Focus on middle income hurts new cheap homes
Cytonn Investments, the upstart fund manager with a bias toward real estate, has opened discussions with Portuguese firm Purever for cheaper building technology in the medium term.
The plan that seeks to move away from the expensive traditional brick-and-motor technology targets upper low- to lower-middle-income housing segments.
Cytonn chief executive Edwin Dande said 85 per cent of its Sh48.06 billion
deal pipeline will be focused on this segment where the supply gap is growing by the day due to rising urbanisation.
“We are trying to see if we can try and get a product [house] in the Sh2 to Sh4 million price range,” Dande said in an interview.
“We are in talks with Pureva, out of Portugal, which has done this kind of affordable housing in many emerging markets including Mozambique, Angola and Brazil.”
Cytonn was formed last September by former senior executives of Britam Asset Managers. It almost immediately controversially wrested a Sh40 billion property deal from former employer as lead transaction adviser.
The deal with Arcon Group, owned 25 per cent by Britam Investments, was to develop 10 real estate projects including apartments, shopping malls and mixed-use developments.
The lingering dream of affordable housing is nonetheless set to persist, at least over the next few years. The firm is first concentrating on developing apartments for the lucrative middle class segment that is more concerned about quality than cost.
“Our immediate strategy, however, is focusing on the areas where people are already paying rent that can sustain good neighbourhood, but the product they are getting is substandard,” the Cytonn chief said.
The company is targeting potential homeowners with an average monthly disposable income of Sh100,000, and who are paying in the upwards of Sh35,000 monthly in rent.
This class, Dande says, can afford to buy apartments priced above Sh5 million, the lowest cost of a two-bedroom house in Nairobi.
Cytonn says the design, concept and financing agreement for the first set of developments comprised of three projects valued at Sh5.28 billion is complete. Groundbreaking is due by the end of the year.
“Those houses do exist in the market already,” Dande said. “However, when you look at the houses in densely populated areas … you will find that they suffer from lack of amenities and infrastructure – back-up power, reliable water, sewer and drainage, security.”
The projects include the Sh3.05 billion gated Situ Village in Mbagathi, the Sh1.6 billion Ruaka project for the middle class and upmarket Amara Ridge in Karen at a cost of Sh625 million.
“Once we feel that we have come deeper enough in that strategy, the next phase will be to try and figure out how can we get houses that can be sold for around Sh2 million to Sh4 million,” Dande said.
“That requires innovation and the cheaper building technology.”
President Uhuru Kenyatta, while commissioning Housing Finance’s Sh7.5 billion, 1,272 residential units in Komarock last Wednesday, endorsed for public private partnerships in affordable building technology factories.
Uhuru said the partnerships would deliver decent houses for less than Sh2 million, underscoring the historic failure by the state to provide enough affordable houses.
The high cost of building decent houses in major urban areas, including Nairobi, has been blamed the cost of materials, bureaucratic and expensive regulatory processes, mortgages averaging Sh7 million and spiking land prices.
State-owned National Housing Corporation in April 2013 opened a Sh700 million factory for prefabricated material in Mavoko. The factory has a capacity of 126, 720 expanded polystyrene panels a year. It was expected to lower construction costs by a third.
Using the panels measuring 1.5 by three metres per unit priced at Sh5,000 translates to Sh700,000 for a two-bedroom house. This is more than half the prevailing construction cost before the finishes are applied.
The Inspectorate of State Corporations, under the office of the Deputy President, in a damning report last September, however, cast doubt on the viability of the EPS plant.
“A visit to the factory revealed a lot of the expanded polystyrene products were lying in the go-down and outside in the compounded in the open,” said the three-member audit team. It was led by Christopher Ombega, a senior assistant inspector-general of corporations.
“The factory’s profitability is based on the assumption of no significant change in the the competitive and regulatory position within the construction industry.”
Cytonn, however, believes it will have appropriate building technology on board by the time it enters the second set of its deal pipeline comprised of five projects cumulatively valued at Sh43.78 billion.
“But that [success of the technology] also requires a shift in mind by Kenyans who still look at housing as purely brick and motor,” Dande said. “There could be some synthetic materials that we could use that are equally durable.”
The projects under the second phase include low-to-middle income master-planned cities in Mavoko and Lukenya at a cost of Sh22.50 billion and Sh12.50 billion, respectively.
Others include a Sh3.83 billion gated community project in Juja targeting the middle class; Sh3.75 billion high density mixed-use development in Mombasa and Sh1.2 billion master-planned Mount Kenya project.
The phase will be implemented in the medium term period.