Since President Uhuru Kenyatta launched Affordable Housing as part of the Big Four Agenda in December 2017, substantial progress has been made towards delivering affordable housing, but a lot more needs to be done, especially in terms of enabling private capital to flow towards financing of low to mid income housing.
In terms of progress, we have seen two main initiatives; the formation of the Kenyan Mortgage Refinancing Company, KMRC and National Housing Development Fund. KMRC will improve house affordability by increasing mortgage tenors from the current 12 years average to at least 20 years. The longer tenors will effectively reduce monthly mortgage payments by about 15 percent.
KMRC will also increase mortgage accessibility by purchasing mortgages off the books of lenders, thereby enabling lenders such as banks to be able to lend more. There is also the National Housing Development Fund, which is supposed to tax 1.5 percent on employee salaries and a similar match by employer, though this has been the least popular initiative so far.
Despite the aforementioned progress, a lot more needs to be done to attract private sector financing through capital markets to ensure the initiative is commercially viable and sustainable.
Capital markets financing has so far not featured prominently in the affordable housing initiative mainly because of our capital markets infrastructure limitations. I believe that making the following five changes to our capital markets infrastructure should help with increasing private capital to housing finance.
First is to allow for sector funds that focus on a specific sector such as real estate. The current collective investment schemes regulations that govern unit trust funds, also referred to as mutual funds, do not allow for sector funds such as a fund that invests primarily in real estate. The current limitations of a maximum of 25 percent in any one asset class should be repealed, not just for real estate, but to allow for sector funds such as technology and financial services.
Second, the process for capital markets fund formation and establishment needs to be clear, predictable and time bound. Fund formation can take sometimes months and even years as there is no statutory period within which an application to form a fund must be reviewed and completed.
Third, the two capital markets vehicles that are established to fund real estate - Real Estate Investment Trusts, REITs, and Asset Backed Securities, ABS - have not been successful. There is no ABS to speak of and there is only one REIT in the market, which is trading at half of its issue price. We need to assess why ABS and REITs have not worked and make corrections to the framework. To expect them to succeed in the current framework may be unwise.
Fourth, developing affordable housing will require capital that can take development risk. The only way to access that capital in our markets today is through a Development Reit, D-REIT. Yet the minimum investment allowed for a D-REIT is Sh 5 million, which is highly unaffordable to the even amid income Kenyan. In a country where the median income is Sh50,000, it seems strange to have a financial instrument where the minimum investment is 100 times the median income, it is no wonder we are yet to have a single D-REIT since the regulations came into place.
Finally, we need to update the scope of entities that can serve as fund trustees for unit trust funds. Under the current Collective Investment Schemes regulations, Regulation 26 (1), only a bank or a financial institution can be a trustee of a collective investment scheme. It is not clear what a financial institution is, as it is left to the minister to declare through a gazette notice. So in reality, one has to be a bank to be a trustee. So even if we expanded our collective investment schemes regulations to allow for sector funds to finance low to mid income housing, the trustees would still be banks.
Now the core business of banks is not to innovate investment products, but to collect deposits and make loans; no wonder we have only four banks offering Trustee services, despite having over 40 banks in the country. And of the four banks, one bank offers trustee services to almost 80 percent of the Unit Trust Schemes. Trustee services offered by banks to investments funds are likely to be slow, substandard and non-innovative since it’s not their core business. It is also conceivable that bank trustees are also likely to be non-supportive of products seen to be threatening to banking business.
We need to widen our pool of investment fund trustee to include capable professionals or corporates. For example, in the UK a Chartered Accountant can register with the Financial Conduct Authority to be Trustee, and in South Africa, an insurance company can also be a Trustee.
I believe that a prompt and decisive focus on upgrading our capital markets infrastructure by addressing the above five impediments to capital formation will have a huge impact on the amounts of private capital that will flow into the real estate sector to help address the financing needed for low to mid income housing.
This article was originally posted on Business Daily Africa