Affordable Housing in Kenya
Affordable housing is at the core of Kenya's new government, having already launched 30,000 housing units between November 2022 and January 2023. To support the affordable housing initiative, the national government has identified REITs as an avenue from which it can increase the rollout of affordable housing.
The Capital Markets Authority (CMA) in collaboration with the Sanduku Investment Initiative, the Association of Pension Trustees and Administrators of Kenya (APTAK), and the Nairobi Securities Exchange (NSE) have made significant progress towards the creation of a Kenya National REIT (KNR).
Kenya National REIT (KNR)
KNR will register all REITs for the development of affordable housing via Special Purpose Vehicles (SPVs). KNR has been conceptualized as an accreditation body for REITs, ensuring that investment-grade REITs are structured for immediate investor uptake.
The Sanduku Initiative, a funding initiative seeking to raise Ksh 1 trillion in five years (2022–2027), is targeting financial sector players such as pension funds, SACCOs, insurance companies, Islamic finance institutions, banks, as well as global investors. A significant amount of the funding will be channeled into the affordable housing project to buttress the Kenya Kwanza administration's bottom-up economic model.
Challenges
The initiative still has some challenges to face. The East African highlighted that property development funding through REITs may be undermined by capital markets products such as company shares, Treasury bills, and corporate bonds, which offer more attractive returns, as well as a lack of knowledge by investors on the subject of the REITs space.
Furthermore, Estate Intel noted the high cost of construction materials due to rising inflation and supply chain disruptions that have seen materials such as steel go up by about 30% in January. This may undermine the cost minimization efforts for development through the provision of land at no cost, having building materials zero-rated, and the corporate tax of the property developer slashed from 30% to 15%.
Our View
The use of REITs to raise finance for affordable housing projects will also enhance liquidity and offer good returns for investors, which might also boost their uptake in the coming years.
Despite several policy initiatives undertaken by the government — including the formation of the Kenya Mortgage Refinancing Company to enhance long-term mortgage affordability, and the National Housing Development Fund to bridge the gap for affordable housing by de-risking private developers through guaranteed offtake and provision of affordable financing solutions to end buyers — the supply function is still far from making significant strides.
Furthermore, industry players need to further look into the proposed model to ensure they have all stakeholders' interests covered, as well as address the challenges recognized in the REITs space.
REITs have the ability to raise funds to support the development of affordable housing. Further, the creation of the National REIT could go a long way in directing a greater amount of funds into the same, and thus reduce the deficit in supply of affordable housing.
Source: The East African, Estate Intel, Business Today, Business Daily and Sterling Real Estate Advisory