Mortgage lender Housing Finance has allocated nearly half of the Sh3 billion it expects to raise through a corporate bond to develop its own projects. This is a strategic shift aimed at earning the financier a higher profit margin from the entire homes supply chain.
HF has set aside Sh1.4 billion to finance development of housing projects on its own and through joint ventures with land owners.
The allocation of nearly half of the proceeds from the corporate bond, which goes on sale this morning, reveals a deliberate shift for the financier to capitalise on its capacity to develop own houses.
The lender set aside more than half of the Sh7 billion raised in the first tranche of the bond for loans to home buyers.
“We are taking a significantly different approach with this issue,” said Sam Waweru, the finance manager of HF. “Our focus is in getting involved throughout the home supply chain to ensure that the market has the kind of homes our target customers can buy,” he added.
Mr Waweru says real estate developers tend to price their houses way above what most mortgage buyers can afford, essentially denying the lender business opportunities.
Entering the home construction business is expected to help HF circumvent the emerging challenge where the projects financed by the lender end up attracting wealthy buyers, who mostly purchase them at a discount since they buy in cash.
HF is also hoping to profit from the margin accruing from the different steps in the housing supply chain, the main motivation for the company to revive the Kenya Building Society, its property development arm after a 13-year dormancy.
The company will use the subsidiary to develop a mixed-use estate in Nairobi’s Komarock estate comprising 162 residential houses and a commercial centre. Managing director Frank Ireri said in a past interview that the re-entry into the property development business would be critical in diversifying HF’s revenue streams and cut reliance on interest income from the mortgage loans business.
Moses Waireri, an investment analyst at Genghis Capital, says the move by HF represents a change in strategy which could be informed by the widening deficit of affordable homes in the middle income segment.
“HF seems to have identified a gap in the supply of homes in the middle income segment, which happens to be its key market for mortgage loans,” said Mr Waireri. “The company is an established brand which will make it very easy to sell,” he said, adding that the houses it supplies would almost entirely translate into new mortgage loans. HF expects to raise just under Sh3 billion from the Nairobi Securities Exchange in the second tranche of a Sh10 billion corporate bond issue that was approved by the industry regulator, the Capital Markets Authority, in 2010.
Initially, the lender anticipated to raise the cash in three tranches in 2010, 2012 and 2013, though it did not indicate its preferred breakdown of the Sh10 billion paper.
In the first tranche, however, the lender raised over Sh7 billion against a target to Sh5 billion, accepting all offers in a situation that effectively eliminated the need to borrow the remainder in two separate issues.
Among the joint venture projects that HF has already signed on are a 414-unit apartments project in Riruta area called Precious Gardens and Kahawa Gardens along Thika Highway comprising 220 homes.
HF is a 50:50 partner with the respective landowners in both projects, while future joint ventures are likely to be undertaken together with other financiers in a consortium arrangement, according to Mr Waweru.
The ever-widening supply deficit has been cited as the main driver of property prices around Nairobi that have appreciated almost four times on average since 2001, according to real estate firm HassConsult, which tracks prices.
Official estimates place the annual housing deficit at about 200,000 units, against a supply of about 50,000. Kenya’s mortgage market has only about 16,000 outstanding home loans.