Kenya is courting international pension funds to help finance the construction of 500,000 low-cost homes in the next four years, as part of President Uhuru Kenyatta’s “Big Four” economic agenda.
Monica Juma, minister for foreign affairs and a key member of the Kenyatta administration, says it wants to match global pension investors with local funds to raise some of the $7.5bn that developers estimate it will cost to build the houses.
The Kenyan government is discussing “matching the pension funds with the Kenyan pension funds as part of the investment”, she says. “This is not corporate social responsibility. We’re offering real opportunities for returns. The need is real.” The housing ministry estimates there is a nationwide shortfall of some 2m homes and that this deficit is growing by about 200,000 a year.
While the administration has few resources to finance housing construction because of its straitened fiscal position, both the central and local governments own huge tracts of vacant land that analysts say would be suitable for low-cost housing. Investors who have met Mr Kenyatta say he has appeared willing to provide government land for housing projects.
The government has created the Kenya Mortgage Refinance Company, which will lend banks and other providers the monies to extend affordable mortgages to lower-income people. Officials have said the government is also considering a put option for developers where the state would buy homes that remain unsold for five years. Other financing initiatives being considered include a retail bond.
US-based pension funds were among the prominent buyers of Kenya’s 10 and 30-year eurobonds issued earlier this year. Aly-Khan Satchu, a Nairobi-based investment adviser, says that investing in affordable housing should be a “no-brainer” for international pension funds, if the yield and investment vehicle were suitable.
“Bricks and mortar investments are seen as less risky to hold so this should be an interesting sector for them,” he says, adding that if government employees were housed in the new homes their mortgage payments could be deducted at source to further reduce the investment risk.
Pension fund investors may judge the risk differently. Oliver Hamilton, principal consultant at Aon, a global investment advisory firm, says that while some pension scheme clients do have exposure to residential housing in developing countries, this will usually form a small part of a diversified fund.
“These funds are high risk with private equity-style return expectations,” he says. “The list of requirements to make this sort of investment institutionally sound is always going to be incredibly long — with a clear understanding of the relevant laws as a start. Thorough operational due diligence will also need to be an important factor when investing in more developed areas.”
One Africa-focused western banker says that without a near cast-iron government guarantee, most pension funds would be very reluctant to invest in a sector that has yet to be tested in sub-Saharan Africa.
“Your only chance of success is to start small and develop a track record,” the banker adds, speaking on condition of anonymity. “There’s no way you could launch a $5bn fund and hope to change the landscape.”
Another hurdle is that Kenya’s 10-year US-dollar sovereign debt is offering a yield of about 8 per cent and so something riskier like a housing fund would need to include an additional risk premium. That would make it costly for those raising the funds.
Palkesh Shah, the vice-chairman of the Kenya Property Developers Association, says there has “definitely been a big change in attitude” from the government towards housing.
“The president and his team really want this to happen and [are] pushing to try and keep the price points affordable,” he says. “We’re working with the government on this and have started interacting with them on their policies. But we’re still waiting for the regulations so we understand what is actually going to happen.”
The three other pillars of the Big Four are food security, manufacturing and universal healthcare. Ms Juma says that the first two were closely linked because almost 40 per cent of the country’s exports are agricultural and unprocessed, such as cut flowers.
“If we want to grow our exports we must think about the quantum but we must also think about value-addition,” she says. “We’re inviting investors now and we’re encouraging them to set up shop here so we can begin to add value to our produce and we’re not exporting raw materials.”
Ms Juma says the large majority of Kenya’s agriculture sector is small-scale and it is hard for many farmers to raise capital. The government was therefore creating targeted incentives and loans to help improve small-scale production, she says, citing the Biashara (which means business in Swahili) fund. Initial priorities include improving locally produced seed and fertiliser quality and quantity, reducing post-harvest losses and opening up new markets in China, India and south-east Asia.
A new area that Kenya is beginning to focus on is its maritime or “blue” economy, and particularly to regulate resource management in the Indian Ocean rim amid the growing illegal fishing trade and concern about the effects of climate change.
“Estimates indicate we could grow our economy [significantly] if we exploited the possibilities of our oceans and waters, whether it’s in terms of transportation or fisheries or exploitation of resources or growing jobs,” Ms Juma says.
