Housing Opportunities for Low to Middle Income Bracket in Kenya

In October last year, Kenya was declared a middle-income country having achieved per capita income of USD 1,160, and surpassed the World Bank threshold of USD 1,036, after the GDP was rebased. The new status is an indicator of the growing Kenyan economy, which translates into increasing demand by the expanding middle class that will lead to increased demand for goods and services, including good housing. Provision of basic services to this middle class will lead to further increase in economic growth. According to the Kenya National Bureau of Statistics, the Kenyan middle class can be defined as anyone having a disposable income of Kshs. 23,670 and Kshs. 120,000 per month. However, in our view, a middle income household should have around Kshs 100,000 per month in disposable income.

With the increase in economic growth, demand for appropriate housing comes to the forefront. In most towns, access to appropriate affordable housing has been, and remains, a mirage for the majority of urban dwellers in the middle and low income bracket in Kenya. Despite the acknowledged importance of housing in Kenya, demand still far outstrips supply, particularly in urban areas.

This manifests itself through overcrowding which leads to increased informal settlements in urban areas, and poor quality housing in rural areas. Delivery of housing to the low to middle income citizens is further aggravated by inequality and imbalance in housing supply among income groups.

Currently, more than 80% of new houses produced are for high and upper middle-income earners, yet the greatest demand is for the low and middle income bracket, which represents 83% of the population and this can be attributed to the ease of exit by developers in the high to upper segment.

Some of the key challenges facing the lower segment of the market include:

1. Rapid urbanization,
2. Relatively high poverty levels
3. Lack of long-term financing, which when available is expensive,
4. High cost of building, and,
5. Increases in the cost of land around major towns.

To address some of these challenges, the government has sought several ways in which to encourage the construction and ownership of homes for the low to middle income groups. This can be seen in incentives such as:

1. Exemptions from income tax of housing loans and any contributions to Home Ownership Savings Plan (HOSP);
2. Lower taxation of housing bonds;
3. Allowing people to use their pensions as a guarantee for the purchase of their homes, and;
4. Through National Housing Corporation to provide affordable housing with affordable mortgage schemes.

Opportunities for the development of housing for this income bracket can be seen in the satellite towns. According to the Hass Consult Q2 land index report, satellite towns have registered a staggering 638% increase in price from 2007-2014. Ruaka, a town where we have an ongoing development, registered the highest increase in land prices. Land in satellite towns however remains considerably cheaper than in urban areas, and thus, the most ideal for development of housing for the low to middle income groups. The relative affordability of land in satellite towns coupled with the major infrastructure developments that have opened up the satellite towns make development of low to middle income housing in satellite towns a compelling theme.

Consequently, Cytonn sees huge opportunities for investors looking to invest and serve the middle income. There are number of successful developments that have come up, and many more coming up, that investors can take advantage off. We shall be focusing on some town specifics that have these opportunities, and next week we shall have a report on Ruaka.