Kenya: Realising Real Growth in the Real Estate Sector

By: Rachael Gitonga
Twitter Logo @wangarigitonga

It’s very exciting how the real estate sector is highlighted as one of the sectors that will give higher returns to investors this year in Kenya. Other sectors expected to drive economic growth are the dairy industry, government tenders, security and cashless tech products.

Some wary Investors have been watching real estate from a distance wondering whether the growth will slow down and the “bubble” will burst. There are some factors at play here that are expected to have an impact on the sector’s performance and penetration by investors.

High land prices

Say for example, the affordability of land for development. A recent survey carried out by Hass Consult Real estate indicates that land prices have increased fivefold in the last 7 years. The land prices in the suburbs range from Kshs 40 to 470 million. Most of these suburbs are both residential and commercial with a number of office blocks coming up. These prices are high for individual investors hence making affordability difficult.

A restrictive credit structure

The only way to ensure increased penetration in this sector is to make credit facilities affordable. However in the past we have seen millions of Kenyans locked out of home loans. This has been mainly due to low levels of income, high cost of money being interest rates and initial costs.

Take for example a home loan of KShs 5 million to buy a 2-bedroom house in the outskirts of Nairobi. The monthly repayment would be approximately KShs 52,000 for a 20-year term. The number of households that can afford this monthly commitment per month is very low. Before the bank lends this amount one would need to raise a deposit of 10% (Shs 450,000) and incur related costs totaling to about Shs 384,000. With the low levels of income the ability of individual Kenyans to own homes is very bleak.

This explains why there is a very low uptake of mortgage loans even with increased demand for housing. It is commendable that some institutions such as Housing Finance Corporation have seen this as an opportunity and have now developed a product that provides 100% financing. The institutions provide financing for the total cost of the home including any incidental costs that an individual would otherwise be required to settle before obtaining the loan.

Most of the population in urban areas will continue to rent houses for a long time unless the current lending regime makes a complete transformation to make home loans affordable. Never mind rent in most areas has risen significantly over the years.

Middle men cost

The process of purchasing and selling of land in the country is largely controlled by middle men, a necessary evil. However this has led to incidental middle men costs which the purchaser often bears. The actual costs of property is loaded with these costs. The cost of corruption in this sector has also discouraged investors. Land scams have been common in the sector and this has slowed development of some large projects. This ranges from the irregularities of ownership of property to the poor service delivery of contractors.

Capital gains tax

The introduction of Capital gains tax with effect from 1 January is expected to have an impact on property prices as owners pass the cost to investors. This increases the general cost of property by some margin.

The good news is that the government has realized some of the above matters, and is providing regulation in some of these areas in an effort to provide an enabling environment for players in the sector. In the recent past, the cabinet secretary for land ordered closure of a few land offices for a total cleanup of records. This has led to some interesting findings; irregular land dealings have been unraveled. Catastrophes involving collapse of buildings have been experienced in the country due to shoddy work done by contractors. Strict regulations have been put in place to ensure the quality of construction and process is monitored. But this is a more reactive approach and is yet to be implemented fully.

The players together with the government should take a more proactive approach to realize real growth in the sector and solve the problems facing the sector. The sector is dominated by institutional investors and therefore not enabling for individual investors due to restrictive rules of the game.

Institutional investors have more resources, greater negotiating power and are impersonal. However if the country does want to make millionaires in this sector then it has to put in mechanisms that make individual investors inclusive.

“Why cant a household paying rent of Shs 60,000 obtain a loan?”


Something needs to be done. This sector has great potential. A quick survey of rent levels across Nairobi tells a silent story. An opportunity. An untapped market. How do you explain households that can afford monthly rent of Shs 60,000 and above and can’t afford to own homes. Recall my previous example of a mortgage of Shs 5M (actually Shs 4.5M after you pay 10% deposit) the monthly repayment is Shs 53,000 for a 20 year term. So why cant a household paying rent of Shs 60,000 obtain a loan?

I have no single answer of where affordable housing for Kenyans should come from, all I know is we need to make a few changes in a number of places to come up with a comprehensive affordable housing program.

So what can the government of Kenya do?

Require that Property developers include a number of affordable units in the housing projects while ensuring they cover their costs to ensure they remain in business. Currently, the government through the national housing corporation, a government agency, has built a number of affordable units, but these are not adequate for the growing demand. These have often been low cost housing units that attract a common economic class. But in the former you will get a mix of economic classes with some taking up units at the market rate while the others taking up unit at cost or below cost.

The other option is for the government to designate certain areas as affordable housing zones and offer clear incentives for developers to put up affordable housing units. This could include offering subsidized construction material costs and subsidized or even government funded amenities (water and electricity installation) for property development in these zones. These should also be geared towards developing locations outside the city. This will require infrastructure development in such areas to attract economic activity.

The government could also regulate property prices. This could be zoned regulation where you have price limits dependent on location of housing units. This will need consideration of various factors, e.g. one would expect projects with better access to construction material to be cheaper. The other side of the coin is that these properties could be overpriced. With developers making super profits. No wonder the average pay back period for a majority of houses is approximately 15 years. This compared to other asset classes may not be an ideal investment for retail investors.

I recently visited one of our neighboring countries and was amazed at the property market there. A single apartment unit in that country goes for $7,500 approximately in rent! Did I say per month! That was shocking considering it’s a very young economy recovering from political instability. Most of the construction materials are imported hence the high cost of construction and property prices. So why can’t we do better and provide affordable housing for the growing economy?


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