Speaking to members of parliament last week, the National Treasury CS, Ukur Yatani, said, “We had budgeted funds for the take-off of the [affordable housing] project, but we are unable to release funds because there is no money.” This statement was made in response to James Macharia, the Transport, Housing and Urban Development CS, who had pointed out that out of the Kshs. 45 billion they expected from the Treasury, the ministry had only received Kshs. 1 billion.
While the communication from CS Yatani may seem like bad news, for me it was actually very welcome. In fact, even disbursing the Kshs. 1 billion was a mistake and it should be refunded. Here’s why.
Firstly, the government’s focus should be on providing public goods that we cannot pursue individually, such as roads, security, sewerage, water and security. There is certainly a case for the government to provide social housing, but this can be achieved by directly subsidizing costs for qualifying citizens so they can afford to rent or buy homes, not actually building these homes.
Secondly, we are a very corrupt society. In choosing to develop mega housing projects, the government exposes itself to the risk of mega corruption. While well intentioned, the Kshs 45 billion the government had promised to invest in affordable housing plus the Kshs 55 billion per year that would have come from the failed housing tax levy may have ended up becoming another slosh fund for tenderprenuers to fleece fatigued Kenyans. The idea of guaranteed off-take of developments using government funds would have encouraged unscrupulous developers to produce mediocre houses and offload them on the government.
Luckily, all is not lost because we have adequate private funding to propel the President’s crucial affordable housing agenda. All the government needs to do is create an enabling environment for the private sector. Enough legislation has been passed towards enabling affordable housing, what is left is for the relevant agencies to operationalize this legislation so that developers and prospective homeowners can access the intended benefits.
Breathing life into the Kenya Mortgage Refinance Company (KMRC) is a good place to start. The Finance Act 2018 amended the CBK Act and empowered CBK to start licensing, regulating and supervising mortgage refinance businesses. In February 2019, CBK published the KMRC regulations. KMRC is meant to provide long term mortgages with tenors of 20-25 years. Extending mortgage durations from the current average of 12 years average would bring down monthly payment by an estimated 15%, thereby improving affordability for prospective homebuyers.
Additionally, we should operationalize the expanded Home Ownership Savings Plan (HOSP) regulations. In 2019, parliament amended the Income Tax Act to make unit trust funds geared towards homeownership eligible for tax benefits. Before this, Kenyans saving to buy a home could only save in bank based HOSP accounts offering 5% p.a. whereas now, they can earn up to 10% p.a. offered by unit trust funds. However, these rules are yet to be operationalized by CMA, preventing Kenyans from enjoying higher returns for monies they are saving towards homeownership.
The third area that needs to be implemented is the tax benefits offered to developers of affordable housing. In 2018, the President signed into legislation a tax break for those producing at least 100 houses per year. However, this hasn’t yet come into effect. The Kenya Revenue Authority (KRA) needs to operationalize the legislation so that developers are able to access the affordable housing incentives, which could reduce development costs by almost 25%.
Finally, we need to upgrade our capital markets’ infrastructure to allow investors to form sector-specific funds such as housing funds. As carried in my opinion piece last week, our current regulations on investment vehicles that can raise funds for affordable housing are very unfriendly to sector funds. For example, our collective investment scheme (CIS) regulations limit the amount of money that a fund may allocate to a single sector, such as real estate, to just 25%. In this day and age, sector mutual funds such as financial services funds, technology funds and real estate funds are so common. The Capital Markets Authority should upgrade its regulations to encourage sector funds to enable developers raise funds for housing.
By assenting to numerous supportive legislations over the last three years, it is clear that the President is serious about making affordable housing a reality. However, for these legislations to have impact, the relevant agencies now need to do the work so that the private sector can access the affordable housing incentives.
The housing deficit is pressing. We have millions of Kenyans cramped up in unplanned, sub-standard houses. We also have investors who are willing to fund housing; they just need sensible funding vehicles and incentives. Additionally, there are developers ready to build the houses if they can get an acceptable return. I would highly recommend that the government shifts the focus of its affordable housing efforts away from building homes to enabling the private sector to deliver on the affordable housing agenda. The President should form an affordable housing taskforce chaired by a leader with a proven track record to clear the bureaucratic obstacles to affordable housing.
Leave a Comment