Kenya- Landscape of Investment
Introduction:
The report presents an in-depth analysis of the landscape of investment in Kenya. It provides useful data on existing DFI investors, the type of instruments they use to invest and the investment environment they operate in. The report forms part of The Centre for Affordable Housing Finance’s Investor Programme which aims at quantify the breadth of investment activity with respect to housing and housing finance across Africa, and to establish a mechanism to track this on an ongoing basis. This project has collected data and highlights gaps and opportunities in the investment landscape. With the aim of stimulating greater investment in affordable housing and connecting investors with potential investments, the report profiles investors and investment instruments with the greatest impact on the housing finance market within the EAC Region.
Growing financial sector experience and increasingly sophisticated financial instruments are driving Investor interest in African real estate. This includes new market opportunities related to a rising urban middle class, an increasingly localized construction material industry and innovations in housing finance such the emergence of Real Estate Investment Trusts and mortgage liquidity facilities across Africa1. However, a key barrier to this growth remains the chronic lack of rigorous data on the breadth and character of financial infrastructure investment. This is particularly true for the housing sector as stimulating targeted investments requires highly differentiated data that illustrates market segmentation. In providing market intelligence that makes the case for investment in underserved markets (segmenting and quantifying the demand side; and scoping, understanding and tracking the supply side), we can support a better policy environment & increased private sector activity in affordable housing markets. In this way, we catalyse scale interventions.
Local Institutional Investors:
Capital markets:
Through the Nairobi Stock Exchange (NSE), a reasonable amount of funds have been locally mobilized for the housing sector. This has been achieved through the issuance of bonds and shares by various housing finance lenders. Housing Finance Company Kenya (HFCK), one of the traditional providers of mortgage finance, has a bigger loan than deposit portfolio. The company typically bridges this gap by drawing on a combination of equity and lines of credit. However, this has proven to be an expensive and unsustainable way of funding the mortgage book. Whereas equity provides the cheapest source of funding, the company could not issue new mortgages without careful planning due to the resultant dilution of its existing shares. In addition, lines of credit from international lenders normally come at high interest rates of about 11%, thereby making the final mortgage interest rate unattractive to clients. The Company borrowed from EIB, Shelter Afrique and AfDB. However, the facilities were highly priced and for shorter periods, thereby leaving the funding needs of the mortgage lender unmet.
Pension Funds:
Kenya has a vibrant pension sector comprising of 1,350 licensed pension schemes. The sector, the most developed in the East African region, is regulated by the Retirement Benefits Authority (RBA), set up by the Retirement Benefits Authority Act (1997). There are clear guidelines on investment classes for pension schemes, and it is mandatory for all schemes to comply with these guidelines.
Investment Activity in Housing:
This section analyses the different investment tools targeting the housing and housing finance sector in Kenya, their investment horizon and the period of landscape of investment.
Top Performing Landscape of Investment Tools:
Loans and Lines of Credit: Loans and lines of credit dominate (88%) the landscape of investment tool used by Institutional Investors, in Kenya’s housing market. Housing Finance Guarantee Africa (HFGA) investment of USD 5 million for 5 African countries, including Kenya, is premised on their belief that access to affordable home loans is a major obstacle to economic development for most low and lower middle income families in developing countries. As a result, many families are unable to buy or improve a home because of limited access to finance.
Conclusion:
The overall goal of incorporating the FAHARI REIT, was to raise funds for landscape of investments in properties across the real estate sector including retail, commercial, industrial and housing. This objective was achieved, as evidenced by the REIT’s investments in a modern shopping mall , offices and a warehouse, using funds raised through stock exchange. A high return on investments plays a critical role in making shares in the REIT attractive to investors. This factor has created a need for the REIT to invest mainly in commercial real estate and luxury rental apartments. There is therefore limited room for investment in affordable housing which could potentially generate very low returns, consequently, diminishing dividends. To cater for affordability in the housing sector, a social REIT could be issued targeting institutional investors with social investment objectives rather than profit motives.
Also Read: Equilibrium Effects of Housing Subsidies: Evidence from a Policy Notch in Colombia