Monday, 22 October 2012

Kenya’s housing sector to remain vibrant till 2030 says govt.

Impression of proposed Tatu City

THE KENYAN HOUSING MARKET IS booming. And it will remain vibrant until 2030 when supply equal demand official estimates show. Consequently, the sector appears to shrug off economic shocks such high interest rates. Demand for credit by the sector is up while consumption of Cement, another measure of the health of the sector, is also up. 

According to the central Bank of Kenya, credit to the sector in the year to June 2012, rose by US$385 million, second only to trade. And more is yet to come, say developers.

What drives the growth? Several factors combined.  Among these is the policy shift and legal reforms in the housing sector; high unmet and growing demand, economic growth in Kenya, the growth of the middle class, increased investment by Kenyans in the diaspora, construction of major roads in the country and foreign investment in the property market.

 Years of neglect and cirrhotic economic growth during the Moi era (1978-2002) resulted in a huge deficit for housing. While demand stood 150,000 units a year, supply hardly exceeded 30,000 units a year. The resulting deficit pushed the price of housing up, making it a lucrative business venture. But the sector was still closed by policy and legal hurdles.

Among the hurdles was the law which recognized land titles. This meant that flats were not recognized as property for legal and financial purposes. The law was amended so that a flat was recognized as property which could be titled individually. That amendment led to growth apartment blocks on plots that used to hold a single family unit.

This reform coupled with the policy shift opened the way for investors develop apartment blocks given the high cost of land. This shift to Vertical growth was welcome as the rapid economic growth in 2003-2007spawned a high demand for housing units.

Further, the construction, expansion or rehabilitation of major roads around Nairobi opened up the city’s suburbs for housing development. Nairobi is facing a major shortage of Land to build houses. This led to outward movement to the suburbs of the city such as Athi River, Kitengela and along Thika road.  Goods roads also contributed to the outward expansion as the driving time to the city was reduced by smooth roads. This growth will be spurred further by development of exclusive communities such as the Konza Techno-city

Even then, the demand for housing is still way beyond supply. The stock of new units has grown to just about 50,000 units a years while demand is still 150,000. Consequently, the return on investment in housing is very high, in the range of 30-40 per cent, official sources say.  The price of a house, industry players estimate, comprises of a 15-25 per cent shortage premium.

This is why demand for credit by the housing sectors was not stymied by high interest rates witnessed for over the last two years. Developers continued borrow to complete projects.  Credit to the housing sector says the Central Bank of Kenya, monthly economic reports shot up US$385million in the year to June 2012.
The government estimates that supply for housing will equal demand by 2030. That means that over the next 18 years, the housing sector will continue to boom.  Last year, the sector grew by 10.7 per cent  while other sectors were depressed. And this growth is expected to continue vibrant. Developers will continue to reap a windfall.

It is this windfall that is attracting developers and financiers, both domestic and foreign into the sector.  Despite high interest rates in the last two years, the industry has remained vibrant, because the newly rich Kenyans want to own houses. That is why mortgage houses are doing a booming business. Even commercial banks have joined the fray. Normally banks shy away from lending long-term especially mortgage houses. However, foresighted banks raised millions of US dollars in fixed rate bonds to finance housing mortgages.

 Key players in the sector include commercial banks, Building Societies, Housing Finance Corporation and Savings and Credit Co-operative Societies (SACCOs).  The Saccos are very aggressive players who mobilize resources from their Membership, build homes for them and then move onto other project. Some of the SACCOs are quite popular with Kenyans in the diaspora through who they invest in the local housing sector. Kenyans in the diaspora remit home an estimated US$800 million a year a large chunk of which goes to housing sector.

Nairobi Business Park
 Local institutional investors have also jumped into the fray. Renaissance Capital is developing a US$3 billion Tatu City along Thika superhighway. The city will hold 75,000 people. The local social security fund, NSSF is also planning to build a similar city in Athi River, 30 KM south west of Nairobi. It will host 30,000 people. It is not clear how much the city will cost but the US$7 billion Konza techno city is not far from the proposed city in Athi River.

 Apart from residential units, the commercial building sector is also attracting investment. Among the developments include the proposed Railways cities in Mombasa, Nairobi and Kisumu. These will be joint-ventures between Kenya Railways Corporation and private developers.  The three proposed cities will cost US$2.4 billion. Among the developments will be five-Star hotels, an industrial park, modern Railways stations recreational areas.

Other investors of note in the commercial development segment include the London based London- private equity fund Actis  which is developing  the Nairobi Business Park project along Ngong Road in Nairobi.

The U$220 million development, which will comprise five office blocks, will create 15,000 square metres of commercial floor space upon completion in mid or late next year. This development is the second Phase of the Business Park, the first phase in the same location created some 8,000 square metres of floor space. This was taken up by Multinationals that have entered the African market but have chosen Kenya as their hub. As more Multinationals set up shop in Kenya, demand for accommodation rises.

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