Making
sense of the numbers in the Housing Fund
One of the
proposals in the Finance Bill 2023/2024 is one to introduce a 3% housing levy
chargeable to salary earning employees. The charge is on the basic pay and the
employee is obligated to match it. It is to be capped at KSh. 2,500 for an
employee and employer. The Government intends to use the funds as a guarantee
to ensure the offtake of affordable houses that are to be constructed. The
houses are targeted to be owned by the low-income earners.
The Government
estimates that it will collect KSh. 9 billion as collections to the fund every
month. This is both mandatory and voluntary contributions. This pool is what
will form a guarantee to the selected developers/investors upon handover of the
completed units to the Government. This projection is not certain since Government
entities are known to not remit the statutory deductions. We will, however,
work with their estimates.
The housing
fund will offer a guarantee to the investors for their contracts. Since the
investors are business entities who the Government has informed the public were
competitively selected, then we will interrogate the average construction costs
in relation to the planned houses. The AHP (Affordable Housing Project) proposes
to do housing units ranging from 30, 40, and 60 Square Meters for a 1-, 2-, and
3-bedroom houses. In context, the Government will “Purchase the houses” from
the developers, then allocate them to the selected members of the public. One
must be a contributor to the fund to benefit. Should you not get a house in 7
years, one can withdraw their contribution to the fund leaving the employers
portion to keep the fund running. There will be a fund manager, whose running
cost will come from the fund.
The Ministry
of Lands, Department of Housing provided the breakdown of the cost as follows. Land
Costs – 23.4%, Infrastructure Costs – 14.5 %, Compliance Costs – 2.2%, Cost of
Construction – 41.4%, Other Development Costs – 18.5%. the source document does
not provide the actual average cost of construction for each unit (AHP, P. 8).
The Costs,
legal issues, and the headwinds
Sampling
commercial builders, the average quoted cost per square meter is between KSh. 34,650
to KSh. 50,000. The average cost per square meter by the Institute of Quantity
Surveyors estimate for 2022 is KSh. 35,900 per Square Meter for simple
finishings. A 3-bedroom house will take KSh. 2,154,000 using the IQS estimates.
The Houses
will be built on lands donated by the Government. Essentially prime Government
land. Upon allocation, and a mortgage registered, the property is conveyed to a
new owner. The country has a law on sectional properties paving way for the
transfers to multiple owners of property on the same land. The cost of the land
or at least an apportioned cost for each unit will have to be factored in the
cost of each sectional property. The legal basis for this land cost is that public
land is being transferred to individuals. That transfer cannot be free.
Another cost
of the is the infrastructure cost. The selling point is that everyone deserves a
dignified living space. Aspects such as sanitation, access roads, parking
space, common areas will have to be factored into the cost of the final unit.
The Authorities have determined that the portion for this will be 14.5%.
Compliance costs will be waived. There is an assumed service charge ranging
between KSh. 1,000 – KSh. 3,000 depending on the unit chosen. There will be a
conveyancing cost too at the point of transfer.
Working the
numbers, we have determined from estimates that Construction Costs, 41.4%,
Other developmental costs, 18.5%, and compliance costs, 2.2%, for each Square
Meter is KSh. 35,000. For the envisaged 3 Bedroom apartment, the cost will be KSh.2,154,000
for 62.1%. The cost of land and infrastructure will thus be apportioned at KSh.
1,314,600 making a total of KSh. 3,468,600. Construction costs differ with location
and finishings chosen.
On
completion, the developer is paid from the fund and the houses transferred to
the Government. The Government on its part is offering the houses at a 10% -
12.5% deposit on the price, and the balance as a 5% mortgage for a maximum of 30
years. It is unclear who the mortgage financier is as of the available
information. There is a proposal to have partner banks who will finance at a
single digit interest rate. The current market rate for mortgages is 15%.
Currently, the
President has launched the construction of 36,092 units in various places (AHP.
P. 41). There were 9,935 units that were launched or planned by the previous
administration (AHP, P. 40). There is no indication of the completion stage they
are at. There are 31,000 units lined up for launch as of June 6, 2023 (AHP, P.
42). Going by these numbers, the fund should be operational if it is to work as
the presentations are made. No costing details for each project have been
provided.
With the
construction already happening, on completion the funds have to be paid to the
contractors and the allocation transfers begin. The funds for these projects
have to be raised if contracts have been entered into.
The
realities
The
Government is facing a trust deficit on this proposal. The mistrust arises from
the funding model. From the findings of the Government proposal, the 5% mortgages
are in doubt, there is no financier in place for the same. On the seven years
lapse, a withdrawal of one’s contribution will be allowed. The lead contact for
the project, the PS Housing said the payout will be considered at a 7%
interest. Assuming they lend at 5%, where is the business case here if you
payout at 7%? Not forgetting there will be administration costs (AHP, P. 24).
What can
we deduce so far?
The Government
has already launched construction of the houses based on a proposal and the
hope that the fund will be enacted into law.
The number
of houses launched for construction so far, 46,000 units, raises a liability
that exceeds the resources that can be raised in this financial year.
There is no
funding plan in place for the 5% mortgage loans and it would be wise to tread
with caution on this issue. The KSh. 16,104 monthly payments for a 3-bedroom
house anticipated KSh. 3 Million 30 year mortgage will not materialize. A 30
Square Meter one bedroom house at KSh. 5,000 too will not materialize. At market
rate the payment would be KSh. 37,935 up from KSh. 16,104.
The
employers are being taxed for their matching contribution, hence increasing
their operational cost.
The fund is
poorly thought out, the proposal document has data and projections made in
2015. For example, The Government settles on a KSh. 50,000 per square meter
estimated cost without a breakdown of how they arrive at it. The cost should
vary from one location to another.
With
proposals on Capital Gains tax in the finance bill 2023/2024 and with knowledge
that you cannot police enterprise, a beneficiary of a house can opt to sell it
at a higher price, the Government is already conflicted, locking a beneficiary
into ownership and at the same time requiring a tax incase of a sale.
Assuming the
numbers are to work out as presented by the Government, 46,000 houses and the estimate
is that each unit will create 2-3 new jobs total 138,000 jobs. The marketing for
the fund is that it will be a game changer.
The supply
chains for the items to be used in construction are existing enterprises and dependent
on the contractor choices for financial viability. They can import if that is
what is viable for them, the supply chains cannot then be relied on for injecting
funds into the related industries in the economy.
Funds are
normally anchored in law as stand-alone acts of parliament. E.g., NHIF Act, NSSF
Act, why not anchor the Housing fund as a stand-alone act? There are
definitions, explanations and operational regulations required to settle the
concerns the public has.
In conclusion,
in a tax class you are taught that a tax is required, is imposed by an authority,
and is not tied to a direct benefit to the taxpayer. The housing levy is said
to be a saving but it is in a proposed finance bill, a tax bill. There is a
direct benefit to a contributor who is selected and successfully owns a house.
Sources
AHP, Affordable
Housing Plan, Ministry of Lands and Housing, Boma Yangu, Web, www.bomayangu.go.ke/media/20230523_Presentation_for_Boma_Yangu_-_Affordable_Housing_Agenda_-_Program_Overview-_Draft_v01.pdf,
Accessed on June 7, 2023
Construction
Cost Guideline 2022, Institute of Quantity Surveyors, Web, www. iqskenya.org/resources/downloads/, Accessed
on June 7, 2023.
