Why low-cost housing makes no business sense

Monday March 8 2010

The construction industry is set for contraction over the next few months as high interest rates continue to bite.

Tamarind Gardens in Nairobi’s Lavington Estate. The construction industry is set for contraction over the next few months as high interest rates continue to bite. PHOTO | PHOEBE OKALL | NATION MEDIA GROUP 

By FRANCIS AYIEKO

When Joe Mungai ventured into property development a few years ago, he, like most real estate developers in Kenya, knew which side his bread was buttered: In Nairobi’s upmarket and middle-income neighbourhoods. And he has never regretted his decision.

His two major housing projects in Nairobi’s leafy suburb of Lavington sold out promptly, at a price range of Ksh8.5 million ($113,300) for a three-bedroomed ensuite apartment and Ksh20-29 million ($266,667-386,667) for a four-bedroomed town house.

He is currently putting up three-bedroomed apartment units in Kileleshwa, valued at Ksh15.5 million ($206,667)

“Developers are business people; they will not invest in places they will lose their money,” said Mr Mungai, the managing director of Tamarind Properties Ltd. He explained that the lack of infrastructure services in low-income areas was the major bottleneck to investing in those regions.

“As a developer I am forced to pass on to the buyer the cost of putting up basic infrastructure such as access roads, water, electricity and sewerage systems. This pushes the prices of houses up,” said Mr Mungai, who is also the vice-chair of the Kenya Private Developers Association .

He said the selling price could go up by as much as 40 per cent.

“Take the case of Embakasi — a predominantly lower-middle income region — where a three bedroomed bungalow that would ordinarily sell for about Ksh1.5 million ($20,000), can end up going for about Ksh6 million ($80,000).

Experts estimate that infrastructure development forms about 30 per cent of the total construction cost.

As things stand, the deficit in the housing sector, particularly in low income regions, is becoming increasingly alarming.

According to the Ministry of Housing, Kenya requires about 150,000 new housing units annually, but only an estimated 35,000 are put up — with only 6,000 units or 20 per cent being for low-income groups.

Although the government has been encouraging developers to invest in low-cost housing, with the promise of providing infrastructure, this has not been forthcoming.

On the other hand, the vast majority of urban dwellers cannot afford to buy their own homes due to the high costs involved.

Mr Mungai says the situation would have been far better had the government implemented the 30 housing incentives and market re-engineering measures prepared jointly by the Ministry of Housing and stakeholders, who included the Kenya Property Developers Association, about three years ago.

The government was to allocate a budget for the provision of infrastructure to urban and peri-urban regions through public-private partnerships as well as offer guarantees and concessions to private local and foreign investors to develop housing infrastructure.

Furthermore, developers and investors who put up at least 100 housing units or serviced plots of equivalent amount for low-income households within a period not exceeding 24 months in urban and peri-urban areas would enjoy a 10-year tax holiday.

Tax exemption

There would also be an investment deduction to contractors on machinery and new appropriate technologies.

Any expenditure on putting up social infrastructure would be exempted from tax. But the stakeholders say no meaningful progress has been registered.

“A little has been done; a lot more needs to be done,” said Frank Ireri, the managing director of Housing Finance, Kenya’s leading mortgage provider.

Daniel Ojijo, the chairman of the Mentor Group, a Nairobi-based property firm, said: “Failure by the government to provide infrastructure to private developers has made the provision of low-cost housing untenable.”

Mr Ojijo said the situation has been compounded by the high cost of land, building materials and loans.

Most developers, he said, rely on bank loans repayable at 14-15 per cent interest rate.

But the acting director of the Housing Infrastructure Department at the Ministry of Housing, Makenzi Kiilu, defended the government saying: “We are already providing housing infrastructure facilities such as sewer lines and water lines. We have established that if we can service more land, more developers will build and houses will become cheaper.”

He said the Ministry of Housing is currently building a sewer line in Athi River, around Daystar University.