Middle class unlocks Kenya's homes market

The uptake of residential houses has been growing as more Kenyans take up homes loans. 

By JUSTUS ONDARI

In Summary

• Housing Finance and S&L, the two big home loans lenders, are recording vibrant earnings despite economic slow-down

As the international markets reacted skittishly to Dubai’s debt problems and the possibility of the world’s wealthy and famous with properties in the emirate losing their fortunes, an almost rosy scenario is taking hold in Kenya, defying an economic slowdown that jolted even the developed markets.

Dubai’s biggest state-owned company, Dubai World, is tottering on the brink of bankruptcy due to the global credit crunch and falling property prices with many projects incomplete in the Middle East’s so-called rich man’s playground. But Kenya’s property market in by all means booming as demand for houses grows steadily.

“Key indicators such as mortgage sales and disbursements show that year-on-year, our housing demand is growing by up to 50 per cent even when we are rejecting a lot of applications for various reasons,” said Mr Frank Ireri, the managing director of Housing Finance, Kenya’s leading mortgage lender.

Fuelling this boom in housing uptake include, among others, the increasingly growing middle-income class (small and medium enterprises and professionals such as lawyers, engineers, doctors, etc), easy property financing and, lately, Somali pirates’ cash from the Indian Ocean, even though hard statistics are hard to come by.

“This (pirates’) cash unfortunately, has found a home in Kenya,” Stanbic Investment Management Services investment manager, Kenneth Kaniu, said recently, “they view Kenya as home and they want to plant their money here.”

Dark past behind

It is this combination of factors that has turned around the fortunes of Kenya’s home loans industry, which a few years ago was so bad that many mortgage companies collapsed while others like Equity Bank and Family Bank converted to commercial banks.

Mortgage firms are showing healthier bottom-lines from the single digit growths that most banks are returning.

Housing Finance, which was struggling under the weight of up to 80 per cent (or Sh8 billion) of non-performing loans some five years ago due “liberal lending”, has not only registered a 57 per cent growth in pre-tax profit for the third quarter this year, but Mr Ireri says things can only get better.

“From 2007 when we had none, we currently have Sh5 billion in property financing projects in the pipeline,” he said.

Housing Finance recorded a profit increase from Sh128 million on June 30, 2008, to Sh202 million this year and cut non-performing loans down to just Sh1.7 billion.

It is a change of fortunes that he attributes to a turnaround programme initiated in 2002 by former MD Peter Lewis-Jones that entailed putting in place adequate credit risk and debt recovery systems. He continued to implement it upon his appointment in July 2006 by developing the 2007-2011 strategic plan.

Backed by the exiting of a key shareholder, Commonwealth Development Corporation (CDC), and Equity
Bank’s acquisition of a 24 per cent stake in 2007 as well as last year’s rights issue which raised Sh2.3 billion, capital base has grown to Sh14 billion.

“With our balance sheet, we have the capacity to take in Sh28 billion as deposits or give out Sh28 billion as loans,” Mr Ireri said.

Savings & Loans, KCB Group’s mortgage lending arm, has just announced a 127 per cent rise in profit before tax for the first nine months this year.

Profit rose from Sh336 million during the same period in 2008 to Sh765 million this year, as part of the Group’s 2005 rebrand.

“We had to change our strategy and focus,” said S&L Managing Director Caroline Kariuki. “Our new structure will boost both our capacity and reach to serve our customers even better.”

The company, though, will become a division of the Group from January 2010 under an ongoing restructuring programme.

 She says six to seven years ago, the industry was depressed because it was not possible to sell individual units of apartments, interest rates were high and project financing products non-existent.

In an industry that is witnessing hitherto non-players like property developers joining the field, the two chief executives agree that project financing has had a big impact on the market.

The newfound vibrancy of the market amidst a slowdown in the economy is reflected in the surge in building and construction over the last two or so years as the number of individual home developers rise and investors in property grow.

HassConsult, one of the country’s estate agents, recently launched a property index that said prices for the middle and upper income town housing in areas like Karen, Lavington, Kileleshwa, Nyali, Riverside and Westlands were on a downturn.

But Ms Kariuki says the high demand and by extension, prices, are not about to slow down.

“We do not expect the prices of properties to fall. Not for a while so long as the supply to demand equation remains skewed,” she says.

Annual demand stands at 150,000 units against a supply of between 25,000-30,000 units.

Rising land prices

With a new breed of investors armed with liquid cash allegedly funneled from pirates who are ready to pay any price without a bargain, analysts say property demand and prices will remain high for some time.

“There is no reason why the price of land should suddenly go up by 500 per cent,” Mr Kaniu of Stanbic Investment Management Services said of the pirates’ influence.

With the global economy still reeling from the financial crisis that begun in the US, the Dubai crisis could not have come at a worse time. And, investment experts say, Kenyans must be worried too.

Endowed with less oil money than many of its neighbours, Dubai has lately become a trading and tourism hub for the rich. Its debt effects could spill into Kenya because some of the country’s wealthier folk have heavily invested in the formerly desert country.

Dubai World, the conglomerate that led the emirate’s expansion, had Sh4.4 trillion ($59 billion) of liabilities as of August this year, carrying with it a large proportion of Dubai’s total debt of Sh5.9 trillion ($80 billion).

Its subsidiary, Nakheel, was the builder of the landmark palm tree-shaped island developments off Dubai.
Save for those who punted their money in the emirate’s property market, Ms Kariuki, the S&L managing director, says the local market is shielded from both the global crunch – except for declining Diaspora inflows – and now Dubai crisis.

“As a market, we have essentially been very conservative,” she says and equates the local market’s conservatism to that of the Canadian property market, which has emerged fairly unscathed by the global crisis.

Product innovation

However, even as the market sticks to the conservative approach in terms of lending, the financiers seem to have let go their breaks on product innovation to entice more Kenyans to own homes.

For instance, among others, Housing Finance has come up with the First Home Ownership Plan, which is a savings plan of a minimum of Sh1,000 for anyone between 25-30 with a regular income who wants to buy a house and the Makao plan, which brings together a group of professionals in the construction industry seeking to cut costs.

Also, it offers the crossover account, which aims to offer a bridge between savings and mortgage; Home Freedom, a pension mortgage product that enables anyone saving with a registered pension scheme to use up to 60 per cent of the pension to access mortgages; and scheme loans to net some of the country’s key employers who wish to assist their employees acquire property.

Besides scheme loans, S&L has partnered with UAP Insurance to provide a cover that will see its customers’ mortgage payments settled by UAP for up to nine months after they lose their jobs. They also offer another product, the Social Perils Cover, which protects clients against loss or destruction of property from riots, strikes and political conflicts as witnessed in the 2008 post-election violence.

It has also partnered with a venture capital, Afrohomes, National Co-operative Housing Union and CIC Insurance in a new concept that enables individuals to buy prefabricated houses through mortgage.

Despite experiencing such growth, the industry still faces a number of challenges that include shortage of serviced land, stringent requirements and costs of building materials, high interest rates and limited incentives for the financiers, developers and home buyers.

The industry is agitating for the enactment of the proposed Housing Bill, draft Planning and Building Bill, which with the Building Code, would mitigate some of these challenges. “We are there to create homeowners,” said Mr Ireri of Housing Finance, “not tenants.”