Smart Public-Private Partnerships bargains in Kenya Real Estate – A means to achieving affordable Housing

Public-Private Partnerships are useful in large projects that require highly skilled workforce and significant cost outlays to get started. Different models are characterized by which party is responsible for owning and maintaining assets at different stages of the project. Ultimately, smart bargains are the ones that attract the most desired private partners with adequate financing and the right risk sharing components.

In Kenya, PPPs are a major constituent in the national government’s agenda to provide low-cost housing. The mammoth project, which aims to provide at least 1000000 housing units in the next 5 years, expects at least 60 percent of financing to come from the private sector. With such an ambition, stakeholders would expect that all bottlenecks that previously stood in the way of providing decent, affordable housing to Kenyans have been corrected and favorable terms put in place to attract investors. But as recent reports indicate, the private-sector acceptances of PPPs for affordable housing are scarce beyond the sluggish pipeline held by the National Treasury PPP Unit. Undoubtedly, new policies need to be adopted to yield dramatic results in the medium-to-long-term beginning with the correction of the apparent fiscal policy biases in the sector.

Some of the successful PPPs we have witnessed include a number that Kenyan universities have pioneered in partnership with foreign investors. These mega projects aim at increasing rental spaces in a category of housing designated as multiple-occupied housing. They include hostels, student accommodation, and temporary type buildings. Although laudable, such PPPs carry massive foreign exchange risks. Furthermore, they do not fit the description of the regular affordable housing.

One of the factors challenging the uptake of PPPs is costs. According to the Center for Affordable Housing and Finance, the cost for a generic, equal-standard house in Nairobi is the highest among 16 African countries averaging $63241 compared to the lowest location, Dar-es-Saalam, whose average cost is $18640. The high cost of housing driven by the cost of urban land which stands at $14826, for a comparable 120square meters of space, coming third after Kampala and Dakar.

The second issue affecting PPPs is excess demand (scarcity of housing) which has driven price increases. Scarcity displaces low-income households even when the units are custom built for them. For instance, out of the 200000 units needed across all income levels per annum, only 50000 enter the market. However, what follows is a price spiral and speculation holding of units by high-income investors who then lock the lower income population out of the market. The target for 1000000 units over the next 5 years will face similar translations unless the policy is altered to address the scarcity that erodes affordability.

As an asset class, the real estate sector has consistently outperformed other asset classes over the last 5 years while maintaining an average return of 25 percent. According to 2017 market reports, prices of residential units outperformed rental yields which only averaged 5 percent, while retail and office spaces averaged 10 and 9 percent respectively. This market structure leaves about 90 percent of Kenyan urban households living in rented houses. According to the World Bank, only 10.2 percent of urban households could afford the cheapest newly built houses in 2015, estimated to cost about $17000. This level of effective demand paired with a growing informal source of income has aggravated housing scarcity, supporting the rental market more than home ownership and further weakening formal bank mortgage loans.

Experts note that there are three players dominating the supply of affordable housing. They include the government, SACCOs, and private sector developers with each operating in a nest. The government mainly supplies public housing for civil servants and the police service. The private sector remains unforthcoming to PPPs but continues to benefit from the 15 percent corporate tax waiver if they provide 400 units of affordable housing per year. On the other hand, Saccos work with inadequate financing and little government support but still enable up to 90 percent of home ownership to prospective home buyers compared to 10 percent provided by banks. This sector, through the National Cooperative Housing Unit (NACHU), works hard to provide decent, affordable housing. It not only leads in the provision of housing microfinance, but also capital building, and technical services, which are all unnoticed in bank lending or fiscal policy.

The third factor encumbering affordable housing is financing. It is also an obstacle in local PPP engagement. The double-edged sword creates scarcity and a high cost of credit for developers while contributing to high mortgage rates to house buyers.

Addressing the affordable housing challenge through smart PPPs will require enhanced access to financing and capital markets, which will, in turn, require proactive government policies, innovative and entrepreneurial risk-taking by the private sector.

Potential gains of Public-Private Partnerships as a program implementation strategy and as a governance intervention rest squarely on the appropriate allocation of risks, responsibilities, and rewards among the various stakeholders. This risk allocation is the defining feature of any PPP strategy. The golden principle is that risks should be allocated to the entity best equipped to manage each risk. The expectation is that such an allocation of risks will not only produce the best possible program and project outcomes but also do so at the most optimum costs. This should lead to good quality outcomes at optimum prices. Well-crafted and balanced contracts backing PPP projects are, therefore, at the heart of addressing the PPP strategy to provide affordable housing in Kenya.

This article is written by Buildafrique Consulting Group; a Kenya Real Estate Consultant and Development Solutions provider that offers End-to-End Financial, Development Management, and Investments Solutions in Real Estate, to allow Developer, Investors, and prospective Home Owners manage risks and realize value for their investments in a fast-evolving Real Estate market.

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