8.1 Capital Markets and Wholesale Finance (Equity and Debt)
In this section, we discuss the equity and debt financing options for housing in Kenya, considering the capital and wholesale finance markets.
Various mechanisms exist to channel funding into housing finance. A key intervention established in regulations published in 2013 is the potential for residential Real Estate Investment Trusts or REITs. Further opportunities exist for pension funds to invest in housing. These are explored below.
8.1.1 Affordable Housing Fund
The Affordable Housing Fund (AHF) is established under Section 8 of the Affordable Housing Act 2024. It replaces the National Housing Development Fund (NHDF) which was established under the Housing Act 1953 to facilitate the provision of affordable housing to Kenyans. As stipulated under the Affordable Housing Act 2024, all monies held by the National Housing Corporation under the NHDF shall be deposited into the AHF.
The Affordable Housing Fund is part of the Kenyan Government’s initiative to provide 250,000 houses per year as part of its Bottom-Up Economic Transformation Agenda. It was created to provide funds for the design, development and maintenance of affordable housing, institutional housing and associated social and physical infrastructure. AHF consists of Affordable Housing Levy Contributions, voluntary savings by individuals towards the purchase of an affordable housing unit, grants, donations, loans approved by the Cabinet Secretary in charge of the National Treasury and income from investments made by the Fund.
The legality of the Affordable Housing Act which establishes the AHF has been challenged before the courts for among other things, lack of public participation. At least seven petitions had been filed at the High Court. These include: Gakenyis & 4 Others v Cabinet Secretary Lands & 4 Others (Constitutional Petition E154, E173, E176, E181, E191 & 11 of 2024 (Consolidated)) and Kenya Human Rights Commission & Katiba Institute v National Assembly & 3 Others HCCHRPET/E191/2024.
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RECOMMENDATION
The government is investing Kshs 20 billion collected from the Affordable Housing Levy deposited into the AHF in Treasury bills and bonds. This speaks to a low uptake rate of the funds.
The government and relevant ministries should work towards increasing the absorption rate of the monies held in the fund. This will have the direct effect of increasing the delivery of affordable housing units.
It is important to monitor and channel any interest incurred from the investments into the Affordable Housing Programme.
The National Housing Corporation which used to administer the now revoked National Housing Development Fund, as of June 2024 had in its inventory unsold houses worth KES 1,275,730,000. Some of these houses relate to projects that were completed several years ago.
This casts doubt as to the government’s ability to offload units under its affordable housing schemes.
Intensify efforts to market the unsold houses by scaling up engagements with saccos, Kenyans in diaspora, county governments and other relevant stakeholders.
The Affordable Housing Act prescribes that AHF shall be administered by the Affordable Housing Board. The Board is tasked with among other things the development of a five year affordable housing investment programme which dictates how monies collected into the AHF will be used. The composition of the Board includes a non-executive chairperson appointed by the President, the Principal Secretary to the National Treasury, the Principal Secretary to the State Department of Housing and Development, and three persons representing the Council of County Governors, Central Organization of Trade Union and the Federation of Kenya Employees.
The Board is yet to be fully constituted and this has delayed appointment by the Board of the Chief Executive Officer who is the administrator of the AHF.
Fasttrack the appointment of qualified and competent persons to the Affordable Housing Board.
8.1.2 Kenya Mortgage Refinance Company 
The Kenya Mortgage Refinance Company (KMRC) is a mortgage refinance company established pursuant to the Central Bank of Kenya (Mortgage Refinance Companies) Regulations 2019. It is regulated and supervised by the Central Bank of Kenya. The company is a joint venture between the National Treasury and lenders like banks, Saccos, and development finance institutions such as the World Bank and the African Development Bank. The mission of KMRC is to increase the accessibility and affordability of housing loans in Kenya by providing long-term financing to primary mortgage lenders. The mission aligns with the mandate of the KMRC which is to provide long-term funding to primary mortgage lenders (banks, SACCOs, microfinance banks) for onward lending as home loans to Kenyans.
The mortgage refinance firm was formally licensed in September 2020 to de-risk access to home loans for workers earning up to KES 150,000 a month which was later increased to KES 200,000 a month. The KMRC offers two market products: affordable housing loans and market housing loans. Under the affordable housing loans segment, KMRC extends loans to primary mortgage lenders to re-finance mortgage loans capped at KES 10.5 million to individual borrowers whose monthly household income is not more than KES 150,000 with a repayment period of up to 25 years. On the other hand, under the market housing loans segment, KMRC extends loans to Primary Mortgage Lenders to re-finance mortgage loans above the Affordable Housing loans threshold.
In 2021, KMRC enabled the issuance of 574 home loans by primary mortgage lenders priced at an average interest rate of 9.5 percent, at an average mortgage size of Sh2.34 million. As of December 2023, KMRC had disbursed KES 9.6 billion to 12 primary lenders i.e. seven banks and five Saccos for onward lending to the prospective homeowners.
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RECOMMENDATION
Individuals working in the informal sector with irregular income are often excluded from accessing home loans as they are perceived as high risk.
The informal sector accounts for eighty percent of the country’s total workforce. According to the Kenya National Bureau of Statistics, in 2022 15.96 million workers out of 19.14 million total workforce translating to 93.39% are in the informal sector.
It is therefore imperative to find a way to de-risk these individuals and allow them access mortgages.
Fast tracking the implementation of the Risk Sharing Facility currently being explored by KMRC. The Risk Sharing Facility is a partial mortgage guarantee providing partial credit default loss protection to primary lenders allowing them to offer home loans to individuals with irregular income.
8.1.3 Real Estate Investment Trusts (REITS)
Capital Markets (Real Estate Investment Trusts (Collective Investment Schemes) Regulations, 2013)
CONTEXT:
· Real Estate Investment Trusts (REITs) refer to collective investment vehicles through which investors (both retail and institutional) pool funds to invest in real estate assets. These trusts are usually professionally managed and are regulated by the Capital Markets Authority. REITs do not hold assets directly. These assets are held by SPVs as they are then able to be traded more cost-effectively.
· The Income Tax Act exempts real estate investment trusts from income tax except for the payment of withholding tax on interest income and dividends as a resident person as specified in the Third Schedule of the Act.
· There are 2 forms of REITs provided for in Kenya, I-REITs (Income REITs) and D-REITs (Development REITs). I-REITs can be issued on a restricted or unrestricted (i.e. publicly listed) basis. D-REITs, which carry significant development risk, must be issued on a restricted basis and have a minimum investment of Kshs 5 million.
· The I-REIT can be offered on an unrestricted basis, with no minimum investment amount.
· There are limitations when REIT issuances are on a restricted basis (i.e. typically when they are unlisted). For restricted offers, REITs are only available to professional investors, who are required to invest a minimum of Kshs 5 million (Regulation 27(1)b).
· Insurance companies are not allowed to invest in REITs under section 50 of the Insurance Act Cap 487.
STATUS/ISSUE
RECOMMENDATION
Through REITs, investors or persons who would otherwise never have acquired real estate in their investment portfolio due to the huge capital outlay needed to acquire real estate or those who would not wish to bother with managing real estate are able to indirectly invest and own real estate and accrue associated benefits. However, despite the attractiveness of REITs and the regulations enabling them to have been in force since 2013, there have only been four REITs since-being Acorn I-REIT and D-REIT which are still trading, ILAM Fahari I-REIT which was delisted on 12th February 2024 and the LAPTrust Imara I-REIT which was issued on a restricted basis.
While the regulations governing REITs are very good for the issuance of new REITs, they are not as clear for the subsequent growth and expansion.
REITs offer an important opportunity to stimulate investment in affordable housing – however, this needs to be explicitly reviewed so that constraints to this particular asset class can be addressed. With this review, it will become more possible to provide clarity and regulations for supplementary offers by existing REITs as without these in place, it can take inordinately long to do so.
REITs are currently affected by high fees, particularly Trustee fees.
Encourage competition in the Trustee field to drive down costs.
Presently, REITs can only be constituted as a trust for them to obtain the approval of the Capital Markets Authority (CMA).
Review the potential to allow structuring of REITs as partnerships and companies (as done in other markets like the UK), and not only Trusts.
The process of registering is too long and can take between one to two years and it involves getting approvals from both the Capital Markets Authority and Kenya Revenue Authority.
Simplification of the process including consolidation of the approval process into one agency will improve efficiency.
Capital Markets Authority has set high minimum threshold for assets at Kshs 300million for I-REITs and Kshs. 100million for D-REITs. This has locked out SMEs and start ups from participating in the REITs market.
A review of the minimum threshold for assets to encourage increased participation in the REITs market.
Until 31st December 2022, REITs enjoyed stamp duty exemption on property purchases. This exemption incentivised the uptake of REITs in Kenya.
Push for the amendment of the Stamp Duty Act for the reintroduction of the stamp duty exemption.
Unclaimed Financial Assets Act 2011
(As amended through Finance Act 2022)
The Unclaimed Financial Assets Authority (UFAA) is sitting on approximately Kshs. 50 billion of assets and can currently only invest in treasury bonds.
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RECOMMENDATION
The law provided for a high penalty for late surrendering of unclaimed assets, which explained why up to Shs. 240 billion had not been surrendered. This was recently changed in June 2022 via the Finance Act 2022 to allow the Cabinet Secretary to waive these penalties.
Promote the utilisation of this waiver to increase the surrendering of unclaimed assets to the UFAA.
Reunification of the unclaimed assets held by the Authority with the intended beneficiaries has been dismal due to complex processes, thereby robbing intended beneficiaries of the necessary capital that would be deployed in purchasing or acquiring housing (from the demand side).
Take measures to promote reunification of assets with the beneficiaries by creating awareness and reducing the complexities associated with claiming the assets.
Further, the unclaimed assets/cash is simply invested in government securities by the Authority.
The assets held by the Authority (UFAA) can be lent to property developers (solving the financing challenge on the supply side) to enhance housing through a review of the law to allow for this.
Public Finance Management Act, 2012
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RECOMMENDATION
This requires that any public fund created by a public entity must be anchored into this Act
Create a register of public funds created for housing and infrastructure how they are utilized, and the impact created.
Public Private Partnerships Act 2021
Efforts to use the PPP structure to enable affordable housing have been challenging to date, as the provision of housing for sale is about ‘asset delivery’, whereas the PPP framework is about ‘service delivery.’ For this reason, PPPs are more suitable for projects where income streams are created (including rental housing).
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RECOMMENDATION
Given the relatively new state of this law (passed in December 2021 repealing the 2013 Act), it has not been utilized in affordable housing, yet it holds significant promise.
The 2021 Act: expands the scope of arrangements that qualify as PPPs and expands the scope of procurement methods available for PPPs by introducing direct procurement as one of the methods; allows government bodies to contribute land in the form of Special Purpose Vehicles; simplifies procedural elements on the conduct of feasibility studies, tender evaluations, contract negotiations and approvals of applications; reduces the number of oversight approvals required from the PPP Committee in the course of project development; delegates various operational latitudes of guiding and championing project development for the Committee to the newly-established Directorate; and provides timelines on key project processes and stages.
These provisions should be taken advantage of by property developers.
The PPP framework and legislation require a publicity campaign to create awareness among affordable housing property developers. This could be an area for focus by the KPDA, to assist its members exploit the potential of the legislation in forging public-private arrangements in affordable housing.
In this regard, the KPDA should also explore the application of the legislation specifically to promoting rental housing projects which are more suitable to PPP structures.
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