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:
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:
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