How to make private sector embrace the low-cost housing plan

Some 228 affordable housing units built under the affordable housing scheme in Ngara, Nairobi. FILE PHOTO | NMG  

By GITONGA MURIITHI

Summary

• There needs to be a provision for long-term financing for entry-level rental developments by actively encouraging saccos, pensions schemes, and insurance companies to invest in mortgages.
• The government through the Housing Fund has the necessary scale to access affordable financing terms from the financial markets which it would then pass on to the home owners.
• It can engage with banks and capital markets to unlock the local and international capital that can be strategically used to fund the affordable housing project.

With rapid urbanisation, and a growing middle-class, local demand for low-cost housing has exceeded the supply to worrying proportions.

Developers shy away from low-cost housing, opting for other types of real estate investment like commercial spaces and high-end homes which are perceived to reap high returns on investment and at a much faster time.

Affordable housing is defined in terms of multiples of the median income. For instance, if the median income of an area is Sh10,000 whereas the median home price in that same area is Sh40,000, the ratio is 4:1.

A housing unit is said to be affordable when this ratio is less than 5. In most important cities around the world, it is rare to find housing units where the ratio is less than 5. In most cases, the ratio is between 7 to 10, which means that the housing unit is severely unaffordable.

According to the World Bank, the housing deficit in Kenya stands at Sh2 million and continues to grow at a rate of 200,000 units every year. Other statistics put the annual housing supply in the country at 50,000 units.

The challenges encountered in managing the affordable housing issue are complex and interdependent. These problems require a collaborative approach by multiple stakeholders to deliberate and find solutions.

Some of the hurdles faced by private developers include low return on investment, rising cost of land, complex land acquisition processes, high interest on capital finance, scarcity of land with infrastructure and outdated planning regulations. For the private sector to get fully onboard the affordable housing scheme, these issues have to be addressed from a policy, monetary as well as innovative perspective.

ACCESS TO FINANCE

Affordability has been identified as a key constraint in access to formal housing for the low-income segment. This is compounded by the lack of access to formal sources of financing for this segment.

To mitigate limitations in the finance sector there needs to be deliberate attempts to adapt microfinance models to low-income housing needs like incremental construction, micro-utilities and live/work developments that are not easy to finance.

There needs to be a provision for long-term financing for entry-level rental developments by actively encouraging saccos, pensions schemes, and insurance companies to invest in mortgages.

The government through the Housing Fund has the necessary scale to access affordable financing terms from the financial markets which it would then pass on to the home owners.

It can engage with banks and capital markets to unlock the local and international capital that can be strategically used to fund the affordable housing project.

BUILDING TECHNOLOGY

The Kenya building sector is heavy on the conventional stone, mortar and a combination of locally available materials (cement, sand, ballast). Technology such as use of reinforced concrete can reduce construction costs by five to 20 percent.

Developers can use cheap materials (cement, sand, ballast) which are locally available and reduce the project duration by months because of the pre-casting. In addition, reinforced concrete has minimal maintenance costs.

These savings will be passed on to the buyer of the house. The developer will cut costs and maximise returns while still maintaining quality standards.

The time factor will be advantageous to the government which needs to put up more than 500,000 units by 2020 that meet all the requirements of a decent and affordable house.

RAISING THE SKILLS GAP

Training in institutions should also align with the adoption of alternative technology to provide specialised labour to various projects. Technical institutions and youth polytechnics should train and certify young, unemployed adults in the various skills required by the construction industry.

With this approach the government will reduce the unemployment levels as well as the cost of construction projects.

High housing prices can be attributed to high labour costs. These costs are high because of the shortage of skilled labour required by builders.

To overcome this problem, we need to start creating vocational schools. These schools will train and certify young, unemployed adults in the various skills required by the construction industry.

Many of these institutes can also provide financing so that the workers are then able to buy the tools required to work in the construction industry.

COMMUNITY SUSTAINABILITY

A key component that should be considered is the sustainability of large scale housing projects, especially those undertaking outside of city boundaries.

Developers of these units should also consider long term access to jobs, schools, health care, shopping and social networks making the projects self- reliable for basic commodities.

As such builders must build more than just houses keeping in mind that a completed development contains what is needed to succeed as a community. These amenities are also crucial in attracting new residents and security is paramount in high risk regions.

LAND ACQUISITION

Land is a key factor of production and as such a critical element in providing low income housing. Land on which houses are built should be properly legislated and its ownership and acquisition streamlined so that barriers are eliminated and therefore cost lowered.

County governments together with the planning department should have legislation specifying that 20 percent of residential land in urban areas be allocated to low cost housing. This will encourage establishment of mixed-income projects that will in turn cross-subsidise lower-income housing.

Muriithi is head of sales and marketing, Centum Real Estate.