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24 April, 2016

In September 2015, see Cytonn Report #37, we did a focus note on the mortgage market in Kenya, essentially looking at why the uptake of mortgages remained low; currently at only 22,000 mortgages for a country of 44 million people with the total mortgage values equating to 2.7% of GDP, compared to, say, South Africa, where mortgage values to GDP equal about 24.2%.

For a country of 44 million people, with a population growth rate of 2.4% p.a, an effective housing deficit reported to be 200,000 per annum, with an increasing disposable income and a growing construction and real estate industry, it is a contradiction that mortgage uptake remains very low. Especially given that the real estate sector contribution to the GDP has grown from 8.0% in 2010 to 14.5% in the last quarter of 2015 while the sector’s total return remains very attractive at about 25% p.a over the last 5 years.

To understand the contradiction from a quantitative perspective, our Real Estate Research team, which supports both our Real Estate Investments and Real Estate Development teams developed the Cytonn Mortgage and Rental Affordability Index for the Nairobi metropolitan area. Using market data from the Nairobi Metropolitan area on house and rental prices, we constructed indices to gauge the affordability of mortgages and rents in specific locations. The purpose of the research is to inform households on the areas they will find affordable to purchase mortgages and / or rent houses based on their levels of income and the corresponding house and rental prices in those areas.

Mortgage and Rental Affordability in Nairobi Metropolitan Area

The Mortgage Affordability Index is a tool used to measure whether the average income earned by a household is enough to enable a household to purchase a house with a mortgage option. The Rental Affordability Index is a tool used to measure whether the average income earned by a household is enough to enable a household rent a house in a given location. In the computation of these indices, the key factors under consideration are household income, house prices, locations in Nairobi and the metropolis, and monthly payments for mortgages and rent. The index value is obtained by dividing the qualifying income by the median household income.

  • The qualifying income is obtained by dividing the monthly mortgage payments by 40%. The assumption being made here is that households spend a maximum of 40% of their income on mortgage payments.
  • An index of 100 or above indicates the most affordable areas, while that of below 100 to 0 indicates the least affordable areas.

From our survey and analysis, the affordability of mortgages in the Nairobi Metropolitan area, and our subsequent takeout, were as follows:

Mortgage Affordability Index – Nairobi Metropolitan Area

(all values in Kshs unless stated)

Zone

Median Monthly Household Income*

House Price Per Square Metre**

Monthly Mortgage Payments***

Qualifying Household Income****

Mortgage Affordability Index*****

Satellite Towns

200,000

65,843

82,985

228,209

 91

Lower Middle

200,000

74,976

100,979

252,446

 79

Low Income

56,250

49,452

33,418

83,545

 67

Upper Middle

450,000

130,140

460,019

1,150,048

 46

High Income

1,300,000

247,879

1,235,790

3,089,475

 42

Median

200,000

97,295

135,635

358,070

 66

Mortgages are unaffordable in all areas of the Nairobi Metropolitan area, with the metro having an index of 66.

Mortgages in Satellite Towns are almost affordable with an index of 91.

High Income areas have the least affordable mortgages with an index of 42.

The difference in affordability between the high end areas of Nairobi metro and the satellite towns is as a result of the high the land prices in the city which consequently push up the house prices

*- Median monthly household income - this is the median of the monthly income earned by households in the area under consideration. For one bedroomed houses it is assumed that a household has one breadwinner and for the rest, a household has two breadwinners

**- House price per square metre - this is the median of the price per square metre of houses in the region under consideration obtained by market research

*** - Monthly mortgage payment – this is the monthly contribution that a household makes to the mortgage lender to service the loan. It is calculated using the excel PMT function based on the house price, at a 15% interest rate and a 20 year term

**** - Qualifying household income - this is the monthly income that a household needs to earn to be able to afford a mortgage on a house

***** - Mortgage affordability index - is the quotient of the qualifying income and the median monthly household income

Source: Cytonn Research

As such, in order to provide actionable recommendations, the table below summarises where households should take up mortgages depending on their income levels:

Summary and Conclusion on Mortgage Affordability

Income Bracket

Towns in which a mortgage is affordable for the income stated

Kshs 25,000 - 50,000

Githurai

Kshs 50,000 - 150,000

Kariobangi, Athi, Kikuyu, Kitengela, Ruai, Buruburu, Embakasi, Umoja

Kshs 150,000 - 300,000

Ruaka, Lang'ata, Kasarani, Kahawa, Donholm, South B & C, Dagoretti, Rongai, Komarock, Ngong'

Kshs 300,000 - 1,000,000

Ridgeways, Westlands, Spring Valley, Riverside, Kileleshwa, Kilimani

Above Kshs 1,000,000

Nyari, Karen, Runda, Muthaiga, Kitusuru

A median household income of Kshs 200,000 can afford to buy a house on mortgage in Satellite Towns and in Kariobangi, Buruburu, Embakasi and Umoja.

In high-end areas a minimum monthly income of Kshs 3.1 million is needed to afford a house on mortgage.

Most of the City’s suburbs require an income in the range of Kshs 150,000-300,000 to afford a mortgage

Source: Cytonn Research

Given the unaffordability in the mortgage market, we also constructed a Rental Affordability Index to analyse the affordability of rents in the Nairobi Metropolitan area. The results were as follows:

Rental Affordability Index – Nairobi Metropolitan Area

(all values in Kshs unless stated)

Zone

Median Monthly Household Income*

House Rent Per Square Metre**

Qualifying Household Income (Kshs)***

Rental Affordability Index****

Satellite Towns

 200,000

 294

 109,448

 183

Lower Middle

 200,000

 346

 126,748

 158

Low Income

 56,250

 253

 44,288

 127

High Income

 1,300,000

 960

 1,166,000

 111

Upper Middle

 450,000

 630

 628,858

 72

Median

 200,000

 392

 157,067

132

Rents are affordable in all areas of the Nairobi Metropolitan area except the upper middle.

The Nairobi metro area has a median rental affordability index of 132.

Satellite towns are most affordable with an index of 183 attributable to the low rents charged in the towns and the distance from the CBD. They also have less amenities

*- Median monthly household income - this is the median of the monthly income earned by households in the area under consideration. For one bedroomed houses it is assumed that a household has one breadwinner and for the rest, a household has two breadwinners

** - House rent per square metre – this is the rent per square meter paid by households each month. It is obtained by market research

*** - Qualifying household income - this is the monthly income that a household needs to earn to be able to afford to pay rent

**** - Rental Affordability Index - It is the quotient of Qualifying rental income and median monthly household income

The table below summarises where households should take up rentals depending on their income levels

Summary and Conclusions on rental affordability

Income Bracket

Towns in which rents are affordable to households for the stated income levels

Kshs 25,000 - 50,000

Athi, Embakasi, Githurai, Kariobangi, Kitengela, Komarock, Ruai,

Kshs 50,000 - 150,000

Buruburu, Dagoretti, Donholm, Kahawa, Kasarani, Kikuyu, Lang'ata, Ngong, Rongai, Ruaka, South B & C, Umoja

Kshs 150,000 - 300,000

Kileleshwa, Kilimani

Kshs 300,000 - 1,000,000

Karen, Kitusuru, Muthaiga, Ridgeways, Riverside, Runda, Spring Valley, Westlands

Above Kshs 1,000,000

Nyari, Rosslyn

Rents are more affordable than mortgages in all areas of the Nairobi metropolitan area. With most areas requiring an income range of 50,000-150, 000 to afford rental rates.

The only place requiring more than a million Kshs monthly income to afford rent is Nyari/ Rosslyn. Ngong, Rongai and Ruaka are the most expensive satellite Towns in terms of rent

In conclusion: With no area in Nairobi and the metropolis having an index score of 100 and above for the mortgage market, the analysis demonstrates that the market is not geared towards mortgage buyers, hence the core reason why the number of mortgages remains low at 22,000 for a country with a population of over 44 million people. The major reasons behind this are (i) low incomes levels that cannot service a mortgage, (ii) high property prices, and (iii) high interest rates, which discourage potential homeowners from borrowing. Consequently, Nairobi and the metropolis area still remain largely a rental market. This also explains why most real estate developments are bought by real estate investors who in turn rent them out to households. The recent emergence of REITs in Kenya will be critical to providing more of the badly needed housing as it will bring in more institutional capital that can finance more developments for rentals.

For additional information on how we constructed the index, methodology and our assumptions, including the mortgage and rental affordability indices of the individual towns, refer to the full report here: Download the full report here: Nairobi Mortgage and Rental Affordability Report


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Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.

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