Kenya can use Islamic finance to unlock mortgage market

PERIOD: July 25 to 31, 2016

25/07/2016 : The Business Daily, Page 3

• As Islamic finance goes mainstream in Kenya’s banking industry, its role in supporting the housing market has only become more critical.
• The Musharakah model of Islamic finance is a participatory form of financing that adheres to the Shariah principles of risk and return sharing.
• In this model, the financier and the client get into a contractually designed joint ownership of a property or undertake a joint commercial enterprise.
• Profits generated can be shared in a pre-agreed ratio whereas any losses that might arise from the business are borne in proportionate to the capital contribution of the parties.
• The financing of projects, equipment, motor vehicles, housing, setting up of new business ventures or the sale of a stake of an existing commercial enterprise to a financier may employ the Musharakah model.
• The financing arrangement may be a constant partnership or one where the stake of the financier gets diminished as that of the customer gets enhanced over a period of time.
• The latter structure is what is popularly known as Diminishing Musharakah and has been used in home financing transactions.
• Unlike the conventional mortgage structure where the customer borrows funds from a bank which is then repaid with interest, the Shariah-compliant home financing model — referred to as home purchase plans in jurisdictions like the United Kingdom — is based on the Diminishing Musharakah scheme that got endorsed by contemporary scholars to cater to the modern day banking needs that involve the acquisition of assets. Read more

Cap on  road building costs kills the dreams of getting-rich-quick contractors

27/07/2016 : The Business Daily, Pg. 18

• The transport ministry has set new limits on cost of building roads under the annuity programme, dealing a blow to the unscrupulous contactors
• Transport secretary James Macharia said firms that had quoted sh300m per kilometer last year will have to do with prices of between sh90m and sh100m
• The government had initially hoped to spend about sh25m for every kilometer of rural roads, and between sh50m and sh80m for the same length in urban and trunk roads under the model
• The ministry has since been talking to them for lower bids
• The government is seeking new ways of financing infrastructure projects outside budget constrains by bringing in the private sector
• The road annuity framework is a new concept in development for road infrastructure whereby the service provider will be responsible for finance, design, construction and a 10-year long term maintenance of the roads under a public private partnership arrangement
• The projects that have been awarded for construction must be delivered within 24 months of commencement.

Nairobi tycoon to be handsomely compensated in outering road expansion

28/07/2016 : The Daily Nation, DN2, Page 2

• Nairobi Tycoon Francis Mburu is to receive hundreds of millions of shillings after the government moved to hive 6.6acres from a piece of land he owns for the expansion of outer Ring Road
• The National Land Commission on Friday announced it would be acquiring part of the land in Ruaraka from African Export Import Ltd and Huelena Ltd, companies associated with Mr. Mburu
• The acquisition by NLC is on behalf of the Kenyan Urban Roads Authority(Kura), which is undertaking the expansion of the outer Ring Road into a dual carriageway
• An acre of land in prime area is fetching as much as sh100m, which could see Mr. Mburu  earn more than sh600m from acquisition

High-end residential area rent record 2.9% drop in first quarter

28/07/2016 : The Daily Nation, DN2, Pg. 2

• Rents for prime residential areas in Nairobi dipped by 2.9pc in the first quarter of the year as a result of increased supply, according to the new report by the management firm Knight Frank
• Despite the slump in high-end residential rents, the prices of prime homes in the city grew by 3.3pc in the three months of the year, according to the Prime Global Rental Index (PGRI) by the firm
• The slums in rent in Nairobi is also a result of a decrease in demand, a factor that is attributable to multi-nationals downsizing or closing their business in Kenya
• Expatriates dominate the top-end market as they are paid housing allowances or are housed under corporate arrangements
• The index tracks luxury residential rents across 17 key world cities.
• In Nairobi, the PGRI tracks prime residential rents starting from sh250,000 for apartments and sh300,000 for townhouses and stand-alones

Construction of SGR still suspended

28/07/2016 : The Daily Nation, DN2,Pg. 3

• The construction of the sh327b SGR on a parcel of land in Mombasa will remain suspended, the Environment and Land Court has ruled.
• Lady Justice Ann Omollo said the construction of the SGR will only continue after sh995, 400,452 which was awarded to African Gas Oil Company Ltd and Miritini Free Port Ltd as a compensation, is deposited in a joint escrow interest-earning account.
• She directed that the account to be opened in the joint names of the lawyers for the two companies and those of the Kenya Railways Corporation and National Land Commission in 21days
• Kenya railways says it is losing Sh37,9m daily since the construction was suspended by the court on June 24, putting the loss at nearly sh1b now, based on the lawyers estimate
• African Gas Oil Company moved to court to stop the rail construction on the grounds that it is yet to receive sh519m awarded to it by the National Land Commission as compensation for ceding the land for the Mega project
• But transfer of funds was stopped after African Gas Oil’s ownership of land was questioned

Digitisation to disrupt services in 13 land registries

28/07/2016 : The Daily Nation, DN2, Pg. 3

• The land ministry started digitising the records on 13 registries and warned that there will be slight disruption in services for the next two months
• The digitisation of land records is intended to improve service delivery through faster land electronics
• The affected registries are Mombasa, Kwale, Kilifi, Machakos, Kajiado central.
• Registry headquarters are Ardhi House, Nairobi, Nakuru, Kisumu, Eldoret, Bungoma, Meru, Thika and Kiambu
• The government want to digitise 23 land registries by August 2017.
• Digitising records will, hopefully, bring to an end the long queues and the graft-inspired opaqueness that Kenyans have come to associate the land ministry with.

Gilanis enter the fray with 14-storey fully commercial block

28/07/2016 : The Daily Nation, DN2,Pg. 6

• The Gilanis group of companies changed the face of real estate in Nakuru with the construction of a 14-storey blocks that opens next month
• Known as Tower One, the building on Moi Road, which sits on 8200 square feet and is Nakuru,s tallest, contains features such as Grade A office space, which have so far been a preserve of buildings in Nairobi
• It is purely a commercial building with 42 offices and 3 basements .one basement will be used strictly as parking space for more than 400 clients who will occupy the building
• When you view the building from Kenyatta avenue it seems to curve in such a way that it looks like it is facing you, and when you approach the front of the building from Moi Road, it still appears to be facing you.

• It has an open space to allow natural sunlight while each floor has at least three balconies
• The 10^th floor is a glass penthouse office block made entirely from glass and ringed by a balcony where clients cam=n take a walk around it.
• The new building has granite and marble finish and is fitted with trans0parent glass lift
• Gilani says that they are targeting high-end clients and already have bookings from Nairobi, Nyeri and Nakuru
• The company is also putting up a multi-billion about 500m from tower one , where it is building 20 there-bedroom apartments for sale known as Central Business District Prestige Apartments
• Already, 40pc of the apartments, which are situated on Maasai Avenue and gong for 12.5m each have been sold
• Gilani said that due to the rapid growth in the supermarket business, they opted to diversify instead of opening more branches like their competitors

Registries closure to cost economy Sh4b- ISK

28/07/2016 : The Standard,Home & Away,Pg. 2

• The closure of 13 land registries by land’s cabinet secretary Jacob Kaimenyi will cost the economy sh4b, according to the Institution of Surveyors of Kenya(ISK)
• Out of the sh4b, sh2b will be revenue due to the government in the form of stamp duty ,the rest will be income to registries, revenue to other departments in the ministry, capital gains tax and fees payable to relevant professionals
• “The amount does not include slowdown that will occur in the financial and property development sectors during the period. The monetary loss is besides other inconveniences that cannot be quantified like search for court bonds,” ISK chairman said.
• The ministry closed the registries to allow for digitization of records, which is estimated to take two months.
• “We are concerned about the haphazard and unilateral manner in which the CS has gone about this process, which in our view is likely to achieve the intended objectives. Our view is that the land information system is an elaborate system is an elaborate process that requires wide consultation and planning prior implementation, Ambani said, noting that the process ought to start after manual records have been cleaned up, otherwise the ministry will be digitizing faulty records
• The surveyors also spoke on double land allocations, describing them as puzzling “because transfers are registerable transactions.”
• Such developments, ISK said, cause uncertainty in the real estate sector: “they do not actually serve to instill confidence in the institutions that we have entrusted with facilitating land transactions and safeguarding the sanctity of title deeds. It is bound to scare away potential investors in the property sector in the country,” said Ambani.
• ISK also called for fast-tracking of the digital National Land Information Management System, which it said will help avoid such cases
• It said the slow reconstitution of land boards has adversely affected the operation of the land sector
• Prof. Kaimenyi disbanded the boards over two months ago with a promise to reconstitute them in two weeks. So far only 16 out of 41 have been reconstituted

Wilson builds sh163m tower amidst land grabbing claims

28/07/2016 : The Standard,Home & Away,Pg. 2

• Transport cabinet secretary James Macharia has given assurance that Wilson Airport in Nairobi will not be relocated despite the grabbing of some of its land
• “The fact that we are here for the ground breaking ceremony of a new control tower is a proof that this airport is here to stay. This airport is busier than Jomo Kenyatta in terms of frequencies. We cannot let it go,” said Macharia
• Wilson handles 182,500 landings, takeoffs and training flights annually. Despite the heavy traffic, the current control tower is a short structure built 50 years ago that cannot scan the airport’s environs effectively due to obstruction by buildings.
• “My ministry works very well with the ministry of lands and action will be taken on anyone who has encroached airport land. If it means demolishing structures built on the land we will do so. Safety is the main concern in aviation industry,” said Macharia.He said that the land should be reclaimed. Read more

Crown paints banks on satellite plants

26/07/2016 :  The Standard, Business Beat, Pg. 3

• Crown paints plans to open satellite plants in Tanzania and Rwanda as it moves to deepen its footprint in the regional market.
• The paint maker, which recently opened a Sh400m factory in Kisumu, said the plants would help lower transport costs and boost production efficiency in the East African market
• The economies of Rwanda, Kenya and Tanzania have been expanding by an average of 5pc the last 3 years , growth has seen increasing activity in real estate and construction
• Satellite plants are usually the first steps in starting manufacturing ,and are often used by factories to test the viability of a location before investing fully in a complete manufacturing entity
• The new plants will be funded through internally generated funds, and are estimated to cost about Sh100m each.
• At least sh3m will be saved every month in transport cost alone
• The firm is counting on its latest product line to endear itself to environment-conscious consumers. It recently rolled out the Zero VOC range of eco-friendly paints in response to the increased use of sustainable construction materials
• The company said high interest rates and a difficult economic environment were the biggest challenges for the paint industry last year
• This year it is counting on the new plants to boost sales and grow market share as it moves closer to the people. Read more

Real estate firm rolls out solution to boost home ownership

26/07/2016 : The Standard, Business Beat,Pg. 8

• Simple homes is determined to transform the journey to home ownership. The firm ownership describes itself as not just a company, but an integrated solution for the real estate sector
• The company which was set up in October 2015, has rolled out home purchase plans it hopes will make it possible for people to own homes at the price they are paying in rent
• The solution brings together renters, who want to own their own homes but are unable to because of high house prices and mortgages ; property developers who want to build but cannot get financing because of their inability to pre-sell the units they are developing; and people looking to invest in real estate for return
• The founders settled on a housing co-operatives model coupled with a developers consortium
• The co-operatives allows members to own homes faster at lower rates, and consortium allows developers to access home buyers with the ability to buy
• This led to formation of the Simple homes housing co-operative society(SHHCSL) and simple homes developers consortium Ltd(SHDCL)
• SHDCL was incorporated in December 2015 with 23 shareholders and Sh37m in capital.
• SHHCSL started with 183 members and has grown to more than 16,000 members in under a year
• To buy a home from simple home developer, you need to be a member of the co-operative and then take up a HPP stating the value of the house, the period you are able to save and what you are able to pay back every month for how long
• The amount you need to save is 5pc of its value. You determine how long you will take to save this
• Buyers are required to pay off the remaining 95pc house cost in five to 40 years
• The model has become popular, with thousands of HPP applications received and partner developers having started 11 projects and completed 4
• SHDCL has 79 projects set to begin before the end of the year, which will add Eldoret and Nakuru to portfolio that covers Nairobi, Kitengela, Mombasa and Kisumu already.
• The firm said its long term plan is to merge both institutions into a housing-focused bank and listing on the Nairobi stock exchange. Read more

Improved infrastructure continues to support developments leading to an increase in house and land prices. Developers continue to focus on provision of alternative financing to home buyers in a bid to increase uptake and increase exit.

 24/07/ 2016 : Cytonn Monthly Report – July

• In a bid to increase uptake of property, developers have increased focus on financing options available for the end-buyers of property. This month, Stima Sacco, announced plans to issue a corporate bond aiming to raise Kshs 5.0 bn to diversify into the mortgage business.
• It aims to issue loans for periods of 10-15 years at a fixed rate and on a reducing balance. Borrowers will however have to be members of the Sacco where they will raise a 20% deposit with the Sacco financing the rest of their mortgage costs based on their contribution to the sacco.
• Given that a 10-year Treasury bond is currently yielding 14.0%, working with a 200 bps premium above the 10-year Treasury bond, Stima Sacco is likely to raise funds to finance these mortgages for at least 16.0%. Therefore, Stima Sacco could lend out the mortgages at 18.0%, considering a 200 bps administration cost.
• On the same note, Commercial Bank of Africa (CBA) also announced a partnership with Bamburi Cement to finance mortgage borrowers in the lower middle income class. CBA plan to partner with Bamburi cement to issue mortgages for houses whose prices range between Kshs 0.5 mn to Kshs 4.5 mn.
• Assuming an 18% interest rate and a period of 25 years, this translates to Kshs 7,600 and Kshs 68,300 monthly payments, respectively. The houses are to be constructed using EPS technology and are expected to take 30-45 days to complete. This initiative among developers and stakeholders are likely to increase the mortgage uptake, which stands at approximately 2.5% of the GDP and provide ease of exit to developers as well as increase home ownership in Kenya, which is largely a renter’s market. The mortgage initiatives will however only work if the interest rates on mortgages are reduced as high interest rates such as 18%, is likely to result in high levels of non-performing mortgages.
• As per the Q2’ Property Report released by Hass Consult, growth in house prices outpaced the growth in rental rates. House prices increased by 3.6% q/q, while rents grew by 2.5% over the same period. Key points to note from the report are:

1. Karen and Langata recorded the highest increase in house prices of 5.5% and 17.6% over the last quarter and year, respectively, with Kilimani recording a 5.4% decline in house prices y/y. The decline in prices in Kilimani can be attributed to the oversupply of apartments in the area. Karen’s price increment is attributable to its high end feel, as a result of strict zoning regulations, allowing only for detached houses hence attractive to buyers and renters seeking privacy and exclusivity
2. On the rental front, Karen and Langata were also the best performing markets recording rise in rents of 9.8% and 10.0% over the last quarter and year, respectively, with Kileleshwa and Westlands recording 1.4% and 3.4% decline in asking rents over the last quarter and year, respectively. The poor performance of Kileleshwa can be attributed to relaxation of zoning regulations in the area leading to mushrooming of apartments thereby making the areas lose its high end appeal.
3. Detached houses outperformed apartments and semi-detached houses in both prices and rents recording price increases of 5.2% against a 3.6% increment in apartments and 0.7% in semidetached houses. Rental rates also moved in tandem with price with detached houses recording the highest increases in rental rates of 2.2% q/q with apartments recording a 1.4% increments while semi-detached houses did not record any growth in rental prices.
4. Land in Satellite Towns buoyed by the improvement in infrastructure, outpaced land in the city growing by 8.1% against the former’s 2.5% in the last quarter. In the City, Muthaiga recorded highest quarterly increase in land prices of 13.1%, with Eastleigh recording the largest decline of 2.5% q/q. In Satellite Towns, Ruiru had the highest price increment of 19.8% over the last quarter with Mlolongo recording a 10% decline over the same period. Other satellite Towns such as Limuru, Juja and Ruaka also recorded high increase in land price 14.5%, 13.6% and 11.3% increases respectively over the last quarter. The price increases in these areas are as a result of infrastructural developments such as the Western and Northern Bypass in Ruaka and increase in development activity in these regions.

• During the week, the council of the Law Society of Kenya paid a courtesy call to the Cabinet Secretary  for Ministry of lands and physical planning. They deliberated on matters affecting land and conveyancing transactions in the country. The following were key take outs:
  • On disruption of activities in 13 land registries – it is only the central registry that is affected and not a complete shut down as had been earlier speculated. The registries will remain open throughout the two months’ period to enable registrars deal with backlog,
  • On Land Control Boards – The CS confirmed that 21 boards had already been reconstituted and the process will be finalised soon. The delay was occasioned by county commissioners who did not comply with the appointment process stipulated by the ministry,
  • On Practise Issues – A working committee chaired by the Chief Lands Registrar whose members will be members of the LSK Environment Land and Conveyancing Committee and ministry of lands officials will be set up within a week. The committee will be tasked with identifying difficulties encountered during the period of digitization, lobby for more registrars to attend to consumers of the services of the Ministry of Lands and come up with a criterion of identifying emergency situations
  • The Ministry will set up a one stop centre at the various registries where members of the Law Society of Kenya will be able to access fast and speedy services
  • The Ministry will in the future engage the Council of LSK before making operational decisions likely to affect service delivery.
• Fusion Capital has registered an undersubscription on the Kshs 2.3bn D- REITs hence has extended the closing date twice. Initially it was to close on 15^th July, but it was pushed to 26th July 2016 and now to 4^thAugust 2016. The low subscription rates can be attributed to poor investor education as most of the participants in the capital market are yet to understand and embrace REITs as an investible asset class.  Fusion Capital’s extension of the dates is aimed at giving investors more time to apply for the D-REITS. The listing date for the D-REIT is still on 10th August 2016. Read more