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Kenya Mortgage loans:How to awaken the sleeping giant

A new apartment block at Riverside Estate off Chiromo Road, Nairobi

A new apartment block at Riverside Estate off Chiromo Road, Nairobi

Stephen Mogaka has had one single dream, that of being a home owner in the city some day. He left formal employment 10 years ago to pursue what he thought was the more lucrative self employment. With the savings he had, Stephen opened a shop in Nakuru and it was doing well until it was razed down during the 2008 Post Election Violence. He moved to Kikuyu township in Kiambu County where has been rebuilding his life, slowly, one coin at a time. Still, his dream of leaving the world of tenancy remains as strong as ever. It isn’t easy though.

Despite a slur in the country’s property market in the past few months, accessing affordable financing remains the single biggest stumbling block to enabling such dreams become a reality. A common chorus has been on the high mortgage interest rates which have made it’s penetration stick to the 20,000 amid a housing shortfall of more than 200,000. This has made home ownership unaffordable to a majority of Kenyans with even professionals opting for rentals.

A home at Riverside, Nairobi

A home at Riverside, Nairobi

While releasing the Hass Index and The Mortgage report for the first quarter of 2014 last week, real estate consultants HassConsult and their partners in construction financial consultancy, The Mortgage Company (TMC) also revealed the stark reality of the country’s urban population’s inability to afford mortgaged housing at current prices. “Sadly, bearing in mind the current price range of most new buildings, say in Nairobi, just one per cent of urban Kenyans can currently afford the mortgage repayments for a house priced at Sh5.7 million, and only four per cent for a house priced at Sh3.9 million,” said Caroline Kariuki, managing director, The Mortgage Company.

“In fact, half of all urban Kenyans could not afford the loan repayments to buy a house at Sh700,000 at the current rates,” she said. To make the mortgage equation in the country more complex, majority of Kenyans, who are the self employed, are not covered by most house financing institutions. This means those able to access mortgages are the salaried minority, but even in this cluster, only the ones with the very big payslips can afford the repayments.

“Today, only salaried employees can even begin to dream of taking a loan for home ownership. Banks consider the payslip as the one sure repayment guarantee for mortgages. Yet in today’s job market, where job security is not guaranteed, this may be a false sense of security for financiers. The majority of Kenyans who are not in formal employment (12 million people according to Africa Economics data) are considered a poor credit risk for long term lending,” says Kariuki.

It is ironic that an owner of a SME cannot access a mortgage, while his employees have a smooth ride to the bank. The bank is willing to take a risk on the employee, but not the person ensuring that the employee gets paid. “We need to learn how to assess the risk of the informal sector and the self-employed. Even those who boast rental income are considered ‘risky’ for banks, with their income so heavily discounted as to be way too low to allow access to any decent loan,” says the TMC boss.

According to Sakina Hassanali, head of marketing for Hass Consult, nationwide demand for housing is strongest at the lowest end of the market, but the financing options are almost non-existent here. This has rendered the private sector property market a high-end affair for so long as property remains a cash purchase only making the cheapest property, ironically, hardest to sell. The bottlen

Great Oak Villas in Syokimau estate, Nairobi.

Great Oak Villas in Syokimau estate, Nairobi.

eck in housing finance has also continued to push rents up with the biggest rise seen on semi detached townhouses.

“With the finance blockage also impacting landlords in acquiring new properties, and the rental yields on properties still at less than mortgage interest rates, the race is now on to get rents up to a level where landlords can cover finance costs and not end up making losses,” said Ms Hassanali. This report comes after another by the Kenya Property Developers Association (KPDA) emphasised the grim home ownership picture in the country. “The country’s aim was to build 200,000 housing units a year in Nairobi to create a world class middle-income city by 2030. But in 2013, just 15,000 housing units were planned for construction,” read the report.

This is stunning underachievement, less than eight per cent to be precise, and while land prices were quoted, the cost of and inaccessibility of financing was the clear winner of the main problem cause. “Nairobi has declared its intention to emerge as a world class city, but this depends on a sharp increase in construction, where current trends are instead slowing down the development industry’s rate of growth,” said Robyn Emerson, CEO of KPDA. Recently, the Deputy President William Ruto came out to acknowledge the urgent need to create an enabling environment to get Kenya to achieve at least one million mortgage accounts.

The big question is what will it take? To achieve the huge shift in mortgage uptake, experts have said that we must look to have interventions that achieve the magical tipping point, converting rent into mortgage, by slashing down interest rates to single digits. Another solution mooted is the integration of pension fund into housing finance. The world over, where mortgage access is commonplace, pension funds and insurance companies use their long-term funding to buy mortgage backed securities. Perhaps Kenya is ready for this.

“With the proposed increase in pension contributions, there is an opportunity to transform our market. If the increase in contributions was tied to the use of these funds to allow all Kenyans access to cheaper housing, the increases would be far more popular. Home ownership allows ‘real’ security in old age as well as creating wealth from capital gains,” read the mortgage report. The creation of a secondary mortgage market is also critical to providing a source of cheaper priced, longer term financing for mortgages.

A modern house in Komarock estate

A modern house in Komarock estate

“The government can guarantee loans that conform to acceptable criteria to enable the pricing of mortgage backed-securities to be priced lower than corporate loans. This will provide much needed liquidity for mortgages for financing institutions perhaps with limitations in the margins that can be charged from these guaranteed loans. The current market system where financiers hold mortgages on their own books greatly limits their ability to issue new loans.” However, perhaps the ultimate prize would be the establishment of a Housing Fund.

In countries such as Singapore, the famous Lee Kwan Yu established a Housing Development Board responsible for developing public housing towns to provide Singaporeans with quality homes and living environments. The Board makes mortgages affordable through subsidies to keep mortgage payments at 20 to 30 per cent of gross household income. A good place to start would be to limit access to affordable housing to Kenyan citizens in lower income brackets.

-The People

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