Major investments in housing and infrastructure have set Kenya’s construction industry, which accounts for 4% of GDP, on course for sizeable expansion in the near term.
According to data issued by the Kenya National Bureau of Statistics (KNBS) in October, the construction sector, which recorded a quarterly increase of 18.9%, was the single biggest contributor to GDP growth during the second quarter. This compares to growth of 4.9% in the first quarter, or the 2013 year-end figure of 5.5%, indicating a strong acceleration in building activity as new investments came on stream.
Infrastructure boost
A major fillip for the construction industry is expected from government programmes to reinforce Kenya’s infrastructure backbone. Increased spending planned on a variety of transport projects include the $25bn Lamu Port and South Sudan-Ethiopia Transport corridor, a Sh327bn ($3.6bn) standard gauge railway development, and the commencement of work on 2000 km of new roads in 2015.
Infrastructure projects will be a significant force powering Kenya’s economy, with an IMF report in mid-November saying such investments will underpin economic growth of 6.9% in 2015, accelerating to 7.5% the following year.
Funding for a number of construction projects has come from donor states, including China, which has in recent years played a large role both in project financing and execution. But the government is also turning towards sovereign debt – having sold a $2bn eurobond in 2014 to help raise financing for some of its capital spending – and it is in addition reforming capital market regulations to allow for real estate investment trusts (REITS).
Supply deficit
Real estate developments are also contributing to an uptick in construction activity, in part thanks to public sector-backed efforts to expand residential supply in lower-income segments.
The government announced in late October that work would begin in February to construct 25,000 new residential units, most of which will be in Nairobi, where slum areas will be cleared to make way for affordable housing – the biggest segment of the supply deficit.
Estimates vary on the housing shortfall in Kenya, with numbers ranging between 150,000 and 200,000 residential units in urban areas and more than 300,000 in rural areas. According to housing finance agency Shelter Afrique, the shortfall will increase further in the east African nation of 43m people, as the urban population grows at an estimated rate of 4.2% a year.
According to Mohamed Hassanali, the CEO and director of property firm HassConsult Real Estate, demand for residential property will remain high while the housing deficit continues. “Housing needs are estimated at 200,000 houses per year,” Hassanali told OBG. “It is important to ensure supply grows in those segments where it is most needed …We have a strong demand for housing, and we are nowhere near meeting this.”
However, meeting that demand could be difficult, particularly for private developers who target the middle and high-income segments. “The property sector has many challenges, especially in supply chain and regulation…This makes it hard to deliver homes efficiently as investors add risk premium on property prices,” said Geoffrey Maina, analyst at lender Old Mutual Kenya, in a research note published in October. “Collaborative efforts between the private sector and government need to be firmly addressed so as to widen the type and number of properties that warrant a mortgage.”
The government is in talks with banks over the provision of cheap mortgages carrying interest rates below 10%. Mortgage financing currently attracts rates of 15% and more, putting such packages out of the reach of many Kenyans. The World Bank estimates that only 11% of Kenyans earn enough to finance a mortgage. Lower lending rates would spur demand for housing, and in turn increase business for the construction sector.
Bureaucratic hurdles to overcome
While sector outlook is positive in the medium-term, bureaucratic hurdles remain a challenge.
The World Bank said the processes of obtaining construction permits in Kenya had become more costly over the past year. The latest ‘Ease of Doing Business’ study, released at the end of October, showed that the process of dealing with permits costs an estimated 9.3% of the total value of a project, compared to a regional average of 6.2% and an OECD rate of 1.7%.
The World Bank put Kenya’s construction industry in 95th position out of 189 countries assessed, down from 35th the previous year, due to a raft of new fees. Kenya was still ahead of most Sub-Saharan countries, however, in terms of the number of procedures and in days required to obtain a construction permit.
Nonetheless, the government has made improving the business environment a key plank of its current policy agenda, and in recent months has introduced new measures that seek to simplify and reduce constraints on private sector activity.
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