September 17th, 2020

By Seeta Shah

(With gracious thanks to Unity Homes directors for sharing their economics).

Unity Homes is delivering two bedroom, 50 sqm apartments in Tatu City (at the periphery of Nairobi) at an average price of Ksh 4.5 million [1] (about US$ 45,000 [2] ) each. The development, Unity West, is generating significant excitement due to its low density, efficient design, natural lighting, and modern finishes.

Unity West comprises 384 units of two-bedroom apartments, delivered on 6.7 acres. The development is located in Tatu City, a mixed use, master planned city on 5,000 acres, in Ruiru, 30 km from the Nairobi central business district. Unity West is expected to generate rentals of KSh 30,000 (US$ 300) per month excluding service charge (estimated at KSh 3,750 [US$ 37.50] per month), the units should achieve a net rental yield of approximately 7% assuming full occupancy. The service charge will include security, maintenance of green spaces, membership to a fitted out gym and other sports facilities and membership to a library. Unity West is being delivered using aluminium formwork, supplied by KumKang Kind. The formwork does not reduce cost, but improves quality and reduces delivery time from approximately 12 months to 5 months per block. Due to the low density design of 12 units per block, the developer is able to build in line with its sales and hence manage capital efficiently, which is a key requirement for financial feasibility of developments.

       

Now, each apartment at Unity West comes with one parking space. Buyers often request a second parking space, stating they would “be willing to pay extra for it.” Unity Homes therefore calculated the price of an extra parking space and the figures are surprising – increasing the parking spaces per housing unit from 1 to 2 spaces, increases the housing price by approximately KShs 900,000/-, (Refer to “V” in Table 1 below), an additional 20% of the original parking space! WHY?

Working out the cost of an extra parking space	Assumption	unit	Number	KShs	USD	Cell Ref	Formula
				Conversion	100
Total Land	Actual	acres	6.67
Total units in development		units	384			A
Current density		units per acre	58			B
Land footprint per housing unit using current density		sqm per unit	70			B1
If provide 2 parking spaces per unit instead of 1, would reduce density by 40%. New density		units	230			C	A* 60%
New density		units per acre	35			D	B * 60%
Land footprint per housing unit using new density		sqm per unit	117			D1
2 Bedroom apartment retail price				KES 4,500,000	USD 45,000	E
Land cost per acre	Market value	Per acre		KES 35,000,000	USD 350,000	F
Land cost per unit with current density	Prorate	Per unit		KES 607,943	USD 6,079	G	F/B
Land Cost per unit with new density				KES 1,013,238	USD 10,132	H	F/D
Therefore additional land cost per unit due to extra parking space				KES 405,295	USD 4,053	J	H-G
Actual area of parking space required, including circulation space.	25	sqm				K
Plus cost of finishing parking space (preparing land for drainage, cabro cost plus laying, VATetc)	KES 2,500	per sqm		KES 62,500	USD 625	L	K*2,500
Land cost plus finishing cost of parking space				KES 467,795	USD 4,678	M	J+L
Plus cost of financing	15%	%		KES 70,169	USD 702	N
Land, finishing plus financing cost				KES 537,964	USD 5,380	P
PLUS additional cost of higher infrastructure per housing unit (as now fewer units to share fixed infrastructure costs like earth works, perimeter security, electrical, plumbing, sewage and storm water etc)internal roads and drainage, perimeter security etc)
Infrastructure cost with current density PER UNIT: using actual costs provided by developer :KES 60,000,000 for whole estate, divided by original 384 units	Per actual infrastructure cost			KES 156,250	USD 1,563	Q
Infrastructure cost with new density PER UNIT				KES 260,417	USD 2,604	R
Additional infrastructure cost due to lower density PER UNIT				KES 104,167	USD 1,042	S	R-Q
Total additional land, infrastructure and construction cost for 2nd parking unit				KES 642,131	KES 6,421	T	P+T
Developer Overhead + Profit	35%	%		KES 224,746	USD 2,247	U
Total cost of 2nd parking space				KES 866,877	USD 8,669	V	T+U

Table 1: Working out the cost of an additional parking space

As illustrated in the table above, the increased pricing is driven by the extra pricing space’s implication on density – and how density impacts affordability. In the existing layout, the developer can deliver 58 units per acre, but to fit in an additional parking space, the density would reduce 35 units an acre (as more land space is required for parking, and the housing blocks are therefore further spaced out. The ‘land footprint’ (that is the total land area consumed by each housing unit) reduces from 70 sqm with current density (Refer ‘B1’), to 117 sqm (Refer ‘D1), a 66% increase in land consumption by unit.  Further, since fewer housing units are on each acre, the cost of servicing the land with infrastructure has to be shared by fewer units (Refer ‘S’).

When the full implication of the extra parking space is calculated, it results in an increase of almost 20% of the original sale price (Refer ‘V.’). This is multiple times what buyers are willing to pay for the extra parking space (buyers’ responses on how much more they will pay for a second parking space range between Ksh 50,000 [US$ 500] to KSh 150,000 [US$ 1,500]).

The above illustration clearly shows that the cost of delivering the space is much more than the market values it or is willing to pay for it. But while public transport options are limited, families with two adults continue to have two cars, one for each adult’s commute.

The key policy takeaway is that the impact of density on affordability – and how providing good public transport, and therefore reducing the use of land to parking – can promote affordability. While this case looks at the impact of providing a second parking space, we can take it a step further and see how beneficial it would be for households to not even need one parking space. In many advanced countries, even a single parking space near your housing unit is a luxury very few can afford – and parking is typically rented in specific ‘parking garages’ within the neighbourhood. The high cost renting a space within the parking garage, and the available alternative public transport options, discourages the use of valuable land in housing developments towards parking, and segments the market for ‘parking’ and the market for ‘housing.’

It is clear that investment in public transport options that will appeal to the middle income who are currently reliant on cars, is a key step towards affordability.

 

[1] The price is dependent on payment terms: the greater the cash payment during construction, the greater the price discount. This is common practice in Kenya, due to the high cost of bank financing for construction.

[2] The blog has used a conversion rate of Kshs 100: US$ 1 for easier reading.

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