Housing market is thirsty for tenant purchase schemes

The appetite for tenant-purchase schemes in Kenya’s real-estate market is huge. GRAPHIC | NATION

What you need to know:

  • “The home-buying market love it and the demand is high because those who are offering it are few,” says Mutiso.
  • It is also important to note that even when the home buyer has the privilege to access the property, they do not have full ownership of the property until they pay in full. “For instance, they cannot peg on it as collateral for a bank loan,” says Mutiso.
  • He says that looking at SIC, the tenant purchase scheme is performing much better than the conventional mortgages.

For many years, tenant purchase schemes have been associated with government agencies such as HF Group, the National Social Security Fund  (NSSF) and the National Housing Corporation (NHC).

The scheme is an alternative payment method for property acquisition whereby the home buyer makes a down payment and is able to access the facility before fully paying for it within an extended period of time.

Most developers in the market tend to shy away from the model as it ties down their cash flow. However, with the many housing developments coming up, and many new and unoccupied residential houses within Nairobi and its environs, tenant-purchase scheme may just be the right model to adopt. That the appetite for tenant-purchase schemes in Kenya’s real-estate market is huge is not in doubt.

In November last year, Safaricom Investment Co-operative (SIC), the investment arm of Safaricom Limited, took a risk and adopted tenant purchase scheme for its Blue Bells Apartments project in Syokimau. “We wanted to widen the scope of home ownership by making the payment process flexible, easier and to accommodate more prospective home buyers,” explains SIC Chairperson Mackrine Abukah.

The market response was impressive, he says. Within just three months, they hit over 25 per cent of their 2016 sales target.

By January 31, 2017, all the 160 units in Bluebells Apartments phase one were taken up. “We realised that there was a big market gap that had not been tapped into. The tenant purchase scheme came in handy to address the home-ownership needs of this market; the un-salaried business people,” Abukah adds.

The sale extended to phase two of the project, whose construction is still ongoing and expected to be completed this month.

Phase one of Bluebells Apartments features 60 two bedroom units and 100 three bedroom units.

Phase one of Blue Bells Apartments in Syokimau. All the units have been taken up. PHOTO | EVANS HABIL

FAMILY HOUSE

“The two bedroom units took longer to gain occupancy. The market is in need of three bedroom units, what they view as a complete family house,” she adds. The slow uptake of the two bedroom units informed the design of phase two, which features all 140 three bedroom units.

Phase one, which had more units than phase two, incorporated the setting up of shared social amenities such as cabro-paved pavements and  parking spaces, walled and electric fencing, boreholes to complement council water supply, waste water and sewer treatment system, standby generator, solar street lighting and a 24-hour security manned gate. All these pushed the cost of the investment to Sh850 million, while phase two cost Sh600 million.

Stanley Mutiso, the sales and marketing manager,  notes that the houses are spacious and the units are also well-spaced to allow for maximum lighting. “The architects were generous enough to give a separate washing area and a balcony,” says Mutisi.

Each of the units is also served with 1,000 litre water storage tanks.

But one factor that has attracted home buyers is that all the houses are internet-ready. “Internet access has become a necessity. People want a home where they can comfortably work from and stay connected with the outside the world,” says Abukah.

The location too enhanced the uptake of the tenant purchase scheme as Bluebells Apartments is in an upcoming zone.

He points out that SIC acquired the land in Syokimau when they noted its viability for a housing development as many people were settling in the area. “We too wanted to be part of this development,” says Abukah.

Being a residential area, the environment is serene and very quiet. “With Mombasa Road becoming a dual carriage way, the location offers great convenience for setting up an urban home,” says Mutiso.

These factors aside, the SIC tenant purchase scheme offers great flexibility as the homebuyer is allowed five years to make monthly payments. The three bedroom units are going for Sh7.4million, attracting Sh740,000 deposit, which one is allowed to pay within 90 days. “This purchase concept has endeared the model to business people and the self-employed,” says Abukah.

A majority of business people, she explains, are excluded from accessing similar facilities in banks or financial institutions like mortgage financing. “The tenant purchase arrangement works well with their cash-flow to acquire assets,” she adds. 

The remaining balance is cleared with monthly repayments of Sh140,000. Within the 90-day period, Abukah says that most of their clients have put even more to the deposit so that the monthly repayments are almost equivalent to their rent, yet they can live in the house or rent it out.

Though the scheme offers great convenience to the home buyer, most developers in the market may not favour as it will keep their cash flow tied for many years. “This denies developers the instant access to the full amount,” Abukah adds.

FULL OWNERSHIP

It is also important to note that even when the home buyer has the privilege to access the property, they do not have full ownership of the property until they pay in full. “For instance, they cannot peg on it as collateral for a bank loan,” says Mutiso. He says that looking at SIC, the tenant purchase scheme is performing much better than the conventional mortgages.

“The home-buying market love it and the demand is high because those who are offering it are few,” says Mutiso.

Besides Fusion Capital and SIC; NHC, NSSF and HF Group are operating the schemes. However, their models tend to favour salaried individuals; mainly civil servants. “There is need for tenant-purchase models that are open to all Kenyans,” Mutiso adds.

Abukah is of the opinion that private real-estate developers in Kenya should open a window to tenant-purchase schemes  to accommodate business people and the self-employed who have no salary but make money within the month. “This will push up home-ownership rates,” he adds.

According to The Report, Kenya 2016, an annual publication of the Oxford Business Group, Kenya’s housing deficit is estimated at 200,000 housing units per year. This is a figure that local developers and the government are unable to meet due to the stringent demands and processes attached to mortgages.

This pushes away many would-be home buyers, something that has seen the real-estate sector perform dismally with slightly over 22,000 mortgages worth Sh164 billion for a country of 44 million people, equating to 2.7 per cent of GDP.

Mutiso notes that if applied widely and made flexible, tenant purchase scheme may be Kenya’s real-estate ‘mortgage of the future’. “It will even make it possible for young people to own property”.  “These houses have largely been bought by young people,” says Mutiso, adding that retirees who have bought the homes are very few. “The scenario could be that young people today are accessing more money than in yester-years due to the wide access to financing from the market, says Abukah.

“Young people are also earning higher incomes, which has empowered them to invest in capital-intensive areas like real-estate that was a preserve of retirees,” she adds.

Abuka notes that the success of the tenant purchase scheme has also demonstrated the high and untapped potential that lies in business people. “The real estate industry in Kenya needs to structure flexible products for this market since their cash-flow avenues are quite different from the employed and salaried,” Abukah shares.

Apartments under construction at Blue Bells Gardens Apartments in Syokimau. PHOTO | EVAN HABIL

Besides the tenant-purchase scheme, other payment models include cash purchase in which buyers enjoy discounted rates, and negotiated payments where SIC collaborates with Housing Finance, Cooperative Bank and the Kenya Commercial Bank.

 SIC has been in existence since 2008. With over 4,000 members drawn from Safaricom as well as individuals that don’t work for the organisation, the share capital has grown to over Sh2 billion. Having invested widely in Kenya’s ever-growing real estate sector, the fund has recorded a 25 per cent return on investment in the last two years. 

Besides Bluebells Apartments, SIC has also invested in other real estate development projects, including two bedroom apartment projects in Ruaka going for Sh7.3 million, four bedroomed mansionettes in Rongai going for Sh13.5 million, and three bedroom bungalows in Kantafu (Serene Homes) going for Sh3.9 million.

Buying and selling of land is another key investment area for SIC. Their parcels of land are available in Nairobi, Kisumu, Mombasa, Machakos, Kajiado, Laikipia and Narok.

Mutiso notes that the diaspora market is an area where they would want to enhance their footprint as they have products that target this market and are not very far from Jomo Kenyatta International Airport (JKIA).

These include: Bluebells Apartments in Syokimau, Serene Homes in Kantafu, Ruaka Ridge Apartments — easily accessible from the airport through the Eastern bypass — and Rongai Villas, easily accessible from JKIA through the Southern bypass.

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What to look out for in a tenant purchase agreement

1. Work out the cost of the unit under tenant-purchase agreement in terms of the interest and then look at its cost under a mortgage facility and see what favours you most. In most cases, tenant-purchase is more affordable, unlike a mortgage or accessing a home through a bank loan. 

2. Scrutinise the contracting process to check the duration of payment. The longer the better for the tenant as it means lower monthly repayments. 

3. Take note of related transactions like legal and administrative costs, including any payable taxes. These further push up the cost of the house as they are payable upfront. The stamp duty that is payable is relatively lower today rather than in future, as the value of the house goes up after acquisition. 

4. Full ownership of the house under tenant purchase scheme is only acquired after the full payment of the total cost of the house. It is only after this that one can use the house as collateral for credit.

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Tenant purchase versus mortgage

• The requirements in a tenant-purchase scheme are not as stringent and as detailed as those in a mortgage. 

• The homebuyer in a tenant-purchase enjoys a grace period, the period between payment of the deposit and when the house is ready for occupancy. There is yet another grace period between receiving the letter of occupation and starting to pay the monthly instalments. Normally, one is given about a month before interest starts accruing. 

• The approval process for tenant-purchase is simpler and faster. 

• The cost of borrowing under tenant purchase scheme is lower than a mortgage and is on a reducing balance. 

• Should you default a tenant-purchase, the foreclosure deadlines are flexible, with several warning letters coming before a public advert with a notice period. This is unlike a mortgage where demand letters are immediately followed by litigation. 

• Under tenant-purchase, one can easily sell off the house because getting the developer’s consent and change of records is faster. With a mortgage, the process is tedious and takes longer due to various consents and ‘discharge of charge’ against titles.