Kenya has a rapidly growing real estate and housing finance sector. As the mortgage market does not yet meet the breadth of the population who might afford a mortgage, most households still finance their housing independently, with savings or non-mortgage credit.
The lowest recorded interest rate on a mortgage in Kenya is 17.1 percent, as of September 2016, and requires at least a 10 percent down payment. There are currently 24 458 mortgages in the country, with the average mortgage size being US$ 81 717. The cheapest newly built house by a developer recorded by CAHF is US$ 15 753, which is for a 30 square metre unit. Cement prices are lower than the continental average, at US$ 7.29 for a 50-kilogram bag.
With an urbanisation rate of 4.28 percent, demand for affordable housing will remain strong, also for affordable rental. Housing microfinance will play an important role in increasing the supply of housing, and efforts to increase access should be undertaken as the current average microloan size is only US$ 197. The recently imposed cap on interest rates may adversely affect one of Africa’s most encouraging affordable housing markets, but other encouraging policy, such as a tax incentive for affordable housing developers, will likely support market growth. With a good macroeconomic environment, sound policy, better data and increased access to affordable credit, an enabled housing market can increasingly provide housing that the average Kenyan household can afford. More information on the Kenyan Government’s view on affordable housing can also be found here.
Find out more information on the housing finance sector of Kenya, including key stakeholders, important policies and housing affordability:
- Access to Finance
- Housing Affordability
- Housing Supply
- Property Markets
- Housing Policy and Regulations
- Housing Sector Opportunities
Each year, CAHF publishes its Housing Finance in Africa Yearbook. The profile above is from the 2017 edition, which has up-to-date profiles for 54 African countries.Download yearbook
Kenya is East Africa’s largest economy, a leading financial centre in the region and a regional leader in terms of investments in mega projects. According to Deloitte 2016 Africa Construction Trends, as at the end of 2016 Kenya had 11 ongoing mega projects valued at 728 billion Kenya shillings (US$ 7.05 billion) which have positioned the country as the regional economic powerhouse. These projects include; the standard gauge railway, Lake Turkana Wind Power Project and the Lamu port berths. The country successfully conducted the 2013 general elections under the new constitution and the ruling party has successfully managed the transition from the old constitution to the new one albeit with some challenges. A number of new governance institutions have been created and are now operational. The second General election under the new constitution was held on 8th August, 2017. The political temperatures before the general elections were very high making a number of investors adopt a ‘wait and see’ attitude pending the conclusion of the elections. The general elections were largely peaceful and were hailed by all the international observers as broadly free and fair. Importantly, Kenya has become resilient over the years enabling the economy to rebound even with internal and external shocks. For instance, In spite of the prolonged famine occasioned by failed rains and the elections mood, the economy is still currently growing at 5.8 percent, way above Sub-Saharan average of 1.5 percent at the end of 2016. The completion of the phase one (Mombasa-Nairobi) of the standard gauge railway in 2017 presents a great opportunity for investors targeting investments in Kenya. The standard gauge railway which stretches from the coastal city of Mombasa to the country’s border with Uganda, is the country’s most ambitious and most expensive project since independence.
Kenya’s economy has consistently posted superior performance over the last five years. It registered GDP growth rates of 6.1 percent in 2011, 4.6 percent in 2012, 5.7 percent in 2013, 5.3 percent in 2014, 5.6 percent in 2015 and 5.8 percent in 2016. According to Kenya’s Economic Survey (2017) Report of the Kenya National Bureau of Statistics (KNBS), GDP growth in 2016 was largely accounted for by accommodation and food services which grew by 13.3 percent in year 2016 compared to a decline of 1.3 percent in 2015. According to the Economic Survey, other sectors such as information and communication, real estate, transport and storage registered improved performance. On the other hand, the severe drought experienced in the last quarter of 2016 negatively impacted on agriculture and electricity supply. The report documents a decline in construction, mining and quarrying as well as financial and insurance sectors in 2016.
The World Bank predicts that the country’s economy will experience a bumpy ride occasioned by depressed private sector credit growth, rise in international oil prices and fiscal shocks. However, the World Bank report contends that the negative exposure will be moderated by the effect of the completed phase of the standard gauge railway. This is predicted to lead to a net slight decline in economic growth rate to 5.5 percent by the end of 2017 before rebounding to hit 6.1 percent by year 2019.
The fall in transportation, housing and utilities as well as communication prices in 2016 led to decline in annual average inflation from 6.6 percent in 2015 to 6.3 percent in 2016. The drop in transportation costs was due to the fall in oil prices while the fall in utilities prices was driven by increased production of geothermal power and its inclusion in the national power grid. The increased activity in the housing sector may to a large extent explain the general drop in housing prices observed in Kenya in 2016. For instance, according to Kenya Economic Survey 2017, construction industry expanded by 9.2 per cent in 2016 from an expansion of 13.9 per cent documented in 2015. The survey finds that the government agency for housing namely the National Housing Corporation (NHC), completed housing projects in 2016, at a total cost Kes 877.9 million (US$ 8505135).
During 2016, the Shilling strengthened against the Pound Sterling and most of the regional currencies but weakened against the, Euro, the Japanese Yen and the US Dollar in 2016. The last quarter of 2016 saw the introduction of interest rate regulation through the amendment to the Banking Act. The amendment to the law now requires that lenders must peg the cost of loans at 400 basis points above the benchmark central bank rate (CBR), currently at 10 percent. In addition the law also obliges commercial banks to pay interest on deposits held in customers’ savings accounts by a minimum of 70 percent of the CBR. The KNBS report finds that the interest rate regulation significantly led to a reduction in domestic credit from 20.8 percent in 2015 to 6.4 percent in 2016. Furthermore, if the 2016 trend continues through 2017, activities which largely rely on commercial banks borrowing will be curtailed.
All in all, Kenya has the potential to be one of Africa’s great success stories from its growing and youthful population, a dynamic private sector, a new constitution, and its pivotal role in East Africa
Housing markets are local, and housing market outcomes reflect local economic conditions (Hwang & Quigley, 2006). As such, favourable changes in economic conditions, income, and employment as well as monetary policies as documented in Kenya over the last years is expected to have major implications on Kenya’s housing market, housing prices, vacancies, and residential construction activity.
Access to Finance
Kenya has robust formal and informal financial markets. The formal financial sector is regulated by the Central Bank of Kenya (CBK) and Capital Markets Authority (CMA). The CBK describes the structure of the Kenyan banking sector as at 31 December 2016 as having comprised of the Central Bank of Kenya, as the regulatory authority, 43 banking institutions (42 commercial banks and one mortgage finance company), eight representative offices of foreign banks, 12 microfinance banks (MFBs), three credit reference bureaus (CRBs), 15 money remittance providers (MRPs) and 80 foreign exchange (forex) bureaus. Out of the 43 banking institutions, 40 were privately owned while the Kenyan government had majority ownership in three institutions. As at December 2016 three commercial banks were not in operation since one of them was under statutory management and other two were under receivership.
According to Central Bank of Kenya (CBK), almost all commercial banks offer mortgage loans to both their customers and bank staff. The number of banks offering mortgages to customers has remained 34 since December 2015 after three banks (Chase bank, Imperial Bank and Dubai Bank) which were all offering mortgages. The CBK makes a number of findings; firstly the mortgage interest rate charged in 2015 averaged 17.1 percent and with a range of between 11.9 – 23.0 percent as compared to 15.8 percent average with a range of 8.0 per cent – 21.3 per cent in 2014. Secondly, about 89.3 per cent of mortgage loans in 2015 were provided on variable interest rates basis compared to 92.5 per cent in 2014. Thirdly, majority of mortgage borrowers in 2015 preferred fixed rate mortgages so as to hedge against interest rate fluctuations. Fourthly, loan to value (maximum loan as a percentage of property value) was pegged below 90 per cent by majority of the banks in 2015 and 2014. Lastly, the average loan maturity in 2015 was 9.6 years with minimum of 5 years and a maximum of 20 years. As at the date of compiling this report, the CBK had not released comparable figures for 2016. These figures are expected to be contained in the Central Bank of Kenya annual bank supervision report 2016. Nevertheless, with interest rates now capped at Central Bank Rate (currently at 10 percent) plus 4 percent, as at December 2016, the mortgage rates were at a maximum of 14 percent.
It is important to note that according to recent World Bank report, Savings and Credit Cooperative Societies (SACCOS), have overtaken commercial banks and mortgage providers in the provision of home construction in loans in Kenya. The SACCOs now account for more than 90 percent (over 100,000 housing loans) of home loans in Kenya according to the World Bank. SACCOs package home loans as development loans and at more affordable interest rates usually at 12 per cent per annum. SACCOs also offer small formal mortgages through the Kenya Union of Savings and Credit Co-operatives (Kuscco) Housing Fund. Importantly, SACCOs avail unsecured construction loans in many instances. SACCOs therefore play a critical and major role in the provision of affordable housing in Kenya. This is especially so considering that the number of mortge accounts in 2015 stood at 24 458 with a mortgage outstanding value of Kes 203.3 billion (US$ 1 969 724 860). The value of non-performing loan (NPL) mortgages in 2015 stood at Kes 11 737 million (US$ 113 708 584) while the NPLs stood at 1475. As at January 2017, the Sacco Societies Regulatory Authority (SASRA) had 176 registered SACCOs, one SACCO under statutory management and another one deregistered.
CBK also reports that the total net assets in the banking sector stood at Ksh 3.76 trillion (US$ 36.5 billion) as at 31 December 2016.— The year 2016 witnessed a decline in money market rates as a result of the implementation of the amended Banking Act in Mid-September. The Monetary Policy Committee (MPC) vacated the Kenya Bankers Reference Rate (KBRR) which had previously been adopted as the benchmark for pricing commercial banks loans in favour of CBR. As at December 2016, base rate was at 10 percent meaning that commercial banks could only lend at maximum of 14 percent (CBR/Base rate + 4percent). The implication of this interest rate cap is that it has increased demand for home loans but reduced supply of the loans. This is because commercial banks are practicing selective lending or a cautious approach to lending. According to KNBS, the monetary policy decisions were designed to support economic growth and to check inflationary pressures in view of the biting drought in the country. The 91 day Treasury bill rate dropped from 9.81 percent in December 2015 to 7.25 percent in June 2016 and later rising to 8.44 percent in December 2016. The interbank lending rate dropped from 6.91 percent in December 2015 to 5.92 percent in December 2016. The capping of interest rates stabilized interest rates in the second half of 2016. The loans-deposits interest rate spread is now capped at three percent and therefore there was a marked drop in the interest rate spread from 9.53 percent in December 2015 to three percent in December 2016.
Cooperative movements remain important stakeholders with regard to supporting the mortgage market. The National Cooperative Housing Union (NACHU), an apex organisation made of registered primary housing cooperatives, works to provide affordable and decent housing to Kenyans within the low and modest income communities. NACHU has more than 800 housing cooperatives in eight regions of Kenya and has become a leading organisation in the provision of housing microfinance, capacity building and technical services. NACHU has supported various community housing and real estate project. Their recently completed projects include Alfa Mwanda Housing Project in Nakuru (33 units), Faith Foundation Housing Project in Nairobi (52 units), Royal Housing Project (50 units) and Mutindwa/Good Neighbours Housing Project (39 units). The projects currently running include; Kabiria Housing Project in Nairobi (37 units), and Ngumo Mbega Housing Project (20 units).
Altogether, access to finance remains below that of developed countries. Yet key statistics, such as loan and advances from the banking sector, indicate a significant positive change. According to CBK, loan and advances from banks increased by 15.12 percent from Ksh 1 881 billion (US$ 18.5 billion) in December 2014 to Ksh 2 091.4 billion (US$ 20.6 billion) in December 2015. The comparative figures for 2016 and 2017 are yet to be released by the CBK.
With regard to the demand-side of Kenya’s housing market, as the economy and urban population expand, a matter of grave concern still remains, affordability. Going by the Kenya Bankers Association’s Housing Price Index (KBA-HPI), house prices continued on a downward trend in the last quarter of 2016 which represented a reversal of the upward trend experienced in the last quarter of 2015. KBA associates this reversal to interest rate caps which lowered availability of mortgages. However, this view is not shared by HassConsult. HassConsult observes that the fall in house prices was recorded in areas with middle market properties located in satellite towns. Hass Consult argues that house price increases recorded in exclusively high end suburbs is explained by the fact that consistent with global trends, high end areas tend be least affected by economic slowdown. The company points out in its report that since the first quarter of 2016, the growth in house prices has consistently exceeded growth in land prices for the first time in nine years.
According to United Nations Sustainable Development Goal number 11, countries should ensure that all people have access to adequate, safe and affordable housing. Conversely, the World Bank Kenya Economic update 2017, observes that Kenya has an estimated accumulated housing deficit of 2 million units and approximately 61 percent of urban households are living in informal settlements. Notably, most Kenyans have informal sources of income which are not recognized by banks for purposes of securing mortgages. In effect, the World Bank observes that 90 percent of Kenya’s urban households live in rented houses. The World Bank contends that house prices are far beyond the reach of most Kenyans. This is due to poverty and unavailability of credit due to informal sources of income and the fact that banks do not lend to those in the lower end of the market. The problem of affordability of houses in Kenya is compounded by the continued escalation in land prices especially in urban areas. Nevertheless, recent Kenya government policy and legislative interventions are expected to bring down the cost housing with positive implications on affordability. For instance, the tax incentive available to developers of multiple units will ensure that developers of over 400 affordable housing units in a given year will pay corporation tax of 15 percent instead of 30 percent. There is significant mobilization by SACCOs to have members group themselves, buy big chunks of land, sub-divide and build houses as communities. This mobilization may account for the fact that SACCOs are the major financiers of affordable houses in Kenya. However, SACCOs are financially constrained implying that housing deficits will continue to widen in the absence of major interventions. Of course this presents handsome opportunities to investors interested in building affordable houses in Kenya’s urban centres.
More and more developers are now focussing on the affordable housing segment, building smaller units at much lower prices. Jamii Bora (trading as Urbanis Africa) and Karibu Homes-Parktel (in partnership with Shelter Afrique) are among the pioneering developers to implement this strategy. Karibu Homes, for instance, has a project of 1 074 units, which includes one-bedroomed houses priced at about Ksh 1.6 million (US$ 15 511) which have already been completed. Urbanis Africa, on the other hand, has, for several years, launched several affordable housing projects which once completed will churn out more than 5 000 units. These projects are in the pipeline and yet to be completed. Other developments include the 1 000 units by Suraya Property Group priced at Ksh 2.9 million (US$ 28 113). The construction of the 185 housing units by Suraya Properties commenced in march 2017 and is expected to be completed in August 2018. In addition, 2 000 units by Erdemann Property Ltd for Ksh 6 million (US$ 58 164) and Ksh 7 million (US$ 67 859 for two and three bedroomed units, respectively. A recent survey by Turner & Townsend ranks Nairobi as the cheapest city for construction in the world despite the high cost of land.
The CAHF (2015) estimates the annual housing requirement in Kenya at about 132 000 units compared to government projects annual production at 50 000 units, leaving a recurrent annual deficit at about 82 000 units. This huge deficit indicates a dire need for increased housing investment, especially innovative and targeted developments, to boost supply. Statistics on investment into housing indicates that there is a growing interest in this sector. According to the annual economic survey of KNBS, only Ksh 127.7 billion (US$ 1.24 billion) was invested into housing production in 2010 but investment in dwellings has consistently been on the rise, recording growth at a rate of 15.2 percent, 17.2 percent, 14.6 percent and 17.3 percent in 2011, 2012, 2013 and 2014, respectively. In 2015, about Ksh 257.3 billion (US$ 2 494 306 ) was injected into the housing sector country-wide with Nairobi alone receiving above Ksh 58.4 billion (US$ 566 138 654), accounting for roughly 7 479 new housing units. According to KNBS 2017 Economic Survey, there was an increase in the value of new private buildings in Nairobi County by 7.5 per cent from KSh 70.9 billion ( US$ 687 315) in 2015 to KSh 76.2 billion (US$ 738 694) in 2016, owing to sustained rise in construction of residential and non-residential buildings.
In addition, according to The National Treasury (Kenya) 2017 budget statement, the Kenya government has promised to launch an additional 1 500 housing units for Kenya Police and Prisons’ staff at a cost Ksh 1.4 billion (US$ 13 563 263). Importantly, the government has reduced corporation tax from 30 percent to 15 percent for developers who construct at least 400 affordable housing units per year. The Cabinet Secretary, National Treasury argues that this tax reduction is meant to provide low cost housing to meet increasing demand for urban housing. Accordingly, the Cabinet Secretary has called upon investors to take advantage of the tax incentive to construct low cost housing.
With effect from the last quarter of 2016, property prices for middle market prices have continued to record a declining trend while those in high end suburbs experience price surges. According to Knightfrank, Wealth report 2017, Kenya added 900 individuals to the elite dollar millionaire class in 2016. Effectively, this addition increased the number of dollar millionaires from 8 500 in 2015 to 9 400 in 2016. Importantly, the report finds that wealthy Kenyans prefer investment in real estate for wealth preservation, presenting handsome prospects for future property developers. According to Knightfrank Africa report 2017, Kenya’s capital, Nairobi has the largest volume of modern retail floor space in Sub-Saharan Africa outside South Africa. In addition the report observes that the Kenyan government estimates the current residential housing shortage is 200 000 units per year and that the country is trying to address the problem in a number of ways such as slum upgrading and provision of tax incentives to major developers.
According to the Knight Frank Prime Global Cities Index, prices of luxury homes in Nairobi increased by 3.3 percent and 2.2 percent for a 12-months’ period and six-month period ending March 2016, respectively. In the 3 months (December 2016-February 2017) the Knight Frank Prime Global Cities Index documents that prime house prices in Nairobi rose by 0.9%. Based on the annual performance, Nairobi is now ranked 15 in their 35-city survey, up two positions from 17 in the last quarter of 2015 This ranking dropped to position 36 in the first quarter of 2017. .
In the opinion of Kenya Bankers Association, the surge in house prices is instigated by developers’ preference of the middle end of the market, developers’ inclination towards renting than selling, growing mortgage market and gradual opening up of new geographical areas for housing development in response to physical infrastructure expansion, especially transport.
Housing Policy and Regulations
Bruce (2015) of USAID puts it rather clear that the way in which nations define property rights—such as private, public, state-held—and permit citizen to hold property (e.g., private, leaseholds, etc.) and defend those rights through the rule of law or administrative procedures, greatly influences the processes of globalization, national economic growth, and the development of a democratic society. In Kenya, the Ministry of Land, Housing and Urban Development and the National Land Commission (NLC) are two main institutions responsible for land administration. The ministry is part of the executive arm of the national government while the NLC is an independent body created by the 2010 Constitution.
Noting the existence of many land laws, the Ministry realised that some of the laws were incompatible and resulted into a complex land management and administration system, fragmentation and breakdown in land administration, disparities in land ownership and poverty. To address these problems, from 2010, the Ministry embarked on the formulation of several land laws in line with the constitution that had just been promulgated in 2010. The resultant new laws include the National Land Commission Act of 2012, the Land Registration Act of 2012 and the Land Act of 2012. The new laws have repealed the Indian Transfer of Property Act, the Government Lands Act, the Registration of Titles Act, the Land Titles Act, the Registered Land Act, the Wayleaves Act and the Land Acquisition Act. The Land Control Act, the Landlord and Tenant (Hotels, Shops and Catering Establishments) Act, the Sectional Properties Act and the Distress for Rent Act were not repealed.
Since enactment of these laws and the formation of NLC, administrative structures for management of land in Kenya changed considerably. The NLC, created in 2012, has a range of functions including advising the national government on a comprehensive programme for the registration of land titles, management of public land, implementing settlement programmes, developing an effective land information system and managing a land compensation fund. Another important function of NLC will be the allocation of public land. The allocation of public land to private individuals has been a concern for many Kenyans for a long time. Allocation of public land was within the control of public officers at the Ministry of Lands, who were susceptible to influence by the executive arm of the government. The process of allocation of public land was therefore shrouded in secrecy and, often, members of the public would only realise that public land has been expropriated, after a title deed has been issued to private persons.
The Housing (Amendment) Act, 2017 now requires the government to maintain a data-base of low income individuals living in urban areas and to update the database yearly and the identification of persons who qualify for low cost houses. The amendment requires the cabinet secretary responsible for housing to in consultation with the Cabinet Secretary for finance- (a) prescribe guidelines to promote construction of low cost houses using appropriate building technology; and (b) provide incentives including tax waivers to investors in the housing and construction industry who take deliberate measures to invest in low cost houses. In addition, the National Construction Authority (Amendment) Regulations, 2017 deleted Part IV of the National Construction Authority (NCA) Regulations 2014 which deals with identification and reporting of construction works contracts or projects by owner.
Housing Sector Opportunities
Kenya requires the construction of at least 200 000 units per annum according to year 2017 government estimates contained in the National Treasury (Kenya, 2017), Budget Statement for the Fiscal year 2017-2018. The number of housing units are projected to cater for new urban dwellers but according to the World Bank, the country’s housing deficit stands at two million . Even as the need is obviously present, the fact remains that only a handful of Kenyans can afford a formally built house and that the majority would prefer to rent unless the cost is brought down to a truly affordable price. True to these words, the housing case for Kenya is basically a case for affordable housing. In the words of Aden Van Noppen, of Acumen Fund, providing more affordable homes and housing finance in Kenya is not impossible and there are a growing number of groups who are making strides in this direction. They are taking risks and testing new models, and many of them need capital from patient impact investors in order to move forward. For instance, on end-user finance, products that match cash flows of the middle and low income earners are likely to be appealing to many customers, such as home improvement loans, incremental construction financing, group loans and joint-income loans.
On the supply side, developers will be able to make a significant impact by constructing smaller units (studio, one-bedroom and two-bedroom units), making joint purchase of land to reduce overall cost of completed units, sourcing concessionary loans at lower interest rates and by using alternative building materials. Typical examples on this would include the already successful Karibu Homes-Parktel, Suraya Property Group, Erdemann Property Ltd and Jamii Bora trading as Urbanis Africa, among others, who have ventured and proven that development of affordable houses is still possible.
Importantly, the Government of Kenya’s new tax incentives for builders of at least 400 affordable housing units, presents great opportunities in the housing sector. Knight frank ranks Kenya as one of the fastest growing cities in Sub-Saharan Africa (at 4 percent per annum). The country has a growing population of middle class in need of affordable housing but the supply of credit is very low compared to demand. The implication of this is that with high demand for housing and low supply of both housing and credit, investors in affordable housing in Kenya are guaranteed of huge returns.