This project was funded by FSD Kenya.
Introduction and Overview
Below are the four sampled projects that provided the necessary information;
Developer A | Developer B | Developer C | Developer D | |
Brief description | The property is managed by the developer’s in-house management company | The property is managed by a company formed by the homeowners | The property is managed by the developer | The running is done by a property management company appointed by the developer. |
Target market | Upper middle class | Middle class | Upper middle class | High class |
Tenure type | Freehold | Freehold | Freehold | Leasehold |
The size of the land the project sits on | 4.7 acres | 1.25 acres | 5 acres | 0.5 acres |
Project Completion Year | Under Construction 2016-2022 | Completed 2018-2020 | Completed 2017-2020 | Completed 2016-2018 |
No. of Units within the project | 477 | 384 | 76 | 32 |
Unit sizes | 1-bed (54sqm) 2-bed (84sqm) 3-bed (117sqm) | 1-bed (40sqm) 2-bed + DSQ[1] (96sqm) 3-bed +DSQ (144sqm) | 3-bed (124sqm) 4-bed (141sqm) | 3-bed (258sqm) |
Amenities and facilities offered | Swimming pool Commercial center Raised gardens Lifts Clubhouse | Swimming pool Gymnasium Entertainment hall | Gymnasium Swimming pool Cabro-paved driveways Landscaped Gardens Children’s Playground | High-speed lifts Multipurpose party hall Gymnasium Car Garage Generator for common areas |
Unit sale prices (2022) | 1-bedroom = Kshs7.9mn (US$67 150) 2-bedroom = Kshs12.4mn (US$105 400) 3-bedroom = Kshs16.4mn (US$139 400) | 1-bedroom = Kshs2.65mn (US$22 525) 2-bedroom = Kshs4.65mn (US$39 525) 3 bedroom = Kshs6.3mn (US$53 550) | 3-bedroom = Kshs9mn (US$76 500) 4-bedroom = Kshs 10mn (US$85 000) | 3-bedroom = Kshs25mn (US$212 500) |
Rent prices per month (2022) | 1-bedroom = Kshs35,000 (US$298) 2-bedroom = Kshs45,000 (US$383) 3-bedroom = Kshs55,000 (US$468) | 2-bedroom = Kshs45,000 (US$383) 3-bedroom = Kshs67,000 (US$570) | 3-bedroom = Kshs30,000 (US$255) 4-bedroom = Kshs35,000 (US$298) | 3-bedroom = Kshs120,000 (US$ 1020) |
Monthly Service Charge (2022) | 1-bedroom = Kshs5000 (US$43), 2-bedroom = Kshs6500 (US$55) and 3-bedroom = Kshs8000 (US$68). The total annual project operating costs is divided among the unit occupiers, to obtain a monthly service charge. Before completion, the projected service charge was Kshs3000 (US$26), Kshs3500 (US$30), and Kshs4000 (US$34), respectively. | 1-bedroom=Kshs2,500 (US$21), 2-bedrooom = Kshs3,000 (US$26) and 3-bedroom = Kshs3,500 (US$30). The service charge is obtained from the market average rates and cost of operational expenses. | The service charge is Kshs5,000 (US$43) for all unit types. | The service charge is Kshs10,000 (US$85). The service charge is derived by dividing the total annual project operating expenses by the number of units. |
Service Charge as a share of the rent | 1 bedroom = 13% 2-bedroom = 13% 3-bedroom = 13% | 2-bedroom = 6% 3-bedroom = 5% | 3-bedroom = 14% 4-bedroom = 13% | 3-bedroom = 8% |
[1] Domestic Servant Quarter(DSQ)
Conversion rate 1Kshs= 0.0085 US$
From the above sample, it is evident that the methodology of arriving at the service charge varies from one developer to the other, and is rather haphazard. For rental properties, the monthly unit rental charges quoted in the lease agreement are often inclusive of both the rent price and service charge and are thus submitted together at the end of the month. From our sample, the service charge is approximately 10% of these monthly unit charges as shown below.
Though inscribed in sale or lease agreements, some developers or property managers may alter the service charge rates in some cases; where the property is handed over from a developer to an independent property management company, from one property management company to another, or this could be done by the same party where there is a change in operating costs and the prevailing service charge collections are not sufficient or where the actual costs, once unit owners have moved into their units, exceeds the projected operating cost during construction. Implementation of these changes demands tenant involvement as it could require a significant adjustment to a household’s housing budget. One of the above-sampled developers adjusted the service charge by approximately 84% to cater to increased operation costs within the residential development. This faced resistance from the tenants noting that the additional charges added an unexpected financial burden that was not provided for in their initial agreements.
The Kenya housing market lacks bodies or authorities to regulate service charges, and the determining of the rates is at the discretion of the developer or property manager. This has over the years exposed some tenants to property managers, who impose exorbitant rates for services that are sometimes not rendered. Failure to comply, the tenants could be denied essential services which jeopardize the quality of life. In some cases, tenants may be denied access to the premises, evicted even if they have paid rent, or their names listed down on a ‘list of shame that’s publicized within the premises. These conflicts may escalate and end up in the corridors of justice, case in point Civil Case 104 of 2011, where a tenant was ordered by the property manager to pay a monthly service charge of Kshs.42,340 (US$360) despite the existing Memorandum of Understanding that was mutually agreed previously quoting a service charge of Kshs.25,000 (US$213) per month plus Kshs.4,000 (US$34) being Value Added Tax.
Legally,[1], the property management company is expected to account for service charge usage and the accounts should be subject to audit. To avoid abuse, the lessee has the right to inspect book of accounts and demand accountability from the directors of the management company. However, many tenants are unaware of this right and become victims of exploitation.
There exists no standard rationale for deriving serving charges in the Kenya housing market, both legally and as market practice. This exposes tenants to exorbitant charges by some developers or property managers and therefore potential home buyers and tenants must carefully consider terms and conditions stipulated in the sale or lease agreements and especially service charge rates when buying or renting a house. Service charges are not one-offs and should therefore be financially sustainable to a household. Housing affordability is a major challenge in Kenya with the majority of the existing and incoming housing supply, being unaffordable to the median income earners. Adding on other associated costs such as service charges and the cost of utilities continues to fuel unaffordability. As both the government and private sector continue to focus on and drive the Big Four Agenda, on the provision of affordable housing, it would be important to consider the development of a standard way of computing service charges. This will not only guide incoming developers but also contribute significantly to the sanity of the housing market and contribute to housing affordability.
Data is fundamental to investment, particularly so for affordable housing. As mentioned earlier in the blog, despite sampling 14 residential projects within the Nairobi Metropolitan Area, only 4 projects were willing to provide adequate data on their projects to facilitate this study. This draws attention to the difficulty in accessing publicly available and credible data on housing which would otherwise support investment decision-making for stakeholders in the sector including; potential homeowners, developers, and property managers. This is a challenge CAHF aims to address head-on through the Open Access Initiative which aims to harness the collective experiences and learnings produced by participating organizations through their investments in affordable housing. The Initiative seeks to focus on the project’s 4Ps; product, process, people, and performance.
[1] https://www.standardmedia.co.ke/business/real–estate/article/2000127663/how–landlords–rip–off–tenantsthrough–service–charge