct research on housing and also drive certain aspects of social housing in Kenya. Through the Housing Bill, the government will be more involved in housing by allocating 5% of the annual budget to housing and infrastructure development. A National Housing Development Fund will also be created with an allocation of about Ksh10 billion (US$114 million) annually. It will also raise funds from the capital markets through housing bonds. The Bill will provide for a Guaranteed Mortgage Scheme that will protect lenders against risks in housing and make lending more attractive. The Bill also recognises the new building technologies which are cheaper and therefore more affordable to a larger proportion of the population. From a lender’s perspective, the panels which are mainly used to construct such houses can be taken as chattels mortgages, hence making securitisation easier.
The adoption of a national land policy in 2009 was a positive step towards resolving the protracted question of the reliability, accuracy and legitimacy of the land administration system in the country. With the introduction of the Land Registration Act and the Land Act, the land laws have been simplified and harmonised, and have introduced transparency and accountability to land transactions. The laws have also seen the introduction of equitable mortgages and revolving charges which have made lending easier and reduced the conveyancing process. To create greater affordability, the stamp duty on property purchases was cut from 25% to 5% of the principal amount, and the tax on mortgages was reduced to 0.1% from 0.2%. To encourage greater supply, developments of more than 20 low-cost units are exempt from VAT.
Amendments to the Banking Act have allowed mortgage finance companies to operate current accounts as a way of attracting low cost consumer deposits to expand their lending capacity. As a result of this intervention, Housing Finance Kenya launched its current account offering in March 2012.
Housing is explicitly addressed in the 2013 election manifesto of the Jubilee Coalition, which rose to power after the March 2013 elections. Special attention is given to affordability for first time home buyers, with a special consideration for youth, women and persons with disabilities, and the manifesto promises that the party will pursue the lowering of mortgage rates. The Coalition also still sees itself as having a role in housing construction. The manifesto requires that five-year housing plans are formulated at county level, where housing construction will be done, funded by the state. The manifesto advocates the continuation of slum upgrading programmes. The most innovative, however, is a commitment to provide microfinancing loans for new home construction to low income Kenyans. Further, the manifesto commits government to encouraging the establishment of local housing co-operatives and savings unions to give all Kenyans better access to credit.
In 2013, the World Bank’s Doing Business Report ranked Kenya 161st out of 185 countries on the ‘ease of registering a property’ indicator, a decline of four places since 2012. In 2013, it takes about 73 days and costs about 4.6% of the total property value to go through the nine procedures involved in registering a property.
According to the World Bank’s 2013 Doing Business report, Kenya ranks 121st out of 185 countries for ease of doing business, down four places from 2012. Major declines in this past year are related to dealing with construction permits (down 14 places) enforcing contracts (down 19 places) and registering property (down four places). Kenya’s rapid urbanisation, demographics and the under-supply of housing point to a consistent need for middle and low cost housing in the range of US$10 000 to US$40 000, where demand is highest and supply least. Research published in 2012 by the World Bank estimates the potential size of the mortgage market to be about Ksh800 billion (about US$9.9 billion) – that is about 13 times its current size. The report identifies a number of obstacles to growth in this area, however, including affordability constraints, limited capacity for effective risk management, limited availability of long-term funds for mortgage lending and insufficient housing supply.
Still, housing markets are growing. With government’s plan to make Nairobi a regional financial hub, it is expected that more foreign banks will set up branches in Nairobi, and the trend shows that a number of West African and South African banks have strategised on how to enter the market, leveraging their financial strength.
Housing microfinance is a critical niche, given the housing finance needs of lower and informal income groups, which make up the majority of the population. Early in 2011, the World Bank granted a loan of US$100 million (Khs8.75 billion) to upgrade the infrastructure in slums and improve their security of tenure. This investment was part of the US$165 million (Khs11.9 billion) tranche pledged by the country’s municipal authorities to increase the standard of living in the country. The loan and associated interventions will improve the investment environment for both formal housing construction at the bottom end of the income pyramid and the growth of the housing microfinance sector.
Central Bank of Kenya (2011). Bank Supervision Annual Report.
Central Bank of Kenya (2012). Developments in the Kenyan Banking Sector for the Quarter Ended 30th June 2012.
Central Bank of Kenya (2013). Monthly Economic Review, February 2013.
Demirguc-Kunt, A. and Klapper, L. (2012). Measuring Financial Inclusion: The Global Findex. World Bank Policy Research WP 6025.
Harmonized Jubilee Coalition Manifesto (2013). Available from www.mwakilishi.com/content/articles/2013/02/03/viewdownload-the-full-harmonized-jubilee-coalition-manifesto.html.
Hass Property Index (2012). Quarter Two Report.
Kantai, C. et al (2013). Recent Information and Developments on the Housing Finance Sector in Kenya. Unpublished note prepared as input to the 2013 Housing Finance in Africa Yearbook.
Knight Frank (2013). Africa Report 2013.
Mutero, J. (2007). Access to Housing Finance in Africa: Exploring the Issues (No. 3) Kenya. Paper commissioned by the FinMark Trust with support from Habitat for Humanity.
Ndungu’u, N. (2011). Mortgage Finance for Increased Access to Housing. Presentation by Shelter Afrique.
Walley, S. (2011). Developing Kenya’s Mortgage Market. World Bank.
World Bank (2013). Doing Business Report 2013: Kenya.
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