Tenant purchasing schemes to help reduce housing deficit
Experts are calling for more strategic support to Kenya’s home ownership market. According to a recent report by the World Bank “Kenya Economic Update: Housing Unavailable and Unaffordable” the housing deficit in Kenya stands at 250,000 housing units annually.
With a constantly growing population, the deficit can only get worse. The Vision 2030 social pillar on housing seeks to attain an adequately and decently-housed nation in a sustainable environment.
“The stand on bank interest rates capping remains unresolved. This has made banks apprehensive in granting of loans and mortgages. Consequently, house loans continue to be unavailable to Kenyans further aggravating the housing crisis in the country,’’ according to Isaak Mungai, MMC Africa Law Partner and expert in banking and finance.
To tackle this anomaly, various parastatals and more recently, private developers, have utilized the tenant purchase scheme (“TPS”) concept to provide an affordable avenue of home ownership for Kenyans.
This is basically a traditional lease agreement that also gives the tenant an option to purchase the rental property sometime after the beginning of the tenancy.
The scheme is an alternative payment method for property acquisition whereby the home buyer makes a down payment and is able to access the house unit before fully paying for it within an extended period of time.
A portion of the tenant’s monthly rent payments is applied toward the purchase price of the house. Essentially, the buyer owns the house by paying rent.
“It would be a mistake to assume that there is no demand for home ownership in Kenya which has continued to be beyond the reach of middle and low income earners. Millions of potential buyers have been turned away due to ten-fold rise in house prices and exorbitant bank mortgage interest rates,’’ said Mungai.
Tenant Purchase Scheme is not a new concept but has traditionally targeted salaried civil servants under the Housing Act Cap 117. Recently, private developers have been encouraged to invest and target informal income earners, the youth and unsalaried business people who make money on a monthly basis.
To debunk the mystery surrounding the operation of a TPS, the starting point is a tenancy, not necessarily a house purchase transaction.
The underlying agreement is therefore identical to a regular lease agreement between a landlord and a tenant, including terms such as the duration of the lease period, the amount of rent to be paid, and repair and maintenance responsibilities of landlord and tenant.
“The benefit of a Tenant Purchase Scheme is the tenant can immediately occupy the house, as opposed to mortgages where occupation can only happen after completion of the purchase. The purchase price payable is also on a reducing balance. In markets with increasing home prices, buyers can get an agreement to buy at today’s price even though the purchase will take place several years in the future. Another advantage is if the house turns out not to be what the buyer expected, he/she can choose not to exercise purchase,’’ as explained Mungai.
In case the tenant opts out of buying off the house, there is an option to sell the house to a third party with just a consent from the developer being required. For mortgages, the consent of the charge and the registration of a discharge of the charge means a resale is not as straight forward.
Tenant purchase schemes present an opportunity to cut down the country’s housing deficit by making it easier for the middle and lower class Kenyans to own homes.
Housing projects being developed by both public and private entities currently in the country are still beyond the reach of most Kenyans.
“To succeed, TPS will require more exposure and support from the government, which has identified housing as one of its Big Four development agenda, with plans to build 500,000 social housing units and 800,000 affordable units by 2023 at a cost of Sh2.6 trillion. This provides a good opportunity for the growth of TPS. Saccos around the country also have a huge role to play in fostering the growth of TPS by structuring the members’ savings to purchase homes,’’ said Mungai.