Property developers turn to bonds market for cheaper capital

Prof Njuguna Ndung’u, the Central Bank of Kenya governor, says private property developers should put their books in order in readiness to roll out corporate bonds. Photo/FREDRICK ONYANGO
Prof Njuguna Ndung’u, the Central Bank of Kenya governor, says private property developers should put their books in order in readiness to roll out corporate bonds. Photo/FREDRICK ONYANGO 

As real estate developers seek a cheaper borrowing opportunity, housing bonds are likely to turn into the most effective way to finance affordable homes in Kenya.

The great hopes pinned on the bonds market to spur real estate is pegged on the success of corporate bonds of companies like KenGen, Sasini, Athi River Mining and Mabati Rolling Mills and government securities with some oversubscribed.

This means the market has enough money to lend developers looking for funds to engage in bigger housing projects.

The Central Bank of Kenya says time is ripe for private developers to take advantage of the low interest regime in the bond market to expand the size of housing projects in a bid to contain the runaway demand.

Prof Njuguna Ndung’u, the Central Bank of Kenya governor, said private property developers should put their books in order in readiness to roll out corporate bonds, adding that bonds will offer a cheaper cost of financing while allowing time for their investment to generate returns.

“We are willing to help because if you have a company that has a strong balance sheet, it means that you can raise your own bond and perhaps target a housing project,” said Prof Ndung’u during a hand-over ceremony of a housing project developed by a private developer.

Already, National Housing Corporation (NHC) has planned entry into market seeking to raise Sh5 billion infrastructure bond to offer cheaper houses, hoping that the move will help calm the rising property prices in Nairobi.

But analysts worry that the plan is likely to be held back by its financial instability and scarcity of land.

The houses, which will be targeted at the middle class, will retail at between Sh3 million and Sh5 million for a three bedroom house, cheaper than the Sh6 million that the private sector is charging.

The NHC hopes that its mega housing projects will make it easier for the bulk of middle class Kenyans to own homes and could influence private investors to cut back on prices at a time when families are finding it hard to build their own homes.

“We are planning to increase our supply into the market through use of various means such as turnkey projects, tenant purchase agreements and partnering with land owners hence influencing the final market prices for houses,” said National Housing Corporation chairman, Bosire Ogero.

The housing sector has been hit by lack of funds, slowing down a rush to meet demand in the property market, but infrastructural bonds are set to improve the financial mismatch.

According to the Nairobi Stock Exchange, the Kenyan bond market is worth Sh473.47 billion, with Sh428.95 billion government- issued and the rest corporate.

“It’s time we explored this path and consider a housing bond to finance the much needed long-term investment in housing and CBK is ready to support such initiatives by the financial sector players borrowing from its experiences with infrastructural bonds,” said Prof Ndung’u in a previous interview.

According to official statistics, the high demand for housing in Kenya’s urban areas is making real estate industry a lucrative venture. Analysts say better incomes by the middle class have contributed to the higher demand as more people desire to own homes.

In Nairobi for instance, current annual shortfall stands at 200,000 housing units against a deficit of 150,000 five years ago.

The high cost of housing has pushed many Kenyans especially in the urban areas to live in informal settlements with the growth of slums expected to be higher as more move from rural to urban areas in search of jobs.

There have been minimal interventions from the government to address the disparity in the demand and supply as tenants continue to pay high rents.

Kenyans are now banking on the private sector to bridge the gap in urban housing and quell the escalating prices.

Payback period

The high returns arising from increasing property prices as well as high rental income from the sector have encouraged more investment with the current payback period having significantly dropped from an average of 13 years about 10 years ago to the current 8.5 years, according to industry statistics.

Investment bankers say this could be a viable avenue to solve the housing problem, but are quick to point out that the individual company’s financial strength determines the financing options that are available to the company.

A general rule in a bond offer is that a company can raise up to double its shareholders’ net worth.

“A bond issue by private developers would be an ideal means to raise funds to increase their capacity because bonds offer the borrower time to build returns unlike loans that start to accrue interest immediately they are granted,” said Mr Michael Gichohi, the MD of Suntra Investment Bank.

As much as corporate bonds would be the ideal means of financing real estate development because the rising coupon payments and the final repayment are delayed, developers’ financial strength is often inadequate to raise meaningful capital through the issue of corporate bonds, says Mr Gichohi.

Credit rating

Through bonds, private developers will be able to create wealth much faster because of the capital gains will be realised within the period that it would take to finish up on a development which is ideally between eight months and a year.

Due to the high demand in the market, it is expected that the time for selling units will be significantly short considering the recent rush for houses with investors paying before the actual construction begins.

A five-year bond can be used to develop up to five developments with the funds being fully utilised, says real estate experts.

Shelter Afrique is one of the companies raising funds through bond issues in addition to several other sources, for onward lending to private developers at rates just about equal to the markets rates. It also offers technical expertise.

“With a strong balance sheet that would give a favourable credit rating, private developers should take advantage of the evolving capital markets to raise capital through the issue of corporate bonds,” said Mr Macharia Kihuro, a risk manager at Shelter Afrique.

However, the stringent conditions for rolling out a publicly traded bond have barred private developers from exploiting this avenue for raising capital, but industry players acknowledge that this would be a worthwhile venture because of the relative ease with which management can project the cash flows.

Among the bond requirement by the Capital Markets Authority are consistent profitability, low debt levels and regular cash flows that would show the company’s ability to make regular repayments.

Most of the private developers are small businesses, usually family outfits that could hardly amass the muscle to borrow funds from the public, but industry experts says partnering with other developers will enable sourcing for adequate funds required to develop a housing project.

Also, regulations introduced last year that allow a member of a retirement benefit scheme to use part of their accumulated retirement savings as down payment for a mortgage has resulted in private developers seeking partnerships with companies and retirement benefit schemes to develop housing for the members.

“The implicit risk is very low for a developer getting into a partnership with an institution to carry out a housing project because costs of financing are eliminated, this has enabled some companies to afford their staff housing at prices below the market” said Mr Daniel Ojijo, the managing director of a property development company.

Some retirement benefits schemes have also sought the involvement of private developers in coming up with housing projects purely for purposes of investment.

Such was the case with the recent development carried out by the Kenya Power and Lighting Company’s staff pension scheme that sought to develop housing for the open market in a bid to gain returns on investments.

The tenant purchase scheme has also been lauded as a way into the home ownership.

Tenants pay a down payment of 10 per cent of the cost of the house to a housing corporation then pay amounts equal to the rent that the facility would attract for up to 20 years.

Proposals put forward in the government budget for 2010/11 are expected to increase the appetite for home ownership.

Real estate experts say special fund from which private developers can borrow at below market rates will also enable them undertake more housing projects.

“The government should set up a special fund that will allow property developers targeting the common person to get funding at lower rates to enable them to roll out big projects that will bridge the deficit in supply,” said Mr Steve Oundo of AAK.

The resources that saving vehicles such as savings and credit cooperatives (Sacco) could also be tapped by private developers, credit avenues that have little inherent risk while providing significant returns.

In more developed economies, the recent global financial crisis has seen commercial banks become more stringent on lending, a move that has opening a lending window in the bond market.

Earlier this year, the University of Cambridge in the UK announced that it would be raising some £300 million through the issuance of a corporate bond to raise funds that would be used to construct new student and staff housing, and would be repaid over at least 30 years time.

The South African government has also raised nearly 150 billion rand that would be used to finance the construction of more than 8,000 new housing units within this year under a social housing scheme that expects to offer mortgages to low incomes earners who have been cut out of the conventional mortgage markets.

Additional reporting by Johnstone ole Turana.