The performance of Kenya’s Real Estate sector has been on a positive trajectory, with the sector’s contribution to the country’s GDP recording a 5-year Compounded Annual Growth Rate (CAGR) of 6.0% to Kshs 749.7 mn in Q3’2022 from Kshs 560.8 mn in Q3’2017. Additionally, the sector contributed 10.5% to the total GDP in Q3’2022, coming in as the second largest contributor to Kenya’s GDP, only behind the Agricultural sector that contributed 14.8%. This impressive performance of the Kenyan Real Estate sector in Q3’2022, surpassing perennial major contributors to GDP such as transport at 10.3%, both financial and insurance and product taxes at 8.9% each, while both manufacturing and trade contributed 8.5% each, points to the increased significance of Real Estate to the economy and paints a positive outlook. The graph below shows the trend of Real Estate contribution to GDP between Q3’2017 and Q3’2022;
Source: Kenya National Bureau of Statistics (KNBS)
The graph below shows the top sectoral contributors to GDP during Q3’2022, with Real Estate being the #2 contributor;
Source: Kenya National Bureau of Statistics (KNBS)
However, the lack of proper regulation and oversight over developers and other stakeholders poses significant challenges that could claw back the gains. One pertinent issue is that despite the existence of laws regulating players in the Real Estate sector, there are currently no specific regulations governing Real Estate developers. Without a developer regulatory framework in place, the sector is vulnerable to various risks and uncertainties, including non-compliance, lack of coordination during market turbulence, mismanagement of funds and unethical practices. Therefore, there is urgent need for Kenya to establish a regulatory platform, anchored in law, that addresses the unique needs of Real Estate developers, financiers, and other stakeholders in the sector.
Existing Regulatory Gap
There is a need for enacting legislation / an Act that is Real Estate developers specific, and that will provide for the establishment of a Real Estate Developers Regulatory Board. The Board would be instrumental in enforcing provisions of the Act which would ideally include; i) the registration and licensing of developers in Kenya, ii) development of a code of ethics for developers, iii) consequent enforcement of the developed code of ethics, iv) develop standard practices in the operation of Real Estate developers activities in Kenya such as standardization of sale agreements, trust accounts, disclosure of information among others, v) impose fines and penalties in case of non-compliance, vi) conducting investigation and enforcing disciplinary actions against developers who violate the code of ethics and conduct, vii) determining any disputes that arise in relation to developers, and, viii) regulation, auditing, and monitoring of escrow accounts for development activities, and approval of the banking and financial institutions qualified to manage these accounts.
In addition, the Board can assist in financing through; i) developing approved frameworks for accessing non-bank development finance through structured investment instruments, or, ii) through fostering partnerships and collaboration with other Real Estate stakeholders such as financiers through championing accessibility to financing for developers. Moreover, the Board can; i) commission research on developers related matters, ii) develop training and education programs that would benefit Real Estate developers, iii) champion for legislation geared towards increasing efficiency and optimizing the environment for Real Estate developers, iv) lobby for developers’ rights and concerns to be heard, v) provide consultancy and advisory services to the government, and, vi) promote the development and expansion of the profession in general. Such a framework would ensure that developers are duly regulated and operate within laid down laws, promote transparency and accountability, and ensure that Real Estate development continues to contribute to the overall development goals of the country.
Real Estate Developers Regulatory Framework
We therefore offer the following recommendations towards promoting development activities in Kenya’s Real Estate sector and ensuring the growth and sustainability of the industry based on case studies conducted on India, Jamaica and Malaysia;
- Formulation of an Act of Law Specific to Developers: The government should fast track formulation an Act of law that specifically addresses the regulation of developers in Kenya’s Real Estate sector. The regulatory framework should be comprehensive enough to oversee development activities and transactions among developers, buyers and other stakeholders. This regulatory framework would serve to protect the rights of all parties and promote transparency and fairness in the sector,
- Establishment of a Developers Regulatory Board: In July 2020, a committee appointed by the Principal Secretary, State Department for Housing and Urban Development, recommended the establishment of a Real Estate Developers Regulatory Board. However, there has been no significant progress made regarding actualizing the proposal. Nevertheless, a dedicated Board serving to monitor the activities of developers should be part of the regulatory framework, anchored in law,
- Championing Access to Affordable Financing: To promote development activities in Kenya's Real Estate sector, developers need to access sustainable financing. This could be accomplished through; i) the development of a dedicated housing finance company for developers, ii) the regulatory Board advocating for bolstering tax incentives to developers, iii) partnerships by financial institutions to invest in the sector, iv) approved financing structures to access capital in both private and public markets, and, v) stakeholders calling for regulations that enable more financing options for developers,
- Mandatory Registration and Licensing of Developers: India, Jamaica, and Malaysia have all made it mandatory for Real Estate developers to register with the appropriate regulatory bodies and obtain licenses to operate. This measure in the developer regulatory framework would ensure that only genuine and reliable developers are allowed to operate and helps to prevent fraudulent activities,
- Establishment of a Developer Code of Conduct: A code of conduct for Real Estate promoters, dealers and developers is necessary to ensure ethical practices in the industry. This code of conduct in the developer regulatory framework should outline expected standards of professional conduct and provide guidelines on what constitutes acceptable development practices in the Real Estate sector,
- Protection of Buyer Deposits: The regulatory frameworks of India, Jamaica and Malaysia mandate that development escrow accounts are set up, audited and monitored in each project for the protection homebuyers' investments. Such a provision in the developer regulatory framework would ensure that all amounts contributed towards the project are safe and only released when the developer meets specific milestones,
- Formulation of Penalties for Non-Compliance: A regulatory framework overseeing development activities should provide for penalties for non-compliance with the provisions of the law. This measure would ensure that developers comply with the law and maintain high ethical standards in the industry, failure to which they are heavily fined or barred from operating in the sector,
- Standardization of Contract Agreements: Standard contract documents such as the sale and purchase agreements with clear and concise provisions would ensure transparency during transactions. This would allow streamlined delivery of requirements outlined in the regulatory framework, such as in Malaysia where developer obligations for the defect liability period are clearly outlined with no room for misinterpretation. Standard agreements may also reduce the time and cost involved in negotiating and preparing agreements for every transaction. However, there is need for a section to add project specific requirements,
- Establishment of an Investor Compensation Fund: Developers would be required to contribute a percentage of sales proceeds into an investor compensation fund that would compensate investors for off-plan developments in the event for failure through fraud or negligence, and,
- Provision for a Dispute Resolution Mechanism: The establishment of a tribunal to hear complaints by parties, such as Malaysia’s housing tribunal would be necessary to protect the rights of homebuyers, and also try to expeditiously resolve industry issues prior to heading to court. In addition, the regulatory framework should provide a mechanism for appeal by those not satisfied with the decisions made, such as the appellate Board in India.
For more information, please see our Real Estate Developers Regulatory Framework topical.