The Demand for Low Cost Housing In Kenya – Is it an opportunity in disguise?

The Kenyan Real Estate Market has for the past five years, primarily, focused on high end homes and commercial spaces. This is despite market data revealing a looming oversupply in these markets, with offices in Upperhill facing occupancy rates as low as 61%, according to a recent market survey.

The tides, however, seem to be changing, with investors in the real estate market increasingly turning to low cost housing as the next investment frontier, even as high end markets continue to experience glut. World Bank estimates that Kenya needs at least 2 million low cost homes to cater for its growing population and rapid urbanization rate. This is in addition to 12% of Kenyans owning homes with only 8% able to afford mortgages.

Currently, government agencies, saccos and learning institutions account for majority of investors in this segment. But even with these players, the real estate market continues to experience a deficit of approximately 200,000 units annually, majority of them within the low income segment. This highlights the fact that there’s still room for increasing participation by private developers.

But is the demand for low cost housing an opportunity in disguise?

Essentially, low cost housing refers to “reduced construction costs without undermining the quality, performance and structural stability of a building”. As a result, investors are able to pass on this benefit to buyers and tenants in form of lower asking prices and rent while still maintaining good profit margins.However, to realize this low construction costs, sophisticated building technology is required in addition to low development costs to enable investors to make good returns on their investments.Unfortunately, this is not the case for the Kenyan Real Estate Market, despite the government recently introducing a financial incentive that will see investors putting up at least 400 units receive a 15% tax break.

For instance, technology associated with low cost housing has proven to be exorbitant. This is due to initial investment costs that have to do with the putting up of factories for mass production of the low cost materials and machinery equipment associated with the same. This has in turn made a lot of developers shy away from this segment of real estate investments especially where economics of scale cannot be realized by the size of the investment.

Additionally, Kenya’s Construction Industry continues to face huge gaps in building technology. This is in comparison to developed countries that have already leveraged on alternative building materials, such as prefabricated materials, to cut down costs and deliver affordable housing. In this regard, Kenya has limited industrial standards meant to regulate these particular building technologies,which leaves most Real Estate Investors opting for standard building materials which are often costly.

LandOn land input costs, skyrocketing land prices in the upmarket areas of urban areas in Kenya and the Central business district has been seen to be a major catalyst for pushing investors in this market to seek alternative cheaper land in satellite towns so as to cut down on development costs. This explains why areas like Kitengela and Athi River have become popular among low cost housing projects.

However, this might not be the case for long with prices in satellite towns increasing by 8.15 fold since December 2007, according to Hass Property Index. This might force investors to seek cheaper land further, eroding the attractiveness of their projects to buyers and tenants

Concurrently, the remoteness and lack of infrastructure in some areas may require developers to pay more for connection to utilities such as electricity, water and sewer lines, which would have been cheaper for development land within the city. This is due to already existing infrastructure as opposed to building new infrastructure alongside a new development, which is much more expensive.

Other factors such as inaccessible development finance and high-risk tenants similarly continue to plague this segment, and unless more is done in terms of favourable policies and innovative financial and building solutions, the low-income market shall continue to experience its current downturn and remain largely unattractive for investors.