Partnerships can boost Realisation of the Affordable Housing Agenda

By James Agin , Managing Principal, Absa Bank.

During this year's budget reading, the outgoing Treasury Cabinet Secretary Ukur Yatani announced a Sh27.2 billion allocation for planned new affordable housing units to serve middle and lower-income families in Kenya's urban centres, major towns, and cities.

This is in addition to the Sh37.3 billion allocated to the Affordable Housing Programme, whose mandate is the construction of new units as well as the facilitation of a mortgage-led housing plan through the Kenya Mortgages Refinance Company (KMRC), which is tasked with funding banks to offer 'capital' specifically to local lenders, who will in turn issue single digit interest rate loans to first-time home buyers.

The Ministry of Housing opines that the provision of new houses is skewed toward high and upper-middle-income households, with only 15% going to lower-middle-income households and only 2% going to low-income households.

KMRC is set to receive Sh4.6 billion from the national budget in the coming fiscal year to help Kenyans buy houses priced between Sh1 million and Sh3 million built on government land by select housing investor-developers.

This enables financial institutions such as Absa Bank to act not only as a mortgage lender, but also to fund housing developers who build units for sale to Kenyans. The inclusion of local lenders in financing various mass housing projects stems from the government's commitment to open up the housing sector to more players, thereby expediting project implementation across the country.

Absa Bank, for example, has partnered with the National Housing Corporation (NHC) NHC to implement various housing projects across the country. Participation of the bank in housing development projects will result in faster project implementation and will inform off-plan purchases from their customers.

?Currently, the bank is among the local lenders that have proposed customized mortgage products that speak to their customers' individual abilities and needs. Among them are rent-to-own and tenant purchase schemes, which attract buyers with attractive terms based on a 25-year repayment plan.

The involvement of local lenders also activates a ready-to-use end-user platform that customers can use as a one-stop shop facility for the acquisition of decent housing units. This platform benefits from lenders' access to individual customer financial data as well as credit scores, which will inform the various mortgage products that will be tailored to each person's ability to repay.

With off-plan housing purchasing schemes facing confidence challenges as a result of rising developer defaults, the entry of financial institutions into the housing development mix means houses will be built on time because they have an interest in allowing customers to assume ownership and commence loan repayments on time.

Some lenders are currently negotiating new mortgage agreements with customers based on the rent they pay at their current rental units. Customers who commit to taking up new units upon completion may end up paying mortgage instalments equal to their current monthly rent payments.

Lender involvement in the housing development market will be a game changer for Kenya's mortgage sector, which currently has only 26,971 active mortgages in a country with a working population of approximately 22.3 million. This reveals Kenyans' reluctance to take out mortgages, which is largely attributed to unpredictably high interest rates. On a positive note, the KMRC-backed mortgages are fixed rate which mitigates the risk of unpredictable high rates.

The KMRC-lenders collaboration bodes well for Kenya, the construction industry, and Kenyans, as prices for housing units will be reasonable due to various government incentives. The government has provided land, which has been found to contribute up to 30% of a unit's cost, to various developers in major towns on the condition that houses be sold between Sh1 million and Sh4 million.

The government has eliminated stamp duty for first-time buyers in order to encourage the purchase of new homes, while also promising to provide off-site bulk infrastructure such as drainage and utilities. Companies involved in large-scale projects have had their corporate tax cut from 30% to 15% if they undertake housing projects with at least 100 affordable units.

All of their project-related construction inputs have also been exempted from value-added tax (VAT), which is intended to protect developers from escalating costs. In addition, at the above affordable price, the tax benefit on mortgages improves cash flow and affordability to the buyer. KMRC has authorized lenders to issue interest-controlled mortgages in order to prepare a ready 'buyer' pipeline, which is expected to drive interest in new decent housing units.

A strong public-private partnership will thus be critical to the realization of the affordable housing dream by bringing on board the expertise, technology, finances, infrastructure, incentives, and all other necessary requirements.

As a result, the government must institutionalize a healthy Public-Private Partnership by fostering strong competition, bankability with low financial costs, lower renegotiation risk, secure value for money, and efficiency gains.