By Kosta Kioleoglou
When it comes to the talk about property market in Kenya, the most popular fact used is the housing deficit that currently stands at 200,000 housing units annually. This is the magic number used from real estate professionals in expressing the need for more new developments in the country. Investors trying to support the market’s sustainability using the rule of demand and supply use the same figure. It is the figure misleading the average investor into false decisions.
There is definitely a housing deficit in the country. I believe it is much bigger than the above-mentioned number. Before we rush into any conclusions, we need to understand exactly the rule of supply and demand to be able to use it properly. By analyzing deeply the situation of housing in Kenya, it is clear that over the last decade, housing development situation has been skewed in favor of the high-income earners. Most developers and housing financiers always target high-income population. The result is the isolation of low-income population who form the majority.
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The key question is how big this part of the population is, are they the ones creating the 200,000-house demand every year?
The answer is obviously that the number of families who can afford to purchase the type of properties delivered in the market is much smaller. 200,000 houses represent over one million people. With simple mathematics, it means that over the last 10 years more than 2,000,000 Kenyan families (equal to 10,000,000 people) should have been able to afford to buy these expensive properties available. That is if the market could provide this number of new houses.
If the market could provide so many luxury houses continuously, then in the next 10 years almost half of the population should be living in nice expensive houses or apartments. With the prices going up constantly, that would mean that the average family should be able to afford to spend over Sh5, 000,000 in the best-case scenario, to buy one of these houses. Well, that scenario would have been perfect. Unfortunately it is far from the actual reality in Kenya.
The World Bank has recently upgraded Kenya to a “Middle Class Income” status country, but that did not change the fact that the GDP per capita is approximately US$2000. Unemployment stands close to 50%, low and very low-income class represents the majority of the population. The middle and upper class of Kenya consists almost 20% of the population according to the World Bank.
Taylor Scott International’s property survey report conducted in the first quarter of 2015 clearly shows that there is quite a high percentage of existing property ownership amongst the middle and upper class that is representing the market today. That is actually limiting the real demand for the available supply of expensive properties around the country.
Still there is a huge need for housing from the majority of the population, the 80% of the population that does not have access to finance and cannot afford even to dream about ownership of a new house in Kenya today.
Provision of adequate, affordable and decent housing for low-income households is clearly in short supply. As a result of the constraints on both the supply and demand sides, Kenya’s low-income urban population is forced to live in informal settlements. They have no security of tenure. They have limited access to water, sewage and power systems. Security is also a nightmare.
Although the real estate development industry has shown an impressive growth over the last few years on commercial buildings and medium to high-income houses, there seems to be a minimal interest in providing low-income housing units by developers in private sector. Their success in the middle and high income housing markets implies that they may have the capacity and skill set to supply the low-income housing required to alleviate, at least partly, the housing shortfall in the country.
Developers have shied away from the low-income market mainly because the profitability margins are lower compared to housing developments for the other markets. There are also other factors affecting the supply of housing from private sector housing developers, which demoralize them. The cost of production and the opportunity cost to the developer’s finite funds in either providing middle-income housing or high-income segment housing are key negative factors.
Developers have to consider the rate of return to their investment and how fast they’ll realize this. Provision of low cost housing to the increasing number of lower and middle-income classes in the country has also been hugely affected by the cost of land and inadequate infrastructure. The increase of CBR and the Kenya shilling sliding are also affecting directly the cost of construction providing further negative points against low cost housing.
According to the available house price index published by the KBA, it is obvious that today the current real estate market of Kenya is facing challenges. The market is slowing down, developers and private investors are straggling to sell or rent their properties at the initially projected prices.
It is time to explore other market possibilities and I believe that the “low income” segment of the market is very interesting from several aspects.
From a social point of view, everyone has the right to have access to buy, rent and use a house in an environment that is providing at least some minimum standards of living. An interesting fact is that the population growth of Kenya is one of the fastest growing in the world. By 2030, the population is estimated to reach 65 million people. With simple mathematics, anyone can understand that this will lead to a huge problem. To avoid this, the country must face the housing problem head on and create a long-term sustainable housing environment.
Many people argue with the fact that in a free market the private sector is not there to cover the social needs of a country but to make profits. On the other hand, the government is the one who has to apply social policies in order to achieve basic standards of living for its citizens.
I cannot disagree with the above argument but I also believe that in a free economy-market, smart entrepreneurs should be open-minded and sometimes think out of the box.
Targeting the medium and high-income class looks like the easy way to make money in this industry. Demographics and macroeconomics have their own important role when it comes to long-term success of a business.
Africa has to show a completely different profile in comparison to the west where the majority of the population is spread between the medium and upper class. In Kenya, over 80% of the population belongs to the low-income class with a huge demand for housing due to a big shortage of supply.
From a business point of view, a huge opportunity occurs. There is a broad supply to the upper middle income and high end market compared to the insufficient supply on lower middle income segments providing a huge demand, almost a virgin sector for the market, the Low cost – affordable housing.
According to Knight Frank, which reports on the high-end residential market, a lethargic prime residential market has resulted in developers shifting focus to smaller residential apartments. It has recorded a notable reduction in activity in the second quarter of 2014 after a historic high in the first. Further, according to the report, developers in the Nairobi prime apartment market are shifting focus from three and four bedroom apartments to smaller units such as studio, one and two bedroom apartments due to oversupply in the former. Recently, a new trend has made its entry in the market, “Bed sitters”.
According to the World Bank’s 2014 Doing Business Report, Kenya’s rapid urbanization, demographics and the under supply of housing points to a consistent need for middle and low cost housing. This is in the range of US$10 000 to US$40 000, (1 to 4 million KES) where demand is at its highest and supply at its least. Research published in 2012 by the World Bank estimates that the potential size of the mortgage market is about Ks
Sh800 billion (about US$9.9 billion) – that is about 13 times its current size.
Given this dynamic, any developer offering homes at less than Sh4M (USD 40,000) is likely to have rapid uptake from the market as long as the homes are in an easily accessible location. It is all about the way a business can make money. One can focus on margins or go after the volumes.
Finally, I would like to comment that it is critical for everyone to understand that the housing problem is not just physical infrastructure but also community infrastructure. A healthy and vibrant community is much more than just houses. It includes schools, clinics, places of worship, parks, and perhaps most importantly, a sense of ownership.
It is essential for developers to think holistically, include the physical spaces and social mechanisms that will foster a sense of community. This will determine the sustainability of the projects and keep it from devolving into a slum or a ghost town. The cooperation between the private sector, local authorities and the Government is essential in achieving this goal.
The need and the opportunity are here. I hope that all interested parties will follow the signs and move towards the direction of affordable housing as soon as possible.
