CAHF Benchmarking Research How can we use CAHF study to spur Kenyan - - PowerPoint PPT Presentation

CAHF Benchmarking Research

How can we use CAHF study to spur Kenyan housing sector Seeta Shah August 30, 2018

Context

• CAHF undertaken cost benchmarking study across several countries in

Africa

• Found Nairobi is the most expensive City to deliver housing
• Applicable to both for single storey houses on small plots of land, and

apartment buildings

• Next 4 slides summarize CAHF findings

Applicable to single storey and apartment blocks

Housing Cost Benchmarking: South Africa, Rwanda & Kenya (2018)

Housing Cost Benchmarking: South Africa, Rwanda & Kenya (2018)

Understanding CAHF psm costs for apartment

TOTAL UNIT SIZE: SQM 40 TOTAL LAND SIZE: SQM 6,000 TOTAL UNITS IN DEV 240 DENSITY P ACRE 162 APARTMENT COST COST BREAKDOWN $ P UNIT $ PSQM % Land 1,508 38 3% Infra 1,371 34 3% Compliance 3,478 87 7% Construction 27,648 691 56% Other 3,792 95 8% Dev Mark up 4,914 123 10% Taxes 6,834 171 14% Total 49,545 1,239

• Looking at 40sqm, 2 BR, 1 bath apartment in the 2 x 5 storey walk up alone –

the CAHF study shows that it would cost $49,545 per unit or $1,239 psm.

• Important to understand that CAHF methodology is to work with a bill of

quantities for this hypothetical unit.

• Market has very few 40sqm 2 BR, 1 bath apartments measuring 40sqm that

we can compare psm delivery costs to.

• However, there are units being delivered for approx. $600 pm but mainly for

larger units.

• Further, Kenya Property Developers Association, have derived that a lower end

2 BR, 1 Bath unit measuring 40sqm can be delivered for $26,000 p unit ($650 psm). Refer to KPDA Affordable Housing Report, June 2018

• Why the discrepancy?
• Need to ensure there is apples to apples comparison about unit being studied in terms of location

(land cost), specification and finishes, gross to net building ratio, and on and off site infrastructure comparison.

• Overall, developers do agree cost of delivery in Kenya very high and can be driven down by economies
• f scale and policy changes.
• Suggested next steps: KPDA and CAHF work together to identify and apples to apples comparison –

and identify how costs can come down. Eg. Taxation on input materials / lack of off site infrastructure etc.

Data – wonderful data

• While there is further work to do to cross check cost of CAHF benchmark

apartment vs delivery costs suggested by KPA, the whole exercise is very useful.

• The stand alone benchmarking study is particularly useful as it deploys the

same methodology across 16 countries, and looks at South Africa, Rwanda and Kenya in more detail.

• Conclusions have borne out what developers and policy makers have been

saying anecdotally – but now validated

• Benchmark stand alone house delivered at $65,000
• affordable to less than 1% of population…
• Important to look at the affordability comparison as well - may show a

greater disparity

Land

• Land cost astronomical – driven by higher density allowances and cleaning out black money
• City embraced densities of 80 – 150 units per acre!
• Overall failure in planning
• On site infrastructure cannot cope
• Smelling biodigesters
• “Fighting with neighbours over parking”
• Buying water as borehole water not drinkable and spoils clothes
• No sense of community
• Very limited green space
• No culture of participatory management – someone else will do it
• Off site infrastructure cannot cope
• Leaking trunk sewers
• Long Commute times
• Flooding even with limited rain
• Policy implications: City can and should contribute land for housing developments
• BUT land not the main limiting factor, as city embraced high density.

Bulk infrastructure

• Actual Cost very high
• But time cost even higher
• Contrast developments that paid more for serviced land vs others that took calculated strategy to

buy cheaper land further out, and spend more on infrastructure

• Latter struggled to deliver due to time delays in being able to install infrastructure at their

cost! Unclear routing for infrastructure, fragmented approval process

• Policy: use stamp duty funds or any taxes raised towards off site infrastructure

Construction

• Why are locally available materials expensive
• Very high import duties
• Higher import duties are counter-intuitive till local manufacturing catches up
• Higher duties on particle board etc – which is a key component of Alternative Building technologies
• Duties based on ‘benchmarked’ costs – not actual costs – so developers who have sought deals pay duty on higher expected price
• Frustration by red tape: case of local ceramics – just not worth it!
• Steel:
• Raw material: import steel billets: no import duty but pay IDF and Railway levy, 6% cost addition
• Transport from port to Nairobi is highest in world / transport costs to development site – unfortunately SGR not helped
• Electricity cost for running the steel plant
• How do you bring costs down
• Improved logistics and finance
• Economies of scale
• Cheaper finance
• Key area for policy dialogue: multiplier effect not appreciated
• Lobby for selective reduction on import duties, for housing delivered for less than $50,000
• Lobby for rebate of VAT on housing delivered for less than $50,000 – VAT rebate should apply to much small projects as well – and not

define time requirements – as the aim is to get as many houses for less than $50,000 delivered as possible.

Labour

• Finding skilled labour a big problem
• Importation of expensive labour not typically seen except for large

projects which can absorb that higher level of management and

• versight required
• Local professional fees very bulky – based on scale fee of value of

project delivered.

• Policy implication: Scale fees for professionals should be re-

considered and move towards fixed fees, as large projects have significant elements of “repeated design”.

• Applies to building professionals and legal fees as well.

Land titling and approvals

• Registration still complex and lengthy
• Particularly partial discharge of mortgage from construction financier

and registration of a mortgage purchaser

• Reflected in the 10 – 20% differential in price between cash and

mortgage buyers

• Approval of buildings very cumbersome – need to move towards

standard designs which are pre-approved

Affordability

• Housing is one component
• Linkages with employment – despite SEZ at Athi River, most people

are commuting

• Commuting cost AND time AND household sacrifices (children aged

10 years put in boarding school near family home as parents arrive home too late to pick them up)

Middle income Rental Housing – Mode A :

Characteristics

• Single landlord, on small family owned plots (1/2 acre or less), 20 to 40 units
• Usually better located along main spine road
• Financed with equity and pooling personal loans / SACCO loan etc
• Poor design / lighting / cross ventilation
• No common amenities
• Managed by owner or 3rd party agent

Middle income Rental Housing – Mode B :

Characteristics

• Large formal estates, built by developers, 100 + units
• Usually peripheral urban locations
• Design and amenities highly variable dependent on developer
• Financed by developer equity, cash instalments from individual buyers and bank debt
• Largely sold to investors (anecdotally 70% or more)
• Investor units enter rental pool, either with directly managed or with 3rd party

Prevailing rents along Mombasa Rd :

Typology Size Rent $pm Mode A Rent $ pm Mode B Bedsit 15-25 sqm $ 80 - $100 $80 - $120 1 BR 30 – 40 sqm $150 $150 - $180 2 BR 40 – 50 sqm $200 $200 - $300

Rental Comparison

• Would expect Mode B to command higher rents: however, differential less significant because
• Mode A usually infill along main spinal transport route
• Mode A has lower service charge as fewer amenities
• However, these are very broad generalizations as each development rental highly sensitive to

actual location - (whether Mode A or B), that is distance from work opportunity nodes and distance from immediate access from main road to particular development

• Higher differentiation in rental achieved seen in 2 BR where Mode B can provide bigger sized

units / more features etc, and hence can attract families to live there

Tax incentives: Part 1

Current regime / Proposed in Bills Recommendation for further policy change

• Developers of low income housing get corporate tax

reduction from 30% to 15% if build 400 houses per year (100 houses?)

• Implementation guidelines, incorporate mixed income

schemes, and latter phases of existing schemes

• Reduce numbers of housing required and remove time

cap: need Cabinet approval

• Only 1 development achieved this
• Rental tax – 10% final tax on gross rent. Capped to

landlords earning less than $100,000 gross rental pa

• 90% of urban population live in rental, lift cap to attract

institutional capital and institutional landlords

• Rebates on import duties & VAT for housing in licensed

SEZ / minimum of 5,000 units

• Current duties:

Import duty: 25% Import Declaration Fee: 2.25% Railway Dev Levy: 1.5% VAT: 16%

• Remove number of unist and location requirement for

import duties, remove VAT for all inputs not just imported

• Even out playing field .. Certain projects delivered for

less than general market due to preferential incentives

Tax incentives: Part 2

Current regime / in Bills Industry position Employers and employees to contribute1% of the employees emoluments to a National Housing Development Fund.(max. KES. 5,000)

• Scepticism from private sector on housing fund: 60 -

80% of NSSF and NHIF contributions go towards

• verhead
• Ring fence funds raised from Stamp Duty to improve

housing delivery Counties to provide land for PPP

• Very necessary
• Need transparency around allocation of land
• Structure deals commercially (quantify land value)

Need to provide off site infrastructure Need to streamline land registration

Overall takeaway ..

• How do I incentive my children to wash dishes? Incentivize them correctly! If they wash dishes, they get

their precious IPAD time.

• Similarly for housing, incentivize investment in the sector through tax rebates: Give up tax revenue for

housing delivery → Earn significant times more tax through multiplier effect.

• WIN - WIN – WIN for government policy, private sector delivery and population that seeks better housing.

GPA attempt at creating cheapest house

Twin semi-detached 2x 1 bedroom units each 38sqm

GPA attempt at creating cheapest house

• Twin semi-detached 2x 1 bedroom units

each 38sqm

• Durable / strong / insulated / fire resistant
• Suitable for all soil types / self build / train

local labour

• Time delivery: 4 weeks
• Delivery price with limited profit is $10,000

per 1 BR unit ($260psm)

• Excludes land and services
• Need 50 unit minimum delivery

Looking ahead

• Contrast India $10,000 delivered housing (G+2 storey, 50 sqm)
• How have these projects fared?
• Positives of Kenyan market:
• Vibrant and capable developer class
• Existing demand not used to subsidies
• Potential to use data to really engage government to pursue changes required
• CAHF and KPDA are engaging more closely to undertake further research in field