Kenya's population growth, which is estimated to reach 52.4 million by the end of 2024, has contributed to a shortage of housing units in the country estimated at 200,000 units annually and an accumulated deficit of over 2 million units since the commencement of the implementation of Vision 2030 in 2008. Furthermore, rising urbanisation rates, at 4.4% annually, have increased the demand for affordable housing in the urban centres. Based on the 2023 Economic Survey, the real estate sector contributes 8.6% to the country's gross domestic product (GDP), underscoring the role that the sector plays in the economy. Nonetheless, housing provision in the sector is characterized by a scarcity of affordable and decent units, with only 2% of formally constructed houses catering to lower-income families. In general, Kenya's housing market faces a dynamic set of interrelated challenges, including high land costs, elevated housing unit costs, substantial incidental costs such as stamp duty and legal fees, difficulty with property registration, and limited access to long-term affordable mortgages.
The Centre for Affordable Housing Finance in Africa's (CAHF) 2023 Yearbook, paints a concerning picture of Kenya's housing affordability challenge. According to the report, a significant portion of the urban population, 46.5%, resides in slums. This figure stands well above the global average of 24.2%, highlighting the severity of the issue. While Kenya's slum population is lower than Uganda (48.3%), Nigeria (58.8%), and Rwanda (65.1%), it surpasses South Africa (25.6%) and Tanzania (40.1%).
Due to the rapid urbanization rates, governments in various African countries are responding with mass housing programs built with state funds or in collaboration with private developers. One of the relatively successful affordable housing programs implemented in Sub-Saharan Africa to address the housing shortage is Ethiopia's Integrated Housing Development Programme (IHDP), which began in 2006. The program aimed to build 400,000 housing units, create 200,000 jobs, encourage the growth of 10,000 micro- and small businesses, and strengthen the construction sector. Over the years, the state-led IHDP has delivered between 25,000 and 35,000 housing units per year, with the program primarily benefiting low and middle-income households.
The Kenya Government Interventions
The Big Four Agenda, an ambitious initiative launched by the previous administration, included a critical component aimed at fulfilling the constitutional right to accessible and adequate housing as stipulated in Article 43 of the 2010 Constitution. This right was to be addressed through a dedicated affordable housing program. However, the program's implementation during the Third Medium Term Plan (MTP III, 2018-2022) fell far short of expectations. The government initially set an ambitious target of constructing 397,000 decent and affordable housing units by the end of the plan period. However, by the close of the 2021/22 fiscal year, a mere 5,019 units had been completed, representing a dismal 1.3% of the target. We note that in spite of the significant government investments in monetary and in-kind resources, such as land and infrastructure earmarked for housing development, the intended outcome of increased homeownership has remained elusive. As a consequence, the homeownership rate in Kenyan urban areas remains low, hovering at around 21.3%. The vast majority of urban residents are relegated to the status of renters.
Against this backdrop, the current government led by President William Ruto intends to close the housing gap by facilitating the delivery of 200,000 houses per year. This would lead to a significant annual increase of 50% in the availability of affordable housing, which currently stands at only 2%. This will be achieved through the structuring of affordable long-term housing finance schemes including the National Housing Fund and the Cooperative Social Housing Schemes. During the MTP IV period (2023-2027), the government aims to significantly boost the number of mortgages from the current 30,000 to 1,000,000 by introducing low-cost mortgages with repayments of KES 10,000 or below. This will be accompanied by the implementation of policies and administrative reforms aimed at lowering construction costs and enhancing access to affordable housing financing. Additionally, it will generate employment and foster entrepreneurial prospects for all Kenyans. The National Housing Corporation (NHC), the government's primary housing implementation agency, is expected to play a key role in this endeavour. The government has also implemented the Affordable Housing Act, 2024, as part of its initiatives to increase affordable housing units.
Government Strategic Initiatives
According to the Government of Kenya's Bottom-Up Plan, which recognises the importance of housing settlement in driving economic transformation, funding of KES 250 billion over 5 years would lead to the construction of 200,000 new houses annually, thereby addressing the shortage of affordable housing supply. In light of this, the Kenyan government has prioritised resource mobilisation towards adequate and affordable housing in its efforts to address the housing deficit. Consequently, to strengthen resource mobilisation, the government has established the National Housing Development Fund to support NHC in mobilising the required resources and in the management of tenant purchase schemes. Based on NHC's Strategic Plan 2023-2027, it is envisaged that implementation of its 5-year strategic plan will cost KES 361.9 billion, where the funds will be mobilised through grants from the government (65.1%), strategic partnerships (19.2%), internal funds (6.1%), voluntary housing fund contributions (5.2%), bank borrowings (3.6%) and the government's equity injection (0.9%).
The Kenya Mortgage Refinance Company (KMRC) was established in 2018 to increase the accessibility and affordability of home loans for Kenyans. It achieves this by providing long-term funds to primary mortgage lenders, such as banks and Savings and Credit Cooperative Societies (SACCOs). These lenders then pass on the benefits to borrowers through single-digit fixed rates and long-term financing.
Financing Options
In order to tackle the issue of procuring funds for affordable housing in Kenya, we believe that the capital market presents innovative financing alternatives for private and public entities. Green housing financing through the issuance of green debt instruments is a crucial sustainability-oriented solution. While Kenya is transforming into a hub for green finance as a result of the support of the private sector and the government, the concept of green finance is still in its infancy. Following the successful issuance of Acorn Holdings' first green bond in 2019, which raised KES 4.3 billion (US$30.57 million) for green-certified student housing in Nairobi, we believe that more funding can be raised for green-certified affordable housing projects. The government has also provided tax breaks and incentives, such as the Value Added Tax (VAT) exemption on goods imported or developed locally for the direct and sole purpose of constructing affordable housing, as well as the withholding tax (WHT) exemption on interest earned by investors in green bonds.
In addition, Kenya has embraced green building principles through various policies and initiatives, including the National Building Code (2022), which provides guidelines and standards for efficient construction. In 2012, the Kenya Green Building Society (KGBS) was formed to lead the transformation of the built environment in Kenya toward environmentally sustainable buildings further underscoring the country's commitment to environmentally sustainable construction practices. Consequently, KGBS in collaboration with Financial Sector Deepening (FSD) Africa and the International Finance Corporation (IFC) supported the Nairobi City County Governor's Office to obtain the IFC EDGE Green Building Standard Certification, which made it the first EDGE-certified green government office building in Africa. The Architectural Association of Kenya (AAK) has also developed the "Safari Green Building Index," a rating tool that can be used for structure planning, design, construction, and approval of built forms in cities. We believe that these policies and initiatives will encourage the use of eco-friendly construction methods and materials, contributing to a more sustainable housing sector in Kenya.
Real Estate Investment Trusts (REITs) are investment vehicles that facilitate the flow of resources from the capital markets to affordable rental investments. The fact that REITs can be listed on the local stock exchange enhances the liquidity of the assets owned by the investors. REITs have demonstrated their success in various African countries. Kenya, for example, embraced REITs as an investment option in 2013 and has authorised four REITs: ILAM Fahari I-REIT, Acorn Student Accommodation I-REIT, Acorn Student Accommodation D-REIT, and LAPTrust Imara I-REIT. Other African countries that have established REIT frameworks include Ghana, Nigeria, South Africa, Tanzania and Rwanda.
We note that the capital markets have also played a critical role in other African markets in raising financing for affordable housing units, mainly through mortgage refinance companies as shown below:
Shelter Afrique, the pan-African development finance institution exclusively dedicated to housing finance in Africa, has also been at the forefront of raising financing from the capital markets for housing projects. In September 2013, Shelter Afrique issued a bond worth KES 5 billion ($58 million) through the Nairobi Securities Exchange (NSE) to finance local currency loans for housing projects in Kenya, which was fully repaid in 2018. In 2022, Shelter Afrique completed its debut ₦46 billion ($110.7 million) Series 1 fixed rate senior unsecured bond issuance in Nigeria's capital market as part of its ₦200 billion (US$481.3 million) bond issuance programme for housing and urban development in Nigeria, underscoring the importance of capital markets financing for housing projects. The company intends to issue similar bonds in other African markets to support local housing projects.
Other real estate financing options available to financial institutions and development partners include mortgage-backed securities and housing microfinance which could be provided by banks, microfinance institutions and SACCOs through financial products tailored to the needs of low-income earners. In addition, the establishment of housing finance credit guarantee funds would increase credit accessibility for the low and middle-income population, particularly women, seeking financing to construct decent homes. This would reduce their risk exposure.
Conclusion
We believe that the provision of affordable housing has the potential to significantly contribute to Kenya's GDP and economic growth due to the real estate sector's capacity to generate a substantial number of employment opportunities. In addition, there are many opportunities in the affordable housing space, including addressing the increasing need for both residential and commercial real estate. However, it is crucial to foster collaboration among all stakeholders involved to secure the resources needed for the successful execution of affordable housing initiatives. The government should take the lead in creating a supportive environment for private developers and investors in the affordable housing sector, offering tax incentives, reducing the bureaucracy in land ownership and transfers and other benefits. In addition, it is crucial to establish robust reporting, monitoring, and evaluation frameworks to ensure that government interventions effectively achieve their desired outcomes. This will help ensure that funds collected for affordable housing projects are used appropriately, projects are completed as planned, and the constructed affordable housing units are allocated equitably.