Financing products that can cut housing deficits

Ideas & Debate

Financing products that can cut housing deficits


Kenya’s housing demand is expected to dramatically shift in the next few years and with it, growing demand for innovative financing solutions.

According to UN-Habitat, the country is rapidly urbanizing with over 35 percent of Kenyans now living in cities and towns, and it projects that this wise rise to more than 50 percent by 2030.

It will take radical measures to meet Kenya’s growing housing need, considering that we have an annual demand of 250,000 units against a supply of an estimated 50,000 units, culminating in a deficit of 2 million units, or 80 percent deficit.

Due to limited sources of funding, the real estate financing conditions in Kenya have been comparatively rigid for a long time. Locally, most land owners and property developers are still used to traditional methods of financing large construction projects by either selling part of the land or borrowing a loan from a bank or both.

Financial institutions are the main financiers for retail projects since they are able to accommodate depending on the exposure levels.

However, there are some challenges like funding structures, understanding of the projects and requirements, and cost of funding, that have led property developers to pursue other options of financing like joint ventures, syndication, and offshore financing.

Under Joint ventures (JV), the landowner partners with a financier, pension scheme or consortium of investors to undertake a project. JVs can speed up housing development while addressing speculative land prices in the sector that ultimately affects the final price of housing units.

In a JV, the landowner offers the land as part of his / her contribution, then the financier, such as NCBA, contributes finances for construction. The landowner can also easily access funds for construction since he / she will not have to undergo the rigorous bank loan application appraisal process.

Under this arrangement, the owner can tap resources and obtain services from consultants such as architects, engineers, quantity surveyors without having to pay initial consultancy fees since the consultants can offer their services as part of the JV contribution.

Another emerging option is syndicated financing. It is no secret — even to those outside of the field — that property sector is a capital-intensive industry. What the industry will need is to raise hundreds of billions of shillings in the next few years to keep up with rising demand for housing.

To make larger loans to property developers under current conditions, private lenders often need to form groups or “syndications” so that no one lender becomes overly exposed to the credit. Banks are keener on smaller and mid-size projects (less than 100 units) where the unit sale price is under $ 100,000. Banks have been prioritizing residential real estate projects for outright sale or rental.

Group lending allows lenders to work with others in spreading risk and minimizing transaction costs for larger loans. Syndicated lending also allows lenders with little expertise in the property sector to gain exposure by working with larger financial institutions that often serve as “agents” for the syndicated lenders.

Offshore borrowing is another option that has huge potential to accelerate growth in the industry. It entails use various forms of debt, JV or equity funding for the purchase or development of a project. A key advantage of offshore borrowing is investors and lenders have the ability to put together almost any required financing component for real estate.

Overall, we should see greater activity in the sector if players shift focus to viability of the project based on location and unit prices as opposed to developers’ securitization and financial levels. This will allow smaller-scale developers who are aligning their products to existing demand to access lending.

We also need to further deepen and develop products that specifically address project finance that allow, for example, longer moratorium periods (up to five years).

Engaging more with stakeholders like the government (registry) to seek for ways to facilitate funds exchange from buyers to the bank in situations where there are extended delays in registration will reduce financing costs. We need to consider other methods of securing the properties during such delays.

We need to employ more flexible financing terms that for example accommodate rent-to-own models and Total Property Solutions.

Another notable move is Green Financing and being part of the Environmental, Social, and Governance (ESG). Currently, we have the Kenya Green Bond Program (KGBP) which was launched in 2017 to promote financial sector innovation and enhance green investments. KGBP is an initiative by the Kenya Bankers, NSE, Climate Bond, and FSD.

The application of science, digitalization, data and collaboration is enabling the construction industry to adapt and succeed to drive the global economy of the future. They are among the game changers pointing the way to a more sustainable and resilient future.

Necessity being the mother of innovation, the property sector in Kenya will have to embrace modern financing products to bridge the housing deficit in the country. Innovative financing for the property sector will in turn support sustainable national development.

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