A case study by the Centre for Affordable Housing (CAHF), in November last year found that developers would have to sell the affordable two-bedroom houses at Ksh. 65,000 per sqm or Ksh. 2.6m to achieve viability
The study sought to test whether a developer can contribute to the Affordable Housing Programme using the government’s offtake arrangement, the only intervention being provided to private developers.
The findings show that the cost of construction was the key limiting factor, contributing up to 66 percent of the unit costs before VAT and a further 11 percent for the VAT pushing the contribution to 77 percent.
According to the case study, alternative building technologies to drive costs down are available in the country but they have not been effective partly because they rely on expensive imports and for the fact that they have not reached scale.
Another challenge is the amount of debt and equity the developer has to raise with developers having to raise 40% equity and 60% in debt.
In the pilot used for the case study, the delivery cost came to KSh. 53,274 per sqm which was 6 percent more than the offered off-take price of KSh. 50,000 per sqm.
The case study shows that the off-take price would need to be increased to KSh. 65,000 per sqm to be viable to local developers.
Local developers require an internal rate of return (IRR) of over 25 percent, commensurate to the risk they are taking and alternative opportunities to deploy their capital in other sectors and markets.