MWANGI: The capital markets solution to housing

As the Government of Kenya looks at various financing options for affordable housing, the capital markets offer solutions worth exploring. Considering that investments in housing are long term in nature, they lend themselves well to long term investment products that are aligned to the growing pool of domestic and international pension and insurance funds carrying long term liabilities.

The capital market as a source of long term financing plays a critical role inmobilizing savings for investment in the productive sectors of the economy. To demonstrate this, two examples come to mind. The Government of Kenya has issued several infrastructure bonds to finance road projects, while KenGen (a public listed company), has issued an infrastructure bond to finance its power generation capacity expansion plans.

The deployment of infrastructure bonds in these instances provided key solutions, considering the projects are long-term in nature.

Affordable housing, which is a key pillar of the Big 4 Agenda, also falls in the category of long term projects that require long term funding to ensure the cycle of delivery of houses is aligned to the nature of available funding.

One of the biggest challenges in Kenya is delivery of houses to meet the growing demand. Studies show that there is annual demand of 200,000 houses yet the market only delivers 50,000 houses. The situation is dire when you look at the number of mortgages in Kenya, estimated at 50,000. All these factors demonstrate there is a serious funding constraint in the housing sector.

For the Government Policy of providing affordable housing to be realised, innovative, long-term financial solutions would need to be considered to meet the growing housing need. The capital market has the answer to the housing challenge since it can facilitate raising of large pools of funds to support the delivery of houses in large numbers in a sustainable manner.

Capital market products for consideration include: Housing Bonds, Asset-Backed Securities, and Real Estate Investment Trusts (REITS). A housing bond is like an infrastructure bond (where bondholders get a semi-annual interest/coupon payment and the principal is repaid after maturity of the bond) and could be issued by the National Housing Corporation to raise long term capital to fund delivery of houses in public-private partnerships to open the space for broad participation.

Asset-Backed Securities (ABS) are financial securities collateralised by a pool of assets such as loans, leases or receivables, and future income from projects, which act as the underlying asset.

REITs are designed to enable the investing public benefit from investments in large-scale real estate enterprises. The launch of the Kenya Mortgage Refinance Company is also another opportunity to raise funding to support the realisation of the affordable housing agenda by taking mortgages off bank balance sheets and securitizing them to raise funds.

The capital market therefore presents multiple instruments to provide long term funding to respond to the need to deliver affordable housing as part of the Big 4 Agenda.