Housing Shortfall
THE REPORT Kenya 2016, an annual publication of the Oxford Business Group, cites Kenya’s housing deficit at an estimated 200,000 housing units per year, a figure that the Government and local developers are unable to meet due to various challenges including access to property financing (mortgaging). With slightly over 22,000 mortgages worth K.shs. 164 billion for a country of 44 million people, this equates to 2.7 per cent of GDP, something critics consider to be dismal performance for the sector.
Enter the Tenant Purchase Scheme
A tenant purchase scheme is an option for a property investor to acquire property by making installment payments over an extended duration of time, while getting to enjoy occupation of the property as soon as the initial deposit is paid.
Tenant purchase schemes have historically been the preserve of government agencies such as HF Group, the National Social Security Fund (NSSF) and the National Housing Corporation (NHC). The models used by these institutions tend to favour salaried individuals, mostly civil servants.
Not surprisingly, tenant purchase schemes are not commonly adopted by many private developers due to the reality of deferred receivables, compared to cash or bank-financed sales. However, a recent article by the Daily Nation on 9th March, 2017 titled Housing Market Thirsty for Tenant Purchase Schemes suggests that with the numerous housing developments in Kenya, most of which have units remaining unoccupied for long periods, the tenant-purchase scheme may provide an option for developers to recoup on their investment in the highly competitive market.
This option is especially touted for people with less traditional sources of income such as business persons and self-employed persons, and even lower-income earners such as younger investors, a majority of whom are excluded from accessing mortgage facilities and other conventional financing options. In most cases, tenant-purchase is more affordable than mortgage financing with simpler, faster qualification processes not to mention lower cost of credit (interest) pegged on a reducing balance. Further, the foreclosure process is more flexible for tenant purchase schemes unlike mortgage foreclosures where statutory demand notices more often than not conclude in litigation.
The Flipside
Despite getting to enjoy almost immediate possession of a property, the tenant purchaser should be aware that title to the property will only pass once the price is paid in full. One disadvantage of this is that the purchaser will not be able to use the title as collateral to access bank facilities. Transferring the property mid-purchase may also prove cumbersome as the tenant purchase agreement may restrict assignments or introduce consent conditions from the developer. Nevertheless these challenges are not as stringent as those for mortgage transfers which require the stamping and registration of a formal discharge instrument.
Potential tenant purchasers should also be aware that some administrative costs are likely to be higher on the actual completion date. For instance stamp duty which is pegged on market value of the property is likely to be higher as the value of the property appreciates during the repayment period for the scheme.
Further, it is quite vital that would-be tenant purchasers identify schemes run by viable institutions with demonstrated development history and longevity in the built environment, since pursuing title issuance at the end of an extended payment duration may prove challenging if dealing with a here today-gone-tomorrow kind of entity, as some frustrated Simple Homes investors may attest to.
Conclusion
All factors considered, tenant purchase schemes may be a kinder option to purchasers and developers alike, for those investors willing to exercise a little patience for the long run.
Please contact us at Info@cfllegal.com should you require further information.
