Analysis of how to reduce cost of Housing in Kenya.Kitengela vs South Africa.

Analysis of how to reduce cost of Housing in Kenya.Kitengela vs South Africa.

Kenyan cost of housing is high compared to other parts of the world such as South Africa and USA.

The average cost of a 3 bedroomed 100m2 house in a middle class area such as Kitengela is kes 5.9m.

This is a house situated between 1 to 2 km from main tarmac road.

See example here

http://langata.olx.co.ke/newly-build-3-bedroom-house-for-sale-in-kitengela-iid-527243632

http://langata.olx.co.ke/house-for-sale-in-kitengela-muigai-area-iid-526041738

http://south-b.olx.co.ke/3-bedroom-bungalow-in-kitengela-near-new-valley-estate-iid-525923651

http://south-b.olx.co.ke/3-bedroom-bungalow-for-sale-in-kitengela-new-valley-area-iid-525021666

http://fedha.olx.co.ke/kitengela-3-bedroom-for-sale-iid-523676948

A similar sized house in South Africa costing kes 6m will have features as below

http://johannesburg.olx.co.za/brand-new-houses-for-sale-100-bonds-available-iid-527425896

http://pretoria.olx.co.za/affordable-houses-iid-527392047

http://johannesburg.olx.co.za/family-home-iid-527317315

http://robertson.olx.co.za/up-on-a-hillside-iid-527303698

The South African property will have more superior infrastructure compared to the Kitengela one. There will be tarmac roads, secure neighborhood, proximity to shopping centres,schools and hospitals compared to Kitengela houses.

Quality of construction.

By comparing pictures of available property for sale in South Africa and Kitengela above, it’s clear that the quality of workmanship in a similar priced South African house is higher.

This is because in South Africa, developers tend to ensure that all relevant consultants in the construction industry, i.e., architect, quantity surveyor, engineer, interior designer etc are used during construction.

In Kenya/Kitengela, the average developer will most likely only use these professionals during design to ensure the local authority approves the building. During construction, the developer will think that by not using the professionals for supervision will save money.

Eventually, the developer ends up with an overpriced house with poor workmanship.

The South African developer who ensures architects and engineers are engaged throughout the construction period ends up with cheaper housing at a more superior workmanship hence more profit.

Unique Designs.

By ensuring architects and engineers are engaged throughout the construction period, South African developers will have the benefit of better aesthetics since each house tends to be unique compared to the Kenyan middle class situation whereby all houses in Kitengela and Rongai for sale look the same.

This unique design ensures that the South African developers have better , faster and more sales hence more profit compared to the Kenyan developers with monotonous repetitive designs.

Economies of Scale.

The use of architects and engineers throughout the construction by South African developers has ensured that research gets within the countrywide construction industry.

This research has in turn enabled more specified contractors.

For example, in South Africa, all doors and windows are specified and have a unique name. Eg a 2m by 1m window will be called ND2010 for example. This means that all architects during design can specify the exact window throughout the republic. The window manufactures then produce these which can be found in every hardware shop and supermarket. This mass production in turn benefits the developers since there is less wastage and more efficient production. In Kenya, each architect specifies any window dimension which will be specifically fabricated. There are no specific standards. This results in wastage during construction and lack of benefits from economies of scale. This cost is then pushed to the consumer hence increase in cost of housing.

See roof truss contractors here
http://www.rooftrussproducts.co.za/

Cost of Finance.

The Kenyan developers have to borrow at the average market rate of 18% from local banks.

The South African benchmark interest rate is at 5%.

http://www.tradingeconomics.com/kenya/interest-rate

Kenya benchmark interest rate is at 8.5%

http://www.tradingeconomics.com/kenya/interest-rate

Standard Bank South Africa is currently giving home loans at 8.5%.

http://south-africa.deposits.org/home-loan-rates.html

Housing Finance Bank Kenya is giving the same loan at 16%, down from 18%.

http://www.housing.co.ke/

If the gurus at Ministry of Finance, Central Bank and corporate banks can sit down and come up with solutions to reduce cost of borrowing, this can go a long way in reducing construction cost.

Currently, cost of borrowing takes 10% of construction cost as shown below.

example Kitengela house costs
Cost Item	Kshs	%
Land	1,250,000.00	24.90784099
	0.00	0
Construction	2,800,000.00	55.79356381
	0.00	0
	0.00	0
Professional fees	224,000.00	4.463485105
Project Management fees	28,000.00	0.557935638
Marketing	212,500.00	4.234332968
Financial Charges	504,000.00	10.04284149
Total	5,018,500.00	100
Financing Plan	Kshs	%
Developer	2,218,500.00	44.20643619
Debt Finance	2,800,000.00	55.79356381
Presales	590,000.00	11.75650095
Total	5,018,500.00	111.7565009
PROFIT
TOTAL SALES FOR 48 UNITS	5,900,000.00
TOTAL EXPENDITURE	5,018,500.00
NET PROFIT	881,500.00
% Profit Margin	17.56500946

Cost of land.

In South Africa , capital gains tax has ensured that people do not land bank. Its not possible to buy land then let it sit vacant till when you decide to develop or resell at a profit. If for example you buy land then resell after a few years for a profit, the South African government will heavily tax you on the profit. This has discouraged hoarding of land , making land price stabilize . There is plenty of available land to develop compared to Kenya.

In Kitengela, for example, if you check on the Google map below

http://goo.gl/maps/ZTpGn

you will notice that there is so much idle land very close to the road.

This land has gained value due to the whole country’s tax contribution towards constructing the tarmac road.

The owners by holding on the land without developing it, are making other Kenyans in need of housing to go further off the tarmac to construct their houses. This creates an artificial demand for land, leading to over 25% annual land value increase.

Once the owner sells after several years, they keep all the profits without sharing with the tax payer who helped /contributed to the tarmac road construction. In South Africa, capital gains tax discourages this.

From the table above, land costs 25% of the total house project costs. If this can be stopped from increasing , housing costs will be lower.

Conclusion.

For Kenya to have reduced housing costs, bank interest rates, land price and construction costs need to come lower.

Bleow is a table showing reduced construction costs, interest rates and land cost.

The kes 6m houses will cost kes 4m with a 25% profit margin for the developers. This means developers will still make as much money but with more sales due to increased potential house buyers due to lower cost.

Reduced land interest construction cost
Cost Item	Kshs	%
Land	625,000.00	19.46737268
	0.00	0
Construction	2,100,000.00	65.41037222
	0.00	0
	0.00	0
Professional fees	168,000.00	5.232829777
Project Management fees	21,000.00	0.654103722
Marketing	212,500.00	6.618906712
Financial Charges	84,000.00	2.616414889
Total	3,210,500.00	100
Financing Plan	Kshs	%
Developer	1,110,500.00	34.58962778
Debt Finance	2,100,000.00	65.41037222
Presales	410,000.00	12.77059648
Total	3,210,500.00	112.7705965
PROFIT
TOTAL SALES FOR 1 UNITS	4,100,000.00
TOTAL EXPENDITURE	3,210,500.00
NET PROFIT	889,500.00
% Profit Margin	27.7059648

With the current situation with expensive land, high interest and high cost of construction, developer are making kes 800,000 per unit.

With lower land cost, lower interest rates and lower construction costs eg in South Africa, developers are still making the same amount of money as profit.

Francis Gichuhi Kamau, Architrect.

info@a4architect.com

0721410684