Affordable Housing Solutions in Kenya: An Overview of Karibu Homes by Ravi Kohli

Interview with Ravi Kohli, Founder and Managing Director of Karibu Homes

What is your assessment of the real estate sector in Kenya?

Over the last ten years, the real estate sector in Kenya has experienced a boom. Property values have gone up very quickly over this period and it seems to have reached a ceiling now. Developers have been providing housing solutions for more of the high end, top 5% of income earners in the country. No one has addressed the middle class and that is where the real demand lies. 92% of Nairobians rent and that is an opportunity to get those people to buy a home.

There is a huge opportunity here. What are the factors that prevent people from buying and make them choose renting instead?

Karibu Homes is a company that was formed specifically to provide a housing solution to people that are as low down on the income ladder as is commercially viable. Our most expensive home, which is approximately 6 million Shillings, is the cheapest that you would find otherwise on the market.

There are a number of restrictions. One big restriction is the offtake finance side of things which results in a very weak mortgage market. There is a lack of long-term liquidity in the market to offer home buyers a 20-year mortgage. There are only 25,000 mortgages in the whole country of 40 million people. That is a big restriction because anywhere in the world, a house is the most expensive thing a family buys. Unless you can fund it, it is very difficult to jump on the ladder. As a result, most of our purchases are done in cash. Another big restriction in the housing sector here for attracting investors is the amount of time it takes to register documents and the Lands Office. It is not a digitized system yet. Because it is manual, sometimes it can take almost one year for a developer to register a house to a customer. That is a quite off-putting situation. Naturally, all these things can be improved. With digitization and the incentive of the government, we do have hope that these systems will provide an easier way to transact as developers.

In Kenya, what is the situation with buying a house and paying a mortgage versus renting?

Because you have a larger amount of people in urban Kenya, Nairobi specifically, you have a situation where most of the property is owned by only a handful of people. Roughly 8% owns 100% of the property. People’s incomes are not very high. You could have very valuable properties but the rental yield will never be in the double digits simply because the customer base you are looking for as a rental cannot afford to pay much more. By worldwide standards, roughly 1/3 of a family’s income goes towards housing. In Kenya, if you look at a family earning $1,500, or 150,000 Shillings, they can afford a rent of $500, or 50,000 Shillings. However, if you were to buy the house with a mortgage, you would be paying a higher amount than you would if you paid rent. That is where there is a mismatch between the rental market and the mortgage market. The result is that you have very low rental yields. On the back of that is that real estate earners are always looking at the opportunity for having a big margin growth in the value of the asset they have bought.

With the upcoming World Bank funding, do you think it might change the system?

That is the big game changer. The World Bank has partnered with the Kenyan government and local banks to form the Kenya Mortgage Refinance Company, KMRC. The whole idea behind this is to inject liquidity into the mortgage market which currently does not exist to allow the banks to lend to mortgage buyers for 20 years. They have put a condition on it that the house value cannot be more than 4 million Shillings in urban Kenya and the family cannot be earning more than $1,500 a month in order to qualify for the subsidized mortgages. This subsidy will be anywhere from 9 to 11%. That makes it much more affordable for people to have a mortgage. On top of that, they will be providing fixed rate mortgages. That gives a family stability. As Kenyans, we have experienced interest rate hikes and movement quite often so it is always a cautious thing.

What are your competitive advantages? What do you bring to the market that is different?

Karibu Homes is a company that was formed specifically to provide a housing solution to people that are as low down on the income ladder as is commercially viable. Our most expensive home, which is approximately 6 million Shillings, is the cheapest that you would find otherwise on the market. There are very few developers, maybe only two or three, that are providing a housing solution for approximately 2 million Shillings to about 7 million Shillings. Another advantage is that we are extremely driven by our market. We did not just come along and say we were going to build houses for the middle-income Kenyans who are lacking in supply. We actually spent more than two years speaking to the market. We really know our customer. We did focus groups and we interviewed hundreds of people to understand what a Kenyan family wants from a community. From that, we learned that Kenyan families definitely wanted an open, communal space so their children could run around. The primary thing on every Kenyan’s mind, no matter your income level, is security. Our communities provide very good security in the form of gated communities. We offer electric fences, guarded gates, etc. Kenyans also experience extreme fluctuations in services such as electricity and water. So, we provide extremely robust water storage and on the power side it is all internally done with our own transformers. Another huge competitive edge we have is that we engage with a company called Arup International, which is one of the world’s largest infrastructure firms. Their foundation did a full schematic of our master plan. They have experience in delivering affordable housing in hundreds of countries. They value engineered our entire schematic and they came up with interesting solutions such as needing to have wider storm water drainage because there will be 5,000 people walking here. Ten years from now, you want to make sure that the external infrastructure is very robust. So, they made us tweak all that infrastructure to make it more higher end. They also insisted that we have a look at the design of the actual structure. So, we use a load bearing wall technology. The impact of this is reducing the cost to us which we then use that money to improve other infrastructure, but it does not hamper the quality of the product. We have gone through a very deep, detailed value engineering exercise.

What are some of the major projects you have completed?

Our pilot project is called Riverview and it is in Athi River which is approximately 20 km from the Jomo Kenyatta Airport. We chose this location because it is a booming industrial belt. There are cement companies, export processing zones, and various other industries that are already flourishing. It is also fast becoming one of Nairobi’s bedroom cities. The location for that and the accessibility to the CBD is very good. We bought a 20-acre parcel of land in Athi River about 1 km from the Mombasa Road. You have to take into account that for Kenyans, transport is also a major issue. You can find very cheap land, but it will be far away from an easy transport link. There is no point in locating our communities far away from adequate transport facilities. It is a hybrid of finding a perihub and location. In order for us to make our projects work, we have to have scale. The master plan is just over 1,000 units spread across five or six phases. The idea is to roll out 200 to 300 units every 18 months. So far, in Athi River, we have completed 572 homes. The community has shops and it is thriving with over 1,000 people living there. Interestingly, unlike other developers that I know in Kenya, roughly 70% of my customers are earner-occupiers, meaning they have bought to actually live there. That is a huge thing because it means the community is actually being taken care of by people who live there as opposed to tenants. That makes a big difference in our strategy as well.

What is the new project you are working on?

In Tatu City we have bought another 20 acres. The beauty of Tatu City is that it is a controlled development of well over 1,000 hectares. The people behind Tatu City are extremely experienced city master planners. We have a piece of land that is on the main highway next to a group of aspirational schools called Nova Schools and it borders Tatu City’s high-end development where there are million dollar homes. Effectively, you are going to be paying between 21,000 to 50,000 dollars for a home where your neighbors’ could be one million dollars and up. You are right at the footstep of numerous industries that are all within the Tatu City environment. You have the support of the Tatu City infrastructure, which is providing open spaces, parks, bike paths. It is incredible. It is honestly like buying in a US subdivision. It is something that we need in Africa where, as a developer, I just have to start building. I do not have to worry about water, sewage, and all the other things that we had to really worry about in Athi River. It is a wonderful situation.

Are you looking to attract international investors?

These projects are extremely expensive to build out and they require large quantities of cash. Therefore, we are always looking for equity and debt investors. It is very common in Kenya and across the continent to have election cycles and economic cycles that can be quite unpredictable. We look for more patient capital. People who are more IR driven might not have the stomach to do what we do. We also are a social impact firm so we measure our bottom line with the impact that we have on our customers and on the environment and the social fabric of the country. We like to see ourselves as a catalyst for the housing industry. We need to find investors that are aligned with that way of thinking. A normal project cycle from the time we buy the land to the time we exit could be up to 7 years for 1,000 houses. It is defined totally by the rate of sales. We tend to look for investors who are driven by the impact that we are having and who are a bit more patient than something like a PE fund.

What technological improvements are you looking for? What does it mean for you to be a data driven company?

The real estate market in Kenya does not have a report that you can go to. There is no credit reference bureau that everyone is registered on that functions properly. So, in order for us to grow as a company, we need to control the data ourselves. For instance, if you decide to buy one of my homes and you were to pay for it in an installment plan or you wanted to get a mortgage, my team would interview you, understand your financial status, get your bank statements, and do the full credit check around you. Then, we will advise you. If you want to buy a home for 5 million Shillings but on paper you can only really afford one for 4 million Shillings, we will try to help you understand that. The other side of the data is that even though we have sold over 500 houses, we have engaged with over 5,000 Kenyan families who have not bought from us, but we have collected a lot of information about them in terms of what their incomes are, do they want a mortgage, where do they want to live, how many children do they have, etc. That data is very valuable as we move forward because we can direct market to them for new projects and it also drives where we look for new land because we have a lot of information about what hundreds of people want. That can drive the business template in a certain direction. The data is very important.

Project yourself into the medium term, three years’ time. What would you like the company to have achieved?

In three years’ time, I hope to have 1,000 houses in Athi River completed and 500 houses in Tatu City completed. In seven to eight years’ time, we would like to be in a position where we can deliver 10,000 housing units per year at prices below 50,000 dollars. In fact, our whole intention is to try to go lower and lower. The truth is that Karibu Homes is really supplying the middle-income segment of the Kenyan population. If we try to provide housing for people lower down on the income ladder, the middle-income clients will buy those housing units because they are hungry for the stock. Over time, we hope to increase our production capacity and lower our price.

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