Kenya faces a difficult task attracting developers to a low-income housing sector that has been ignored for a long time due to its low returns. The government wants to deliver at least 500,000 low-cost housing to its citizens in the next five years.
Property consulting firm Knight Frank said developers have shunned the low-end property market due to its high risks and low margins.
The government will therefore be required to offer more tax incentives in addition to free land to attract investors to build low-cost housing.
“Essentially, low-cost housing is not profitable for developers. The margins are low, so is not economically viable for developers. Developers have shied away from such projects because they relatively high risk,” Ben Woodhams, the firm’s chief Executive told The East African.
“Developers want to see at least 20 per cent profit margin on development and can’t get it on low-end housing market,” he added.
The EastAfrican has learnt that while the decision by the government to provide free land for housing projects and establish a mortgage refinance firm to provide medium to long term funding to primary mortgage lenders is laudable, its increased borrowing from the domestic market, high cost of construction materials, high inflation and high rate of joblessness pose a disincentive to private developers.
It is argued that the government will also have to take bold steps to reduce import duties on the main items used for affordable housing such as steel, cement and other manufacturing-related imports.
According to Cytonn Investments Ltd, the government should reduce the rate of unemployment in the country, which is currently estimated at 11 per cent compared with a global average of 5.7 per cent.
The government data also shows that about 74 per cent of employees in the formal sector earn less than Ksh50,000 ($500) per month, implying that mortgages are out of their reach.
In Kenya, an average mortgage size of Ksh9.1 million ($91,000) with an interest rate of 13.5 per cent and a tenure of 12 years translates into monthly mortgage payments of Ksh 130,700 ($1,307), which is unaffordable for over 90 per cent of Kenyans.
According to Kenya’s Property Developers Association (KPDA), the supply of affordable houses with prices of Ksh3 million ($30,000) and below has been low partly due to the high cost of construction with Kenya being ranked as having the highest cost of construction, among 16 African countries.
“While we appreciate the great emphasis on affordable housing from the government, the private sector would like the government to ensure that all policy and regulations are done with an all-inclusive engagement with the Ministry of Housing and all relevant departments of the government,” says KPDA.
“We therefore urge the government to understand the needs and capacity of local developers and formulate policy accordingly,” it added.
Kenya is banking on the private sector to construct at least 500,000 affordable houses by 2022.