Affordable housing

Creating an equitable contract and model for tenant purchase scheme and linking the proceeds to an income REIT

June 18th, 2024

Tenant purchase schemes are an alternative route to homeownership.

From the homeowner’s perspective, tenant purchase schemes typically have lower upfront costs and simpler processes so that access to a home is  easier. From a developer or financier perspective resolution in case of default is typically more efficient as they remain the owner of both legal and beneficial title until payments are fully cleared.

The developer or financier also has the freedom to provide contractual terms that may suit their particular commercial circumstances.. This means, particularly given that the Kenyan tenant purchase scheme legal framework is not as developed as that governing mortgages, that the contract that binds the buyer and seller should be fair to both parties.  

FSD Kenya contracted Liaison Capital (REIT instrument arranger); Raisin Capital (financial model consultant); KN Law (legal advisors); Altair Ltd (international tenant purchase scheme advisors) and Stima Investment Cooperative (vendor / developer) to review the frameworks around tenant purchase schemes and develop an equitable contract and excel model to support this financial contract.  

To make the learnings more practical, the work was centred around an actual development project, Ngara Heights, which broke ground in May 2023. 

The consortium has designed a dynamic and innovative tenant purchase scheme framework which allows both a path to homeownership for the demand of housing units, and an investment alternative to institutional capital via the pooling of funds in a Real Estate Investment Trust (REIT).  

REITs have long been recognised for their ability to offer investors an ability to invest in a diversified real estate portfolio without undertaking the hassle of property management directly, and Kenya has a relatively strong regulatory environment to support the development of REITs.  

The key features of the tenant purchase scheme structure devised are:   

  1. Simplifying eligibility: The tenant purchase scheme offers a flexible eligibility criteria compared to traditional mortgages. Unlike conventional mortgages, where the tenure is linked to the buyer’s years until retirement, tenant purchase scheme assesses eligibility based on the buyer’s ability to meet monthly payments, resulting in enhanced affordability. 
  2. Reduced upfront fees: The tenant purchase scheme provides a pathway to homeownership without the burden of a substantial upfront payment or the intricacies of securing a mortgage. The Upfront fees are significantly low with KES 548,750 for a studio and KES 1,087,500 for a 1 bedroom.  
  3. Shortened sale process: The tenant purchase scheme has worked to enhance sale timelines to ensure that the completion process takes approximately one month, in contrast to traditional mortgages that take 3 – 6 months.  
  4. Structured monthly payments and payment acceleration: Tenant purchase scheme offers structured monthly payments, akin to rental payments, easing financial planning for buyers. Additionally, buyers can accelerate payments without penalties, reducing principal amounts owed and enhancing affordability. This flexibility encourages timely payments and empowers buyers to leverage market opportunities by selling their units. 
  5. Affordable housing tax relief: Tenant purchase scheme  buyers are eligible for tax relief under the Income Tax Act Amendments 2018, providing further incentives for homeownership through alternative financing options. This tax relief supplements existing benefits for mortgage buyers, making tenant purchase scheme an attractive option for aspiring homeowners. 
  6. Ease of resolution in event of default: In the event of tenant delinquency, the repossession process under a tenant purchase scheme  is faster and more straightforward compared to judicial foreclosure processes associated with mortgage defaults. With clear procedures for delinquency notifications and demand letters, followed by the option for repossession and resale, tenant purchase schemes minimise risks for sellers while maintaining avenues for resolution and property retention by the tenant. This contract therefore seeks to promote financial viability for investors while promoting consumer rights for the demand. 

Overall, the financial viability of attracting funding to tenant purchase schemes is more challenging currently with the high interest rates offered on long term government bonds (for example, the government issued 18 year infrastructure bonds offering a tax free interest of 17.9% in February 2024 IFB1/2024/18 which raised KShs 241 billion) and the low fixed rate mortgages offered by Kenya Mortgage Refinance Corporation.  

However, the challenges of registering a title and a mortgage charge, and challenges of pursuing mortgage defaults in court, still make tenant purchase schemes an important avenue to pursue to grow the affordable housing market. Linking tenant purchase scheme income streams to REITs can also enable the investors to benefit from the tax incentives and governance provided by the Real Estate Investment Trust (REIT) structure. 

Per FSD Kenya’s commitment to supporting the development of a knowledge base to promote affordable housing and in agreement with the consortium, all outputs have been made open to the public as below:

  1. A review of the legal framework around REIT and tenant purchase scheme structures in Kenya.
  2. A template tenant purchase scheme agreement between the tenant purchase scheme financier, Stima Heights Ltd (the developer and vendor) and the purchaser. 
  3. A financial model that allows the projections to pooling tenant purchase scheme income streams into a REIT, with the ability to run sensitivities. 
  4. An explanation of how the financial model is structured.  
  5. Stima Heights has also provided a high level development appraisal of the project to demystify the various costs and expected sales revenue and profile. 



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