Joseph Wainaina

HABITAT HEIGHTS DEVELOPMENT PROJECT MORTGAGE FINANCING BY NATIONAL SOCIAL SECURITY FUND March 2020 1 Introduction 1.1 Executive summary The right to housing is the economic, social and cultural right to adequate housing and shelter. The adoption of three important declarations by the United Nations related to human rights and freedoms established the basis for recognizance of adequate housing as a fundamental human right. In particular these include; The Universal Declaration of Human Rights (1948),The International Covenant on Economic, Social and Cultural Rights (1966), The International Covenant on Civil and Political Rights (1966). The Universal Declaration of Human Rights (1948) states that; “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.” Further, The International Covenant on Economic, Social and Cultural Rights (1966) also clearly states that in part “The States Parties to the present Covenant recognize the right of everyone to an adequate standard of living for himself and his family, including adequate food, clothing and housing, and to the continuous improvement of living conditions. “Fact Sheet No.21, The Human Right to Adequate Housing. As a consequence of the ratification, member states including Kenya are accountable to their citizens for ensuring the rights and freedoms in these bills are adhered to. In accordance to our constitution, the provision of housing is a fundamental human right. Chapter Four, Article 19 of our constitution guarantees the rights and freedoms of each citizen under the bill of rights. This includes “the right to accessible and adequate housing, and to reasonable standards of sanitation.” It is the responsibility of each and every state organ and agency to protect and advance this fundamental human right to adequate housing to ensure the development of our society. 1.2 Statement of the Problem The demand for housing in Kenya continues to escalate amid lower levels of affordability by most Kenyans aspiring to be homeowners. The housing deficit in Kenya is estimated at two million units with a rapid urbanization rate of close to 500,000 persons per year. (World Bank, 2019) The current supply of residential housing units is estimated at 50,000 units annually against a demand of 200,000 units nationally (National Housing Corporation, 2018). The challenge for potential buyers has been access to affordable finance. The country currently has slightly more than 26,000 mortgages (Central Bank of Kenya, 2017). The World Bank continues to report that only 11% of the urban population can afford a mortgage at the prevailing rates. The shortage in financing alternatives for the larger 89% of the urban population have to either purchase or self-develop their own homes through own investments. In addition only 23% of the urban population in formal employment earns an income of above Kshs 100,000. This exacerbates the housing situation as only a handful can afford to own a home from the existing pricing in the market and commercial bank mortgage financing mechanism. The proportion of households owning the main dwelling unit they occupied was 61.3% while those occupying rented/provided dwelling units were 38.7 per cent. (Kenya National Bureau of Statistics 1 National Population Census 2019). Nairobi requires at least 132,000 new housing units per year to keep pace with its expanding population. Yet only 50,000 homes are constructed, creating a growing housing shortfall of 82,000 units per year. It is said that 61% of urban households in Kenya live in unfitting settlements of which 70-80% in rental units. The need to create solutions which can benefit the larger more deserving population is quite important to ensure sustainable housing in the country. Partnerships can be created between the National Social Security Fund (NSSF) and developers to promote solutions to the public. 2 Proposal Description NSSF has over the years invested in the real estate sector as a developer and financer. The fund conventionally has been providing access to housing to its registered members who can afford to purchase residential units being developed using the Tenant Purchase Scheme (TPS). As of June 2017 the fund had invested close to Kshs 6.8 billion under the TPS to provide housing to almost 5,000 members. Our proposal seeks to expand the funds reach across the registered members by provision of affordable homes as part of the Habitat Heights Housing Project which seeks to develop 8,888 affordable housing units to the public. Through a mutually beneficial partnership, our model envisages the fund providing its members access to financing through a mortgage housing scheme. 2.1 Structure The structure involves the engagement between several stakeholders whose interrelationship will see the facilitation of the affordable housing units envisaged by the developers, acquired by registered fund members. At the first instance, the NSSF will enter in to a Memorandum Of Understanding (MOU) with the project developer, Habitat Heights Ltd. The purpose of the MOU primarily, will be to specify the intention of the fund to facilitate registered members to acquire the to be developed housing units. The project developer will have the responsibility to deliver the housing units to members. The fund will provide to its members the opportunities to make purchase through flexible purchase plans such as the mortgage finance platform. 2.1.1 Tenant Purchase Scheme Historically, this method of financing has been utilized in the country for many years. It has been successful over the period and has facilitated many aspiring homeowners to acquire residential units at favourable terms over a long term repayment duration. Housing institutions such as the National Housing Corporation (NHC) and the NSSF have used the alternative since inception. Members initially expressed interest in the purchase of the units and thereafter were allotted units based on their desire and ability to purchase. With a low urbanization rate in the period between-’s, the model worked perfectly. However, the growing population rate especially in urban areas necessitates a rethink of the model to ensure the workforce who opted to rent, can acquire homes at attractive terms. Further, financing development of affordable housing through TPS really inhibits the proportion of homeowners whom can acquire homes as much capital is tied down in construction which increases the 2 funds opportunity cost of investments. Further, NSSF has been experiencing adverse selection where houses meant to be scooped up by the target mid and lower income brackets under TPS, are taken by wealthy individuals. The default and cost of recoveries can weigh down the investment returns as from previous reports, this amount to Kshs 1.5 Bn. As a diversification strategy, fund could continue with its service offering in home acquisition through providing mortgages through partner commercial banks. 2.1.2 Mortgage Financing Currently as a provident fund, NSSF has the ability to provide cheap mortgage loans to the public through investment in the mortgage sector. Through an amendment of Section 38 (1) (c) of the Retirement Benefits Act, the National Social Security Fund is NOT restricted to deposit monies with a financial institution for provision of loans at preferential rates. This amendment in 2016 by the then finance minister, Mr. Henry Rotich, allows the fund to provide registered members with mortgage financing options at preferential terms. This provision was an amendment to the NSSF Act as contained in the Finance Act of 2016. In conjunction with partner commercial banking institutions, the fund will enable buyers to access mortgage facilities with the duration dependent on the member’s financial capacity. The fund would allocate a proportion of its assets under management particularly in the real estate sector to be loaned to registered members through commercial banking institutions. The current investment in the real estate sector amounts to Kshs 36 billion. If the fund was to re allocate 10% of the capital to mortgage provision, in the first instance to the proposed project, we would deepen the proportion of aspiring homeowners and registered members to acquire homes at affordable rates. Members will be required to pay the down payment through their pension savings if they cannot make payment using cash and be entitled to a unit upon the financer(NSSF) paying the developer the balance of the sale price through the respective commercial bank offering the mortgage. The buyers will continue to make payment of the mortgage including interest to the respective commercial banks over the specified duration. The structure below highlights the model described. 3 NSSF Singapura Developers Ltd (JV partner) Deposit of funds for mortgage disbursements Registrati on and payment of 20% of sale price MOU Commercial Banks Mortgage Finance Construction Home purchase Habitat Housing Heights Project Land contribution Habitat Housing Cooperative Society (JV Partner) Mortgage Mortgage servicing Principal Liquidation NSSF Members Kenya Mortgage Refinance Company Finance and Technical Support Payment of 80% of Sale Price Mortgage service payments Cash flow Housing Bonds United Nations Office of Project Services Invest ment Bondholders 4 Our proposal would be to levy a seven percent interest on the facility. The fund could earn a return of four percent in interest of the deposit placed in the identified commercial banks while the commercial bank to earn a return of three percent for administering the mortgage fund. The partner institutions can thereafter refinance the loans made with the Kenya Refinancing Mortgage Corporation (KMRC). This will be by packaging of the debt instruments and selling to KMRC which will re issue the loans as packaged instruments to the public. The home buyers through the commercial banks will manage the servicing of the mortgages to finance the bondholder interest and principal. The bonds issued will be collateralized by the underlying securities which would be the homes and the borrower’s mortgage payments. 2.2 Property Description Habitat Heights is an affordable luxury living estate designed to enhance the quality of life of its residents. The project is an architectural masterpiece tastefully laid out and built using modern technology incorporating top notch amenities and facilities. The concept provides a sustainable housing development where residents will be able to live, shop and play. It involves the development of 8,888 residential units on a 77.75 acre parcel of land split into four different typologies. The development mix has been designed to suit first time home owners and investors who desire to earn a rental yield from their investment. The project will involve the below configurations. Unit Type Est. Size Range (sqm) Total units Studio apartment 22 324 Studio apartment 28 252 1 Bedroom 44 972 2 Bedroom 75 2,912 3 Bedroom 95 4,368 Total 8,888 In addition the development shall have a commercial section that will have retail unit developments to provide ample shopping facilities to the residents. The specifications for the retail section are as shown below; Retail Retail unit Retail unit Retail unit Retail unit Retail unit Type Type A Type B Type C Type D Type E 5 Size(Sqm- Number 2 2 1 1 24 The parking lots have been designed as illustrated below. Underground parking Open Parking Total 4,974 2,532 7,506 Due to the large scale nature of the project, a seven phased development plan has been muted over the entire site. The unit typology for each phase is as shown below; Phase 1 Size (sqm) Studio Apartments Number 1 Bed Apartments 2 Bed Apartments 3 Bed Apartments Type A Type B - - - Retail Retail Unit Retail Unit Retail Unit Retail Unit Retail Unit Type A Type B Type C Type D Type E - 2 2 1 1 24 2 3 4 5 6 7 Size Size Number Number Size(sqm) Number Size(sqm) Number Size(sqm) Number Size(sqm) Number (sqm) (sqm) - - Type A 22 - - Type B 28 - - - - - - - - - - - Type A Type B Type C Type D Type E The project has been developed using contemporary modular building technology. EPS building technology will be used in the construction using the Baupanel® System. This is an integral earthquake, hurricane, fire resistant and thermo-acoustic insulated construction system made of structural panels. It produces energy savings during construction and has a very low environmental impact. The technology is a versatile system that allows a more flexible and creative architecture, achieving economic and time savings, linked to an efficient and sustainable construction. 2.2.1 Concept The design of the project follows a modern multi-family residential concept with high rise blocks laid out in a rhombus arrangement representing each phase. It shall consist of 26 apartment blocks of 16 storeys each, two blocks of 20 storey apartments with open terraces at the top as break out areas for the residents. It shall also include two blocks of strata landed clubhouses. Various facilities will be included such as sporting facilities, shopping areas, and restaurant and dining areas; the development will have retail centers on two blocks at the lower levels. Parking considerations have been made for the large population expected within the estate as underground, upper level and surface parking will be utilized. 6 - 2.2.2 Impressions 7 8 2.2.3 Plans/Renders Studio Apartments One Bed Apartments 9 Two bed apartments Three bed apartments 10 2.2.4 Location The proposed project located in Machakos County, is tucked away in a quiet, scenic and vast savannah area in Mavoko Sub-County, Lukenya. The development lays first row from Mombasa road and is situated 35 Kms from the central business district and 27.7 Kms from machakos town. The plot is opposite Primarosa Flowers Farm and 15 Kms from the growing industrial hub at Athi River which includes export processing zone, Devki Steel Mills, cement manufacturing companies, walker industries ltd and many more organizations. The site has good access given the good road and rail infrastructure in the location which has reduced travel times to the subject location on daily commute to their respective working areas. The project is located perfectly suitable for the young and middle aged working population and business people working within the Nairobi and Machakos counties especially along Mombasa road just before you get to Makutano junction. Several local and multi-national organizations provide a good catchment zone for the project with their employees being registered members. 2.2.5 Fittings The development concept follows a contemporary luxury living feel with upscale amenities. The units across the development shall have fully fitted bathrooms, ensuite master bed units, semi furnished with micro wave ovens, refrigerators, washing machines, kitchen hood and hobs, fitted ovens and inbuilt wardrobes. 2.2.6 Facilities In line with the concept the project will have befitting amenities to mirror the desired project vision and theme. These particular include;                 Shops & Cafes 2 Club houses (Mombasa Gallery & Daystar Gallery) 24hrs full service gym Studying corners Meeting room Multipurpose halls (Wedding, Birthday parties and other events) Water feature ponds Olympic size swimming pools Children’s play pool  11 Jacuzzi Pool Astro turf football Pitch Rugby Pitch Basketball courts Tennis courts Gardens with foot path & ponds Children’s playground, Outdoor elderly fitness area, Jogging tracks, BBQ pits Outdoor picnic area (Pavilion & Gazebos) 2.2.7 Pricing The pricing adopted for the project is very accommodative for the target market. The project is designed to provide value at a very affordable cost. Off plan sales are being offered in cash and mortgage options to the buyers. The table below gives the pricing point of the units. Phase 1 Description Residential Component Units Cash Price Cash Mortgage Installment Monthly Service Charge 1 Studio Type A 162 Kshs 1.98m Kshs 1.98m Kshs 2.18m Kshs 1,800 2 Studio Type B 126 Kshs 2.48m Kshs 2.48m Kshs 2.78m Kshs 2,300 3 4 5 1 Bed-44 Sq.M 2 Bed- 75 Sq.M 3 Bed- 95 Sq.M - Kshs 3.4m Kshs 4.8m Kshs 5.8m Kshs 3.4m Kshs 4.8m Kshs 5.8m Kshs 3.78m Kshs 5.48m Kshs 6.88m Kshs 3600 Kshs 6,000 Kshs 7,600 1 2 Phase 2 2 Bed- 75 Sq.M 3 Bed- 95 Sq.M 448 672 Kshs 5.2m Kshs 6.2m Kshs 5.2m Kshs 6.2m Kshs 6.032m Kshs 7.192m Kshs 6,000 Kshs 7,600 Under the mortgage platform the units will be financed by the identified partner financial institutions. Upon expression of interest to purchase, the buyer will reserve and make payment of the initial down payment either through assignment of the membership savings at the fund or cash payment. The balance will be paid upon completion by the respective financer after whom the buyer will start making monthly mortgage service payments to the bank upon occupation. A schedule of expected payments is shown below for the one, two and three bed units. Description Mortgage Amount Down Payment Principal Mortgage Mortgage Period(Yrs) Monthly Repayment One Bed Apartment Kshs 3,780,000 Kshs 378,000 Kshs 3,402,000 25 Kshs 24,044.63 Two Bed Apartment Kshs 5,480,000 Kshs 548,000 Kshs 4,932,000 25 Kshs 34,858.35 Three Bed Apartment Kshs 6,880,000 Kshs 688,000 Kshs 6,192,000 25 Kshs 43,763.77 12 2.2.8 Developer profile The Government of Kenya has launched one of the housing projects under the Affordable Housing Programme initiative dubbed the ‘Habitat Heights’. The housing project is one of the first projects developed under the Memorandum of Understanding between the State Department for Housing and Urban Development and United Nations Office for Project Services (UNOPS) in September 2018 to develop 100,000 housing units. The project is being undertaken by AFRA Holdings Limited through its local subsidiary Singapura Developers Ltd (Kenya) in conjunction with Housing Finance. The project is being undertaken as a joint venture partnership between Singapura Developers Ltd and Habitat Housing Co-operative Society through Habitat Heights Ltd as the developer. 2.2.9 Project Status All the required permits by respective agencies have been procured. The county government of Machakos has already approved the project for construction and the National Environmental Authority provided the green light for development. The project was launched in December 2019 by the President of Kenya His Excellency Uhuru Kenyatta. 13 3 Stakeholder Benefits 3.1 NSSF Members 3.1.1 Affordable homes The registered members of the fund will be able to access affordable and decent housing units in a sustainable housing development which previously they were not able to especially given the high development cost which private developers were passing on to home buyers as reflected in the pricing. The concept goes ahead and caters for a different set of age groups ranging from the student to the matured family person. The development provides more value to the target market holistically and leads to a sense of fulfillment. 3.1.2 Affordable finance The RBA Act allows the fund to be able to provide cheap mortgage loans to the 3.9 million registered persons. The amount will be disbursed to qualifying members at seven percent. This would make an aspiring home owner who would want a home valued at Kshs 5.5 million to acquire it with a modest Kshs 35,000.00 on a monthly basis at an interest cost of 7% per annum. 3.1.3 Taxation benefits: Mortgage Relief In Kenya mortgage payment for owner occupier residential housing entitles the mortgagee to a tax relief if units are purchased under the affordable housing programme which is in line with our subject property offering. The Finance Act, 2018 specifies that aspiring homeowners will now enjoy a 15% tax relief on mortgage interest payments subject to a maximum of Kshs 108,000 per year. Meaning on a monthly basis members can get a relief of up to Kshs 9,000 on their gross emoluments. This will reduce the tax payable. 3.1.4 Employed and self-employed members can attain affordable housing The fund provides opportunities for the employed and self-employed persons whom contribute to their retirement savings in the fund to have a chance to obtain decent housing. The benefit will accrue to members depending on their ability and availability of an ideal housing unit fitting their financial position given the wide choice and number of housing units. 3.1.5 Increased standard for living for members The project concept provides quality, decent homes at a very low cost. The homes are sustainable creating a balanced and homely feel. They provide good value for money given the wide array of amenities being offered and facilities within the estate. 14 3.1.6 Ability to attach retirement savings to acquire homes In accordance to Section 31 of the Retirement Benefits Act, members in a registered pension/provident scheme can assign a prescribed proportion of the benefits accruing to a member under a pension fund and used by the member to secure a mortgage loan from a bank, building society or other similar institutions and on such terms and conditions as may be prescribed under the Act. A proportion of 60 per cent of accrued retirement benefits to offset outstanding mortgage loans in case they lose their jobs and are unable to service pay back. 3.2 National Social Security Fund 3.2.1 Minimal capital investment in provision of affordable housing The fund’s total monthly collection from all the registered 3.9 million members, total to Kshs 1.5 Bn while on an annual basis the amount is equivalent to Kshs 18.6 Bn. Using these funds, a portion of 30% being allocated to real estate would result in an allocation of Kshs 5.58 Bn and if we were to give a mere 20% of this to the mortgage sector it would provide Kshs 1.2 Bn for mortgages to the members. By investing in the provision of mortgage, the fund would be able to reduce their investment in the tenant purchase scheme which is capital intensive and continue to provide housing to members through partnerships with developers. 3.2.2 Increased membership The ownership of housing by the mid and lower segments of the working force remains a pipe dream for many. Majority are forced to rent units only to save up and develop owner occupied units in far flung areas latter in their working life. Through having such incentives to members, the membership would increase amongst the self-employed or persons making voluntary contributions in a bid to become homeowners. Total contributions to the fund would increase significantly enough from wider membership that would enable the capacity to provide more and earn a higher return in the long run. 3.2.3 Higher return on investment Our proposal provides the fund the capacity to earn a return of four percent on the mortgages disbursed to members. Looking at the current effective demand for housing by the public standing at 132,000 housing units annually, mostly consisting of employed persons, if a partly 10% were to obtain mortgages the funds return would be enormous if projected on a 25 year mortgage period. 15 3.2.4 Lower risk investment (elimination of development risk) The provision of mortgages comes with its own risks to the financers arising from counterparty risk associated with default. The likely hood of default may arise from several unfortunate circumstances. However with the advent of mortgage insurance, the fund can be secured from default risk. Outright development of housing units for direct sale to members carries higher degree of risks associated with construction. This include development risk which can skew returns expected to developers. By venturing in to mortgage financing, this risk is eliminated and transferred to developers who have to manage the risk internally. It is also worth clarifying that the fund cannot and will not guarantee purchase but provides a platform for members to purchase houses. 3.2.5 Long term horizon of pension funds The long term investment horizon of pension funds provides the best alternative to mortgage financing as opposed to commercial bank financing which is limited to a period of 15 years. Pension funds can advance mortgages for a period of up to 25 yrs. 3.2.6 Portfolio diversification Lastly, through mortgage financing the fund will be able to diversify its portfolio thus ensuring it is able to earn a higher portfolio return and reduced portfolio risk given the uncertainties resulting from unpredictability of future economic environment. 16 4 Case Study 17 5 Implementation 5.1 Methodology The proposal involves engagement with project developers with large scale projects which can be able to attain economies of scale and lower the average unit cost. Our target is to incorporate projects which have been initiated through the Government of Kenya under the affordable housing program. The advantage would be the lower cost of units would enhance absorption by the target market. Our proposed project, Habitat Heights, a signature development by the United Nations Office for Project Services and the Government of Kenya provides the perfect avenue where the fund can provide mortgages to aspiring homeowners. To initiate the process, an MOU will have to be entered in to between the developer and the fund. Secondly, the obligation of the fund would be to communicate to members on the availability of housing units through sensitization efforts and public awareness through intensive media campaigns which will be used to enlighten members. A budget by the fund would be created to facilitate the exercise. Registered members would be made aware of the ability to purchase units through assignment of their pension contribution as down payment. Individuals who can be able to make cash contributions towards the down payment can be able to do so in an instalment plan during constructions which would not be more than 20% of the unit value. More important would be to understand the fact that the mortgage service payments will be made upon occupation. Partnerships with local commercial banks will be sought to administer the funds on behalf of NSSF. 5.2 Finance Partners The project has appointed Housing Finance as the principal financer for mortgage provision to end buyers. The fund as proposed will get in to an agreement with the financer to provide the mortgages at the proposed rate specifically for the Habitat Heights housing project. This will be done under the affordable housing programme. The interest rate proposed will not at any one point in time distort the market interest rate since the project and financing will be within the programme. 6 Conclusion Our model requires intense joint collaboration amongst the stake holders sighted. The success of the proposal is hinged upon the commitment towards ensuring the housing pillar under the government’s agenda 4 is achieved. The structure is within the legal statutes in the jurisdiction and all we need to do is to actualize the vison as envisioned by the drafters of the separate policies and legislations including the supreme law of the land which remedy the housing situation in the country. 18 The project is designed to accommodate the interests of Kenyans who desire to own homes at all costs but are limited by unavailability of affordable housing financing options. The private sector has been very active in the provision of affordable housing to their employees in respective organizations. The public sector to as well can emulate the same and not only fulfil the supply side by creating affordable homes but also fulfilling the demand side by creating adequate effective demand through affordable financing solutions. 19