Authors: Mary Mutinda, Baraka Mwau, Jack Makau, and Alice Sverdlik 

Over the past 50 years, Kenyan government housing policies have increasingly sought to enable low income households pay for and own a home in an urban area like Nairobi. Various financing strategies have been applied towards this goal, including: subsidizing the cost of the housing unit or the cost of credit, increasing access to long term mortgage capital, and providing social housing. These strategies have repeatedly failed to make any meaningful improvement in access to ‘adequate housing for all’, as enshrined in article 43 of the Constitution of Kenya 2010.

In this briefing, we argue that the Kenyan government’s “one household, one housing opportunity” home ownership paradigm fails on two significant aspects. Firstly, it fundamentally assumes that an estimated one million low income households in Nairobi are willing to pay for and live in affordable urban homes. Secondly, this policy is blind to the reality of a pervasive private rental market in urban areas—and does not seek to explain this market’s persistence since independence.  

We propose a policy expansion beyond this home-ownership paradigm, to include interventions that stimulate institutional investment in a ‘lease-to-build-to-rent’ affordable housing framework, while safeguarding the right to the city for vulnerable groups.

4 policy pointers

1. Policy makers should expand instruments of realizing access to affordable housing for all, beyond home-ownership paradigm and consider multiple occupancy arrangements that include adequate and regulated rental housing. 

2. Collaborating with the national government, Nairobi City County should develop long-term policies and incentivize a Lease-to-Build-to-Rent housing framework for organized and institutionalized investors.

3. By streamlining land administration, Nairobi City County can improve efficiencies in property charging, creating tangible value to long term housing private investors through de-risking of the ventures.

4. To secure the right to the city, Nairobi City County should seek to identify and work with the estimated 5.9% (approximately 30,000) [1] of urban poor households who own their land but are financially limited when it comes to improving their housing. 

Nairobi housing overview: A city dominated by individual private landlords

Nairobi is a paradox. Property agency Knight Frank places the city as one of Africa’s leading destinations for real estate investment. And yet, the Kenya National Bureau of Statistics [2] claims that nearly 70% of Nairobians live in single roomed housing, often irregularly constructed and below adequate housing standards [3]. A majority of its 4 million residents live in slums or slum-like conditions. The urban form is of islands of prosperity in a sea of slums. 

Interestingly, there is negligible squatting across all Nairobi’s housing typologies, formal or informal, and for over four decades individual private investors have dominated the city’s housing market. According to the 2015–6 Kenya Integrated Household and Budget Survey (KIHBS), only 8.1% of Nairobi’s dwellings are owner-occupied, and 84.6% of households (approximately 1.3 million households) rent; 62.8% of the city’s tenants (944,000 households) pay rent to individual landlords[4]. So, assuming a minimum of 1 dwelling unit per landlord and an upper limit of 98 units per landlord (ie in the increasingly popular tenement blocks), the number of these undesignated city housing investors could range from 10,000 to 900,000 individuals.

The dominant housing typology, of single roomed dwellings with shared toilet facilities, shelters over two-thirds of the Nairobi’s residents. It is worth noting the shift within the dominance of single unit rooms, away from corrugated sheet-iron slums, which accommodate 33.5% of Nairobians, towards high density tenements, estimated to accommodate 36% of Nairobians. This shift could in part reflect an increased confidence of investors, to take more risk and allocate more capital towards developing the often unlicensed 5–10 storey structures that can realize greater profit. This shift also has strong implications for the possibility to apply corrective policy measures: whereas slums can be razed for upgrading in days, stone and mortar tenements need assessments of structural integrity and/or expensive retrofitting.

The financing strategies of investors in Nairobi’s shelter

Nairobi’s housing market features a diverse mix of investors, from government mandated institutions to private institutional investors (both foreign and locally owned), as well as individual private investors. However, individual private investors dominate, controlling nearly two-thirds of the market.

Financing strategies are equally diverse. In in-depth interviews with housing investors, we identified 16 different financing strategies. Larger players used their own equity, bridge capital financing from formal banking institutions, financing from foreign banks, government exchequer allocation, debt-swap, and design-build-finance-operate-transfer (DBFOT) vehicles. Some institutional investors have also designed an income–real estate investment trust (I-REIT) product which pools the incomes of multiple units and offers management at a fee.

The dominant investor type, individual private investors, applied more financing tools, including equity release, salary or personal savings, diaspora remittances, non-interest borrowings from family and friends, sale of assets (such as a car), sale of an alternative piece of land or property, accessing credit from community cooperatives, borrowing from regulated cooperatives, personal loans from formal banking institutions, and entering into strategic legally negotiated DBFOT arrangements with land-title holders. 

Interestingly, formal banking institutions are at the top of the financing food chain for both formal and informal housing investors.

With limited savings—often below KES 1 million (US$ 10,000)—a significant number of individual private investors turn to formal banking institutions. The surprise dominance of formal banking institutions’ participation, against a backdrop of few mortgage loan accounts, is mainly achieved through personal unsecured loans, or equity release products for larger scale ventures. Official statistics indicate that in December 2018, Kenyan banks held 26,504 mortgage contracts [5]. In contrast, an estimated 100,230 [6] formal residential housing units have been supplied in Nairobi over the last five years. It is evident that the classic mortgage arrangement is not the preferred pathway by majority of investors in Nairobi’s housing.

This departure from the mortgage book can be explained by the complexity and informality of land tenure in Nairobi, especially for the 69.5% predominantly informal or quasi-formal housing market units, making the land and structures on it not possible to leverage as collateral. With high returns in the lower end of the housing market, an investor can often meet their credit obligations and turnaround within the credit period—usually in under 3 years. Banks, on the other hand, scrutinize the physical development to satisfy themselves the rent generating units do exist , and often seek to control credit risk by using escrow accounts for tenants to deposit rent payments that will then service the loan. 

Challenges of investing in Nairobi housing

In the interviews, investors highlighted key challenges they face in investing in housing in Nairobi. These include:

Very high land prices

“Kenyans really value land … and there's a lot of speculative land buying. That in the overall makes land very expensive it is much more expensive in Nairobi … Depending on the location of land this can be a significant component of the costs … if you look at overall cost event in the city the least you can get a piece of land per unit is a million shillings for every single unit that you do so even if you think of it as half a million shillings it's still going to be unaffordable for the social housing category.” Government funded housing developer

Weak enforcement of planning laws and perceived corruption

“A major challenge in the frontier areas of target [eastern Nairobi] is the weakness in enforcement of planning laws. It is hard to reap our return when our development is next to a slum eating on the road reserve.” Large scale institutional developer of affordable housing

Infrastructural gaps

“There is a huge infrastructure gap – roads, sewer and water when you venture out from the cliché parcels in the west of Nairobi.” Large scale institutional developer of affordable housing

Complexity of land tenure arising from corrupted land allocation processes

“He was giving allotment letters from the [city] council[of Nairobi] but when we did our research we found that many allottees were former District Commissioners and others Provincial commissioners but none of them followed up to obtain full title of the plots” Landlord, Maili Saba

Inefficiencies in land and property registration processes that could lead to financial losses

“The way the law stands you have to have an occupation certificate before you apply for a lease. That means therefore you have to complete then go for the lease. If there is any delay at that point as a developer you are disadvantaged because one you are being financed you have drawn the whole facility so the cost of finance is quite heavy. So if the delay persists it starts eating into your margins. You might find you are losing a unit every two months in terms of interest payment. Its important that the developer realize that that is a risk – regulatory delays especially on the procurement of leases” Licensed mortgage lender and housing developer

Despite the challenges, quality limitations and illegality of informal settlement solutions, Kenyan slum real estate is today highly profitable, with a payback period nearly four times better than a formal housing unit in Nairobi (on a “Build to Rent” model).[7] 

Table 2: Nairobi housing economics. Comparing the economic value of "build to rent" models in Mukuru (a low income informal settlement) and Kilimani (an upmarket formal area).

Shelter financing strategies for Nairobi’s residents

Only 9.3% of Nairobians (approximately 140,000 households) live in their own homes.  Majority (53.7%) of the owned units were constructed, 30.8% were purchased (about 43,000 units) while 15% were claimed as inheritance.

Nairobi is a rental market, with 90.6% (approximately 1.35 million) households paying rent and 87.4% (approximately 1.2 million) households paying rent to an individual landlord. [8]

Understanding the pervasiveness of the low cost rental market

About 70% of Nairobi’s residents are low income slum or tenement residents. They exhibit high mobility, with an average stay of under 4 years in the same slum area. Further, over 40% of slum residents claim to own land with title in another county, usually their ancestral home. Interestingly, there is very little squatting in Nairobi’s slums. While the cost of housing and basic services in informal settlements appears low in budget terms, at a per unit level it turns out to be more expensive than that of formal housing areas. We call this the “poverty penalty”[9]: the higher price a slumdweller pays for lower quality services. For example, water costs 3 times more per unit for a resident of Mukuru (an informal settlement in Nairobi) compared with a resident of formal housing in the city.[10],[11],[12]. There is also strong evidence of room sharing in informal settlements. It is easy to share rent, a lot more complex to share a mortgage even when priced at par. Put together, we have the case of a highly profitable informal rental housing market and highly mobile low income residents with evidenced desire to invest away from Nairobi.

Box   

The idea that low income groups are willing to pay is refutable:

Consider a fictitious representative case. Wafula is a guard in Nairobi, taking home KES 15,000 (US$ 150) per month. He takes out a KES 100,000 (US$ 1000) savings cooperative loan for 3 years at 12% per annum. This is enough to build a two room house in his rural village, with kitchenette and external latrine, and using local building materials. His monthly loan repayment is approximately KES 3,300 (US$ 33). To squeeze the shillings, he rents a one room unit in Mukuru informal settlement which costs KES 3,000 (US$ 30) per month and shares it with three other guards—so his effective rent is KES 750 (US$ 7.50). Now here comes a government plan that seeks to lock him into a 15-year repayment plan of KES 4,000/month for an improved stone one-roomed house in an urban area, valued at KES 600,000 (US$ 6000). This single roomed financial obligation largely ignores the realities of his life circumstances: in 15 years Wafula will likely be married with children and urban single room living will no longer be acceptable. The government plan opportunity would only make sense if he could rent out the urban house at a price higher than the mortgage repayment, so that it becomes an extra source of income to finance his cooperative loan repayment. So, though noble, the government’s plan may not be very appealing to Wafula!

Box

Nairobi’s housing gap and the ‘Big 4’ Affordable Housing Programme (AHP)

Nairobi’s housing gap is systemic, cutting across multiple income brackets. The Kenya Government under its ‘Big 4’ Affordable Housing Programme (AHP) has set an ambitious target to deliver 500,000 housing units in 4 years[13]—aiming to bridge demand by nearly 20% across those income brackets with identified housing gaps.

It is interesting, however, to note the divergent perspectives of the government and private housing investors in supplying to the “mortgage gap” target group—defined as households with monthly incomes between KES 50,000 and 149,999 (US$ 500–1,490). Whereas the government sees the ‘mortgage gap’ group as the ultimate owner of housing (buy-to-own model), the private sector sees the ultimate owner as a higher income group earning over KES 150,000 and seeking to invest in buy-to-rent housing to gain additional income (buy to rent model).

Left: A development in Utawala, eastern Nairobi. Investment in a build-to-rent model of 2 bedroom units at KES 18,000, 1 bedroom units at KES 12,000 and bedsitters at KES 6,000. Image source http://lustman1990.co.ke/property/lords-house-apartments/ 

Right: Architectural image of a government affordable housing flagship project, Park Road in the Ngara area of Nairobi, that will consist of 1,370 units to be completed October 2020 for home ownership (3 bedroom units at KES 3,550,000, 2 bedroom units at KES 2,000,000, and 1 bedroom units at KES 1,500,000). Source https://bomayangu.go.ke/Projects/view/4

These differing tenure approaches for the same income group call for reflection. The government’s flagship affordable housing agenda seeks to develop 150,000 affordable units for mortgage purchase (see table 1) for the monthly income band of KES 50,000–149,999. Official statistics indicate that there are about 700,000 formally employed workers in this income band[14]—translating to policy-supported housing solution for approximately 21% of the targeted group.

The individualization of limited affordable housing units through home ownership raises questions about sustainability and gentrification. With a finite and rapidly-diminishing supply of suitable land for developing affordable housing, little attention to generating formal and longer term employment opportunities, and generally weak enforcement of policies and legislation, housing prices are bound to rise over time and eventually become unaffordable for growing urban households.

Similar to what was witnessed in the housing programs of the 1970s and 1980s, it is rational to assume that the unserved 79% of the mortgage gap group would then resort to accessing housing units that are designed for those lower income or social support groups who make up 70% of urban households—by offering to pay higher prices for these units than the lower-income groups can afford. This will exacerbate gentrification of lower income areas, driving away lower income households and further slumifying the city.

Table: an analysis of Affordable Housing Program (AHP) buy-to-own units against targeted income group. Source: Kenya National Bureau of Statistics analysis of 2.7 million formally employed workers’ income tax returns 

Conclusion and ways forward

A complex dynamic interplay of rapid urbanization, dysfunctional land tenure, undignified living conditions, poor public provision, conflict along the lines of politically aligned patronage, elite capture and corruption has created a vibrant, highly profitable, privately owned market for low income housing and basic services in Nairobi. This casts a long shadow of doubt on the success of singular approaches to regularizing tenure and providing affordable housing for purchase.

To realize accessible and affordable housing for all as enshrined in article 43 of the Constitution of Kenya 2010[15], the city will need a varied range of integrated policies and approaches. We outline some of these below.

Develop affordable rental housing regulatory framework

• Home ownership falls way short in scale to solving Nairobi’s shelter deficits; Nairobi needs multiple tenure and occupancy arrangements, with an emphasis on affordable rental housing and economic development strategies targeting low-income residents

• Appropriate, well-enforced policies and regulations on rental housing can improve tenants’ living conditions. Co-opting informal rental housing providers housing 70% of Nairobi residents may be necessary in realizing impact of policy action. Future interventions can leverage on their capital as well as collaboration in retro fitting structures.

• Designing policies to incentivize institutional investors would ease the enforcement of regulation and policing over affordability, quality and maintenance on Lease – to – rent housing tenure. Such policies could explore offering guarantees on the long term rental and return profiles to align long term investment with policy and regulations on adequate housing standards [16].

Addressing challenges faced by investors

• Improving the integrity and streamlining land ownership records and process of charging properties would lower the risk of financial losses for investors. Such a system when integrated with planning regulations would lower the risk of mismanagement and corruption.

• Leveraging on its power to reconstitute land and regulate its use, Nairobi City County can capture the economic value generated from regularizing of land and development rights to finance basic service infrastructure, especially water sewer and roads in underserved areas.

Safeguarding the right to city for vulnerable groups in the poverty trap

• It is paramount that the estimated 5.9% (30,000) of urban poor households in owner occupied shanties passed down over generations for better targeted social housing support be properly identified and documented to safeguard their right to city

• In slums with embedded historical tenure claims, we propose a Cooperative Partnership of a build – to –rent model within a defined legal and policy framework that protects the community of interest to perpetuity.

 

Footnotes

[1] Estimate based on field work conducted in 2016 Published by Akiba Mashinani Trust and Muungano wa Wanavijiji. https://www.muungano.net/publicationslibrary/2018/1/22/mukuru-spa-situational-analysis-phase-2-report-mukuru-kwa-njenga-kwa-reuben-viwandani

[2] KNBS. (2018). Basic Report. Kenya Integrated household budget survey 2015/6. Nairobi: Kenya National Bureau of Statistics

[3] In the Housing and Sustainable Development (HABITAT III) Conference, UNHABITAT defined adequate housing as: measures that provide for habitability (protection from natural elements, hazards, and disease), access to basic services (including to water, sanitation, lighting, electricity, and garbage disposal), legal right to secure tenure (including compliance with a continuum of land rights, promotion of gender-equal land rights, and prohibition of housing discrimination and forced eviction); http://habitat3.org/wp-content/uploads/Habitat%20III%20Policy%20Paper%2010.pdf.

[4] KNBS. (2018). Basic Report. Kenya Integrated household budget survey 2015/6. Nairobi: Kenya National Bureau of Statistics

[5] Central bank of Kenya. (2018). Bank supervision annual report 2018. Nairobi: Central bank of Kenya. Retrieved from https://www.centralbank.go.ke/reports/bank-supervision-and-banking-sector-reports/

[6] Sourced from Cytonn Nairobi Metropolitan Area Residential Report 2017/2018 https://www.cytonn.com/downloads/nairobi-metropolitan-area-residential-report-2017-2018  

[7] The economic valuation ignores the value of home ownership after purchase of the formal unit. It also assumes there are no associated mortgage costs.

[8] KNBS. (2019). 2019 Kenya population and housing census, Volume IV: Distribution of population by socio-economic characteristics. Nairobi: Kenya National Bureau of Statistics.

[9] See forthcoming IIED working paper by Mutinda, M. et. al. (2020)

[10] Mutinda, M., & Otieno, S. (2015). Unlocking financing for slum redevelopment: The case of Mukuru. Africa Policy Journal , 11, 44-46.

[11] Gulyani, S., & Talukdar, D. (2008). Slum real estate: The low-quality high-price puzzle in Nairobi’s slum rental market and its implications for theory and practice. World Development, 36(10), 1916-1937.

[12] Mendoza, R. U. (2011). Why do the poor pay more? Exploring the poverty penalty concept. Journal of International Development, 23(1), 1-28. 

[13] Kenya Affordable Housing Programme Development Framework Guidelines downloaded from https://www.housingandurban.go.ke/wp-content/uploads/2018/11/Development-Framework-Guidelines-Release-Version.pdf.

[14] KNBS. (2018). Kenya Integrated household budget survey 2015/6. Nairobi: Kenya National Bureau of Statistics

[15]Constitution of Kenya 2010 article 43.

(1) Every person has the right -

(a) to the highest attainable standard of health, which includes the right to health care services, including reproductive health care; (b) to accessible and adequate housing, and to reasonable standards of sanitation; (c) to be free from hunger, and to have adequate food of acceptable quality; (d) to clean and safe water in adequate quantities; (e) to social security; and (f) to education.

(2) A person shall not be denied emergency medical treatment.

(3) The State shall provide appropriate social security to persons who are unable to support themselves and their dependants. 

[16] In the Housing and Sustainable Development (HABITAT III) Conference, UNHABITAT defined adequate housing as: measures that provide for habitability (protection from natural elements, hazards, and disease), access to basic services (including to water, sanitation, lighting, electricity, and garbage disposal), legal right to secure tenure (including compliance with a continuum of land rights, promotion of gender-equal land rights, and prohibition of housing discrimination and forced eviction); http://habitat3.org/wp-content/uploads/Habitat%20III%20Policy%20Paper%2010.pdf.