The government has recently put in place a raft of incentives, especially tax incentives, to encourage the development of affordable housing.
Taken as a whole the incentives can bring down the development cost of affordable housing by almost 25 percent. The government has done a great job making it cheaper and easier to develop affordable housing.
However, even though the government has made it cheaper to construct housing, we still need to raise the funds needed to deliver on the affordable housing agenda, especially given that the government has pulled back the unpopular plan to fund affordable housing through a housing tax levy, which would have taxed even those not interested in getting a house. We still need to figure out the funding.
Luckily, there is capacity to fund the affordable housing agenda given investor hunger for better returns. The hunger for returns can be sustainably satisfied from the housing sector given the huge housing deficit, which is more acute at the affordable level.
However, funding will not flow into the housing sector unless we address we address three major obstacles to housing finance capital formation in our capital markets;
First, we need expand the pool of trustees for investment funds. A trustee plays an important role in investments. They ensure that investments are being made in accordance with the laid down rules. In short they are like a referee.
We currently have only three firms that are approved as trustees for Real Estate Investment Trusts, REITs, this is too short a list to catalyse a vibrant housing finance market.
It is no wonder the fees charged by REIT trustees are almost four times the amounts charged by pension fund trustees. The requirements by the Capital Markets Authority regulations to be a REIT trustee are onerous – you have to have at least Sh100 million in capital, essentially limiting trusteeship to big balance sheet companies such as banks.
This is compared to Sh10 million requirement to be a trustee of a pension fund regulated by the Retirement Benefits Authority.
The Sh10 million requirement makes it easier to have many corporations eligible to be trustees hence promoting a vibrant market. How do we explain small market like the Sh6 billion REIT market requiring 10 times the capital compared to the capital required by a much larger Sh1.3 trillion pension fund market? We need to open up investment trustee beyond the control of a few players.
Secondly, other than REITS, the second way to mobilise funding for housing is through collective investment schemes (CIS). Collective investment schemes are meant to bring together like-minded investors to pursue a common investment objective under a regulated structure. However, our CIS regulations currently require that the maximum a scheme can invest in one asset class is 25 percent.
That makes it difficult to form a specialised fund to invest in housing. In this day and age, it’s just bizarre that we have regulations that deter specialised funds such as technology fund, financial services fund or a housing fund.
Other than the amount required for liquidity, a housing fund should be allowed to invest the vast majority of its funds into housing.
Finally, in 2019 parliament amended the Income Tax Act to expand the Home Ownership Saving Plan (HOSP) tax benefit to include savings done in collective investment schemes. Until the amendment was effected, only savings done in a bank qualified for tax benefits.
However the operationalisation of this amendment remains outstanding. The amendment needs to be operationalised so that Kenyans can begin to save for HOSP and in the process mobilise funding to support the President’s housing agenda.
Unless there is swift action to address these three major capital markets obstacles to funding affordable housing, we are unlikely to see significant financing into the housing sector, which means most developers will still rely on hard to access bank funding for their funding needs.
Dande is CEO, Cytonn Investments.