Home ownership in Kenya has been riddled by myriad challenges, making prospective home owners shy away from this high-capital investment. Young people, especially, have been locked out of real estate because they simply cannot afford to buy a house or a piece of land to develop.
But this is fast changing, and we are now seeing a crop of young Kenyans who have broken barriers and boast impressive investment portfolios when it comes to real estate.
In the wake of limited financial muscle, and even as many mortgage financing institutions continue to charge as high as 18 per cent on their products, young people are beating the financiers in their own game by opting for simpler and more plausible ways of acquiring property.
Charles Peter Mwangi, a real estate consultant and CEO of Rubyland Limited, says a good number of his clients, some as young as 25, are determined to make their investment debut in real estate.
“There are young clients with small money who want to start with a simple plot within the outskirts of Nairobi or out of city,” says Mwangi.
Their maiden investments would go as low as Sh200,000, but are very ideal for starters.
Today, several real estate companies and financiers are creating packages tailored for this crop, which saves monthly but consistently.
“We tell them to set aside part of their income, at least 10 per cent. If, for instance, you save Sh 10,000 monthly, that is Sh120,000 in a year and you could own property worth Sh200,000 by the end of the year,” says Mwangi.
Caroline Kariuki, the Executive Director of The Mortgage Company, confirms that indeed a lot of first-time home owners are young people in their 20s, eager to own the roof above their heads.
The key to owning a home before 30, Caroline believes, is creating a really strong saving culture that will ensure you raise the deposit you will require to buy a house. This is normally 10-20 per cent of the price of the house.
“It is important that young people begin to think about owning a home. Make it a habit to save with an ultimate objective. Even when it comes to paying off a mortgage, you will have the discipline to make your payments on time,” she says.
Any additional income, for example through bonuses or side-hustles, should be channelled to your dream home. This way, you will be disciplined and you will save on your interest a great deal.
“Your income is not stagnant,” says Caroline, “therefore start with a starter home and use the increments to move on to your next home. The trick is to start with what you can afford and be clever when you want to sell.”
Take note of property cycles in the country when buying and selling property. It is now common knowledge that property prices go up every five years after elections. Plan your life in line with these opportunities and you will own a home before you know it.
The other option that young Kenyans have turned to is investment groups, popularly known chamas. The concept has birthed joint ownership of properties by groups of five or more.
This concept has also come to be appreciated by real estate consultants and mortgage financiers alike because of its overwhelming advantages.
“Collective investment, in my view, is much better than individual investments because the risk is shared and also because of economies of scale. Through a chama, you can do much more within a very short time. You reap more benefits and, of course, more capital to move on to your next investment,” says Mwangi.
Low-end housing products
Yet another way through which young people are acquiring property is through the low-end housing products that have made a grand entry into the Kenyan housing market.
Harun Nyamboki, a developer with Moke Gardens, notes that the Kenyan housing market has now turned its attention to the low-end products to target the previously rubbished ‘un-bankable’ population, who largely included youth and average-income earners.
Says Nyamboki: “The low income class is now the hottest hunting ground for mortgage providers and property developers alike. This segment has previously faced an acute housing shortage due to the high cost of land, high interest rates, and the complicated process of acquiring housing plans. The lower-income bracket has been largely circumvented by the property boom of the past decade.”
Designed to be as rudimentary as possible, affordable housing concepts are proving popular within this group.
One such example is the Lukenya Hillside Apartments, whose core target market is young people in the lower income bracket. Based on the unique concept of ‘rent-as-you-purchase’ that is now fast gaining momentum in real estate circles, young people are renting as they purchase studio, one- and two-bedroom apartments.
“This change in attitude has encouraged developers and financers to put up housing units that cost as low as Sh1 million for, say, a 30-square-metre studio apartment,” says Nyamboki.
In such arrangements, young families are buying off-plan, which has several advantages, including manageable risk, flexible terms of payment and also because prices increase by 20 per cent after the ground breaking.
To top it up, young families are enjoying capital gain over the construction period and can choose finishes and fittings while monitoring construction progress and quality of their homes.
Real Estate Investment Trusts (REITS) are set make a debut at the Nairobi Securities Exchange (NSE). The CMA has been pushing for establishment of public Reits in Kenya for many years. With the recent growth and maturity of the real estate sector this has been long overdue. Kenya will become the 41st country in the world to introduce REITS and second in Africa after South Africa.Why you should be interested in them and why this may be a turning point in the property market in Kenya.
WHAT ARE REITS
A REIT is a Real Estate Company/Corporation which owns, develops or manages different types of properties. They are investment instruments that source funds to build or acquire real estate assets which they sell or rent to generate income. REITs are traded like stocks and investors can buy and sell shares and are regulated by the Capital Markets Authority (CMA).The income generated is distributed to the shareholders at the end of a financial year.
REITs may choose to focus on one main genre of real estate or may diversify to all types.REITs in developed capital markets have been in existence in their present format since the 1960s, but they were actually were introduced in the 1800s.One of the advantages of Real Estate Investment Trusts is that they are exempted from double taxation; REIT schemes are exempt from corporation tax and are also exempted from income tax except for the payment of withholding tax on interest income and dividends.
Introduction of REITS in Kenya
Kenya’s property market has seen exponential growth over the years. Kenya property values have grown to become among the best in the world. House prices continue on increasing coming into 2013, rents in townhouses have increased by 3.8% in the first quarter of 2013.Interest rates for developments are still high and the market is extremely under supplied especially in housing for the lower segment of the market.
How would REITS benefit the real estate sector
The capital markets can help mobilize and allocate resources. REITS will enable mobilizations of savings from individuals and groups.This means groups and cooperatives will be able to invest in the market. Individuals will also get a stake in Real estate with investments of sums of as low as Ksh. 5000 depending on the structure of the REIT.
REITS will provide a chance for developers to go the capital market to raise funds. This may make financing developments competitive and thus reduce interest rates for developments. It may also force banks to review their mortgage rates downwards. REITs will also allow Kenya’s capital markets to have a strong role in the further development of the real estate sector.
Specialized REITs will be encouraged especially those involved in the low and medium cost residential properties. This will allow for more development of housing for this particular group which is under supplied. It is said that Kenya has a shortfall of 150,000 housing units every year.
Expected structure of REITs
REITs will be structured as close-ended trusts and encouraged to list on the Nairobi Stock Exchange. Private placements will also be allowed.
Development property will be restricted to 15% of the REIT value. This will help restrict the risk that comes with developing property.
To encourage existing property management companies and property investment companies to convert to REIT structures, majority ownership will be allowed up to 50% for the primary sponsor. All other investors’ stake should be restricted to a maximum of 25%.
A minimum of 100 shareholders will be required for a publicly listed REIT to help in ensuring liquidity.
It will be required that 90% of the income generated be distributed to shareholders as dividends.
The CMA is expected to set the minimum value of a publicly listed REIT to Ksh 50 million for those REITs specializing in low and medium cost housing. For those investing in high-end housing and/or non-residential properties, the minimum asset value will be Ksh 500 million.
REITS will be exempted from all taxes including:
- VAT on all rental income
- Corporate tax
- Any capital gains tax
- Stamp Duty on purchase/sale/transfer of properties
- VAT on professional services
For a country that imposes a 30% corporate tax REITs are sure to be attractive for investors. The CMA must ensure that Kenya Revenue Authority (KRA) recognises these incentives. The proposed framework in Kenya, unlike many other markets, proposes a hybrid model comprising Income REITs and Development REITs. Development REITs specialized in Residential properties are expected to provide more residential units which are in short supply compared to the demand. REITs will also give Kenyans a sense of ownership to a growing sector that seems aloof and benefitting a few in the country.
HassConsult Ltd, real estate firm produces a quarterly index on residential property prices and rents Kenya. The Hass property indices housing prices from all published and formal sector sources. The property index for the first quarter 2013 was released Wednesday, April 17, 2013. The report showed a slowdown in the housing market in the first quarter 2013. This is mainly because of the hold off due to the election. The index reported that House prices were almost static in the first quarter of 2013. Only stand-alone houses registered a rise of 1.2%. Town prices recorded falls in prices of 1.5% and 0.2% respectively. The report recorded 0.5% increase in house prices, driven by some continuing movement in the prices for standalone houses, but offset by marginal declines in the asking prices for town houses and apartments.
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The interior designer
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