NASCENT MORTGAGE MARKET OPPORTUNITIES IN THE HOUSING MARKET

Transcription

1 NASCENT MORTGAGE MARKET OPPORTUNITIES IN THE HOUSING MARKET PRESENTATION TO The 4th Annual Africa Banking & Finance Conference Chris Chege HEAD MORTGAGE FINANCE CO-OPERATIVE BANK OF KENYA 3/6/2014 1

2 Definition The word mortgage is a French law term The word mortgage is a meaning "death pledge", meaning that French law term meaning the pledge ends (dies) when either the "death pledge", meaning obligation is fulfilled or the property is that the pledge ends (dies) taken through foreclosure. when either the obligation is fulfilled or the property is taken through foreclosure. 3/6/2014 2

3 Town house in lavington 3/6/2014 3

4 VALUE MAISONNETE PLOTS IN MIDDLE INCOME AREAS 1,400, ,200, ,000, , , , , SOUTH "B" SOUTH "C" SOUTHLANDS MADARAKA WEST DONHOLM ESTATE 3/6/2014 4

5 Background Access to decent housing is a basic human need, while owning a home is certainly a dream that almost every person would cherish. This is why the state of Africa's housing market is a matter of grave public concern. Owning a home is not as simple as one might have thought and this implies that Government, remains a key stakeholder and should consider pumping more resources into the housing sector. In Kenya access to a mortgage facility is a nightmare. At the moment there are about 20,000 mortgage accounts compared to estimated population at 40 million 3/6/2014 5

6 Introduction World Bank report in 2010 says Kenya s mortgage market is the third most developed in sub-saharan Africa with mortgage assets equivalent to 2.5 per cent of the country s gross domestic product (GDP). According to vision 2030, by 2030, 50-60% of Kenyan population will be residing in urban areas Kenya is rated as one of the countries with a very vibrant financial system in Africa and technologically fairly advanced if money transfer and mobile usage is anything to go by. With above scenario provision of decent housing becomes a critical component from both social and economic gains With a shortfall of about 3 million units cumulatively for Kenya and annual shortfall of about 200,000 units. These are the opportunities in the housing market in Kenya and by extension Africa at large. 3/6/2014 6

7 Overview of Real Estate Sector in Kenya Growth in funding by banks & other financial institutions in the housing sector increased access to development and mortgage finance. Increased activity by private players and innovations in implementation of housing projects. Infrastructural expansion opening previous agricultural land to urban. Fragmented roll out of housing projects on small medium scales. Increased attraction to county demand for real estate investmen t destination. 3/6/2014 7

8 Rapid Urbanization Inaccessibility to land Housing market highlights Stringent planning regulations Restrictive building standards High cost of infrastructure and an availability. 3/6/ /03/2014 8

9 Housing Distribution in Kenya (Demand) Most real estate developments target the upper and middle to upper classes meaning lower class not catered for Upper class 10% Middle Class 30% Increasingly a move to Reduce space to lower Price /increase affordability Lower Class 60% 3/6/2014 9

10 Housing Opportunities for growth Opportunities based on Location Property type Income groups Property prices/rents; Policy framework for middle and lower income groups. Infrastructure development in virgin areas. 3/6/

11 Figure 1:House Start-ups Vs. Lending Interest rates in Kenya,

12 Housing opportunities -Nairobi Kenyan middle class has been expanding rapidly in the last decade estimated 34 per cent of the total population. This is the class that is, by socialisation, unattached to their rural backgrounds, hence prefer buying small plots in the cities., most follow infrastructural development. That is why land along the Nairobi by-passes was quickly taken up when the same opened up. How economic sense quickly pushes people out of the city, where land is cheaper and easily available, hence the current exodus towards Thika and Machakos. Note that the traffic jam on Thika Road is quickly stretching towards Roysambu despite the super highway! diaspora money has been going into the real estate sector. This among other factors explains the current surge in demand and investment in properties in Kenya. 3/6/

13 Housing opportunities -Nairobi 3/6/

14 Overview of mortgage market Mortgage market currently has 25,000 customers and volume/size of Kshs. 120B Mortgage product is available through commercial banks and one mortgage provider financed include: acquisition, construction, land purchase and equity release. Construction is one of the most popular product, while owner occupation is most common need financed Lack of long-term money has constrained affordability and penetration of mortgage in Kenya hence tenor mismatch. Current Land reforms have heavily contributed to surge in availability of land and hence interest in real estate development Building code has recently been reviewed to recognize emerging trends and alternative building technology (s). This will help make housing more affordable. 3/6/

15 Mortgage opportunities- Kenyans who can afford a 4 million mortgage are about 3% Average family 5 per household no of potential mortgages - 240,000 thousand compared to 25,000 currently. An estimated 8% of urban population qualify for typical mor tgage products approximately 350,000 households. Since 2001 property values have increased by; detached h ouses-180%, terrace-houses-130% and apartments-100%. 15

16 Opportunities for growth Housing Market Comparison Area Type of unit Average Square feet Price Guide in Kshs. Upmarket- kilimani, kileleshwa, lavington, Karen, runda etc Apartment M Town House Land ½ acre 40-90M M Middle- Mombasa road, langata,south b, south c, Thika road Apartment Maisonette M 9m- 25M Lower to middle Mombasa road, Eastland's, Kitengela Apartments Maisonette Bungalow Plot (1/4 & 1/8) M 8-15M 6-9M 1m- 6m Note: prices are indicative based on current market conditions and not representative on any specific property 3/6/

17 Middle class housing Mombasa road 3/6/

18 PURPOSE OF THE LOAN Total (753) BBK (45) Cooperative society/ SACCO (29) Equity (29) KCB (34) Family Finance (6) ** Housing Finance To build a house 29% 45% 50% 17% 29% 25% 33% 67% 0% To buy a house 21% 9% 13% - 14% 25% 33% 33% 33% buy a residential plot 18% 9% 25% 17% 14% - 33% - - To buy a commercial plot 18% - 13% 17% 14% % - To buy a car 16% 18% 25% 50% - 50% - 33% - To expand my business 13% 9% - 67% 14% 50% 33% - 33% To pay school fees 7% 27% 13% % To invest in shares 6% - 13% 17% Medical bill 2% % Personal development 1% - 13% (26) SCB (7)** Co-op Bank(28) 3/6/

19 Financing Options Primary Market - Kenya Equity Partnership Investment Groups Line Of Credit Rent Receivable Discounting Advanced Disbursement Facility Personal savings Sacco loans Pre sales proceeds Mortgage Finance 3/6/

20 Investment opportunity Urban Income Distribution Source: Developing Kenya s Mortgage, IFC/World Bank, Feb /6/

21 Source: obtained from CAHF s 2011 Year book 3/6/

22 Mortgage opportunities 8% of urban population qualify for typical mortgage p roduct Represents approx1.4 million people Potential mortgage market approx. $13.7 billion Product range is within Middle Income Housing is wit hin the average mortgage loan-kshs 5.0 to 8.5 million (US $ 55,000- US $95,000). 3/6/

23 Mortgage specific Threats There is inadequate access to finance for low cost housing associated. lack of appropriate financial solutions for the employed and the self-employed in the middle and low end bracket. Lack of long-term funds which has a direct impact on the interest rates and hence affordability. complex legal and regulatory framework, which culminates to complicated land and property registration procedures. inflationary pressures especially owing to the level of economic development leading to runaway land and material prices Lack of an active secondary mortgage market or a vibrant money market Not withstanding there are serious funding gaps in housing, resistance to adopt non traditional building technology infrastructural challenges especially roads, sewer and power in that order 3/6/

24 MOST IMPORTANT FACTORING TAKING A MORTGAGE TOTAL Borrower - (436) Mortgage (259) Borrower - Loan (177) Interest rates 39% 35% 45% Repayment period 19% 19% 19% Flexibility in repayment 11% 13% 7% Repayment plan 8% 9% 8% Mortgage / loan amount 6% required 7% 5% Installment amount 4% 5% 3% Deposit / down payment 4% required 6% 2% Collateral required 4% 3% 6% Application procedure 3% 3% 3% Eligibility requirements 1% 1% 1% 24

25 VALUE LAND VALUES IN VARIOUS RESIDENTIAL AREAS BETWEEN 1990& ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, WESTLANDS UPPER HILL KILIMANI LAVINGTON SPRING VALLEY ESTATE 3/6/

26 Kenya Prime Rents and Yields Prime Rents Prime Yields Offices US$ 10 per sq m per month 9% Retail US$ 31 per sq m per month 11% Industrial US$ 3.6 per sq m per month 13% Residential High end US$ 4,000 per month 7% Affordable/Middle Income US $ 400 per month 7% Low cost US $ 90 per month 4% 3/6/

27 Inflation vs. mortgage size 3/6/2014 Source world bank report

28 Housing market highlights With above scenario provision of decent housing remains the biggest challenge for the country. A number of initiatives have been mooted to address the above, including tax incentives and mortgage schemes by banks. Majority of this initiatives are geared to manage the cost of borrowing and the closing costs Shortage of funds capital and expertise in real estate development. 3/6/

29 Impediments High cost of finance. Lack of serviced land, and high cost associated. High cost of building construction materials Inappropriate building and Construction technologies. Informal incomes affecting affordability and risk management. 3/6/

30 Highlight- Real Estate Risk Fraudulent sale Risk Mitigation Strategy Verify ownership, purchase title insurance Adverse possession Obtain a boundary survey from a licensed surveyor Environmental contamination Obtain environmental survey, test for contaminants (lead paint, asbestos, soil contaminants, etc.) Building component or system failure Complete full inspection prior to purchase, perform regular maintenance Overpayment at purchase Obtain third-party appraisals and perform discounted cash flow analysis as part of the investment pro forma, do not rely on capital appreciation as the primary source of gain for the investment 3/6/

31 Risk Economic downturn Highlight- Real Estate Risk Mitigation Strategy Purchase properties with distinctive features in desirable locations to stand out from competition, control cost structure, have tenants sign long term leases underestimation of risk Carefully analyze financial performance using conservative assumptions, ensure that the property can generate enough cash flow to support itself Market Decline Purchase properties based on a conservative approach that the market might decline and rental income may also decrease Fire, flood, personal injury Insurance policy on the property Tax Planning proper planning of purchases and sales to save taxes. 3/6/

32 Way forward Pension backed mortgages but more flexible to take advantage of the long-term funds associated with this sector Kenya and south Africa pension backed mortgage has not archived this purpose Tax incentives towards home ownership savings & purchase including waiver of stamp duty for first time home owners. Central Banks Regulatory provisions for increased liquidity by Banks for mortgage lending and project finance Household based mortgage financing provisions including longer term. Mortgage products for Informal Sector practitioners this is the mainstay for the African economies, however mortgage products tend to focus on employed stable income. 3/6/

33 Way forward Achieving a balanced mixed of affordable financing and affordable housing Partnership with key players- developers, investors, government, co-operatives through Public Private Partnerships Encourage and support developments targeting low income groups through tax incentives and infrastructural development Culture change to consider and accept alternative building technology 3/6/

34 Conclusion Product quality & functionality project origination excellence. Efficient execution/delivery capability a functional property value chain convergence of material suppliers & service providers. Competitively priced end products (procurement logistics and management). Facilitation to financing (smooth end user finance including the discharge process). Property agency collaboration with developers and banks to ensure information centers. Interest instability and inflation has a big impact in housing African governments must first tame inflation in order to promote housing. 3/6/

35 Gated community in Karen An advance of funds secured by a pledge of borrowers real property (real estate ).Specialized defined under legal and regulatory frame work. Social product Specialized product Lifetime commitment 3/6/

36 3/6/