Quest for cheap houses hits a brick wall

Many developers are finding it difficult to provide affordable, low-cost housing in the prevailing economic situation due to the costs involved.

This has left the task to big-time players and government agencies in the real estate sector.

Indeed, early this month, the National Housing Corporation (NHC) announced an ambitious plan to build 11,000 low-cost houses along Nairobi’s Thika and Mombasa roads.

The firm said it would build 3,000 units along Thika Road and 4,000 units along Mombasa Road, 1,200 houses in Eldoret, 1,000 houses in Kisumu, and1,800 houses in Mombasa.

NHC Managing Director Wachira Njuguna sait the one- and two-bedroom apartments, would be sold for as little as Sh2 million.

“Our target market is individuals in the lower and middle market segments who want decent housing at affordable prices,” Mr Njuguna said.

At this price, and with the NHC’s flat interest rate of 13 per cent, buyers will pay about Sh25,304 monthly for 15 years.

Getting low-cost financing is a big challenge to many developers as the cost of development mortgage is high despite the base lending rate being a single digit.

“The demand from the public should be enough to show the banks that there is a market.

But in a scenario where interest rates are nearly double the base lending rate, we cannot supply the right number of units to the public.

This is the main problem,” says Mrs Sue Muraya, the CEO of the Suraya Property Group.

High mortgage costs

Mrs Muraya says that mortgage costs are extremely high compared to the income levels of most Kenyans.

“These costs aren’t just punitive to the buyers, they are also high for developers who, at the end of the day, have to pass it on to the buyers.” she says.

“Our houses try to cater for different classes and have different prices so that we can supply all market segments.

If you can put a deposit and qualify for a Sh2.1 million house, by the time it is finished, the price will have gone up, which means that the value of investment will have been achieved.”

Mrs Muraya adds that ensuring that young people own homes should be a priority for the government because this is the way to ensure that the housing deficit is addressed.

“We have packages that will allow everyone to own a piece of real estate.

There is no longer an excuse that the price is out of range.

We have developed homes for as little as Sh900,000 within our Sucasa models in Mlolongo consisting of bedsitters, as well as one- and two-bedroom apartments, targeting young home buyers.

We also have other houses that go for s Sh2.1 million,” she says.

The mortgage report for the first quarter of 2014 released recently by HassConsult shows that there is increasing demand for low-cost housing, with developers and financiers turning their attention to this segment of the market.

The high construction costs, coupled with high interest rates, have for a long time seen developers shy away from these segments, but many are now trying to cater for it, with one-bedroom apartments and bedsitters now cropping up in Nairobi and its environs.

Balancing the needs middle-income and low-income earner in order to provide affordable housing for them should be the government’s priority but things stand, most developers say the high construction costs prevent them from building houses for low- income earners because they are remain out of their reach.

During the release of the report, Ms Carol Kariuki, Managing Director of The Mortgage Company, said that the focus on the lower end of the market is a natural shift by developers to generate a new income stream.

“The next market is the lower end of the pyramid.

This is where most people who don’t own homes are, and many e developers have realised that there is money in the numbers,” says Ms Kariuki.

The Central Bank Annual Supervision report for2013 shows that the construction sector is now robust, with cement consumption, a key indicator of building and construction performance, increasing from 3,858,402 metric tonnes in July-June 2011/2012 to 4,007,226 metric tonnes in July-June 2012/2013.

Notably, these statistics don’t reflect an increase in housing in the lower end market, which cannot even service mortgage.

The report also shows that the value of building plans approved by Nairobi City Council also increased significantly from Sh191 million in July-June 2011/2012 to Sh211million in July-June 2012/2013.

According to the report, the average commercial banks’ lending rate fell from 20.30 per cent in June 2012 to 16.97 per cent in June 2013.

In the recently released economic survey 2014 by the Kenya National Bureau of Statistics (KNBS), overall construction costs jumped to 7.2 per cent from 5.6 per cent in 2012.

Cost of building materials went up

The period also saw the cost of construction materials increase by 5.7 per cent, up from 4.3 per cent in 2012, mainly due to upswing in the cost of structural steel, timber and fuel, among other actors.

Labour charges also increased by almost 10 per cent due to the increase in statutory minimum wages by the government in May last year.

“What this means is that developers factor in all these cost increases and pass them on to the buyers, leading to an increase in property prices,” says Mr Kennedy Gesami, a quantity surveyor.

Mr Gesami says it is difficult for developers to provide low-cost housing because of the high cost of development financing, land, construction costs and lack of government incentives to any developer who wants to take this path.

“This leaves developers like NHC , Shelter Afrique and other giants in this market because they can access cheap financing and affordable land, which the government can provide with infrastructure,” he says.

Tax rebates would help

He adds that if the government were to provide infrastructure such as roads, electricity, water and sewerage systems, and also give tax rebates to developers to lower the cost of construction material, it would be easier to provide low-cost housing.

“The developers have the headache of looking for land, then they have to face increasing unfriendly financing options, high cost of labour and materials.

At the end of the day, you cannot have a house going for less than Sh3 million because the margins will be low,” he says.

A report by the Africa Development Bank shows that while about 80 per cent of new houses on the Kenyan market target high- and upper middle-income earners, the greatest demand, estimated at 83 per cent, is among low- and lower middle-income earners.

With only about 11 per cent of Kenyans earning enough to support a mortgage, the real estate market, as currently constituted, cannot afford to provide houses for most middle and low-income earners as they cannot afford to buy even an entry-level house.

KNBS classifies middle-income earners as those who get between Sh23,672 and Sh119,999 per month, upper income as those with earning more than Sh120,000 a month, and low-income as those earning less than Sh23,671 a month.

What this means is that only a section of middle-income earners will be able to afford the Sh2 million houses the NHC is building.

This is because, given that the average mortgage repayment rate is 18 per cent, the repayment on the premium for such houses for 15 years will be Sh28,987.58. And that is after making a 10 per cent down payment.

Consequently, owning a house through mortgage will remain a mirage for most Kenyans.