Nairobi’s Paradox: Do Informal Settlements Provide UNAFFORDABLE Housing?

Housing costs more to live in Mukuru than Kilimani!

On the one hand, property agency Knight Frank pits Nairobi as one of the continent’s leading destinations for real estate investment. On the other hand statistics by the Kenya National Bureau of Statistics[1] indicate that nearly 70% of Nairobians live in single-roomed housing often irregularly constructed and falling below adequate housing [2] standards.  With the majority of its 4 million residents living in slum-like conditions, Nairobi is indeed an island in a sea of slums.

Image source: Mukuru SPA Situational Analysis Phase 2 Report[3]

The allure of manicured gardens and beautifully planned concrete blocks can deceive the eye to thinking that Nairobi’s real estate treasures lie in its formality. Paradoxically, it is the crowded, inadequate slum like housing that mints the gold.  A 7 year long multi-disciplinary research led by Akiba Mashinani Trust (AMT) and Slum Dwellers International (SDI – Kenya) [4] revealed that though the cost of housing and basic services seems low in price terms, it turns out to be more expensive than that of formal housing residents in Nairobi at a per unit consumption level. This is termed as the “poverty penalty” – the higher price the slum dweller pays for lower quality services.[5]. Simply put, a Nairobi slum dweller pays more for water (Actually three times more) than a Kilimani resident.

Basic Service	Rent	Water	Electricity
Units	Square metre	Cubic metre	Kilowatt hours
Average monthly Consumption (KES)	9.00	1.80	43.20
Average monthly cost in Mukuru (KES)	1,979.00	433.44	434.45
Cost per unit (KES)	219.89	240.80	10.06
Formal Cost per unit (KES)	185.00	55.00	4.40
Estimated price penalty	18.86%	337.82%	128.56%

Table 1: Estimated price penalty on basic service provision in Mukuru per unit of supply [6]

Looking at it in terms of real estate investment, the same narrative plays out. Despite the limitations on quality and illegality of informal settlement solutions, slum real estate in Kenya today is highly profitable with a payback period 2. 5 times faster than a formal housing unit in Nairobi on a “Build to Rent” model^.[7]

Feature	Mukuru	Kilimani
Type	1 room	2 bdrm 2 bath
Average size of unit (SQM)	9.00	100.00
Purchase price (KES)	80,000.00	8,100,000.00
Price per SQM (KES)	8,888.89	81,000.00
Rental (est.) (KES)	2,000.00	80,000.00
Payback period	40.00	101.25
5 year implied yield	17.27%	-18.95%

Table 2: Nairobi housing economics. A comparison of economic value of “build to rent” models in Mukuru – a low income informal settlement and Kilimani – an upper market formal area

The mirror term of the Poverty Penalty is the Poverty Premium. By paying a higher price, essentially the urban poor have demonstrated the ability to pay for the formally provided basic services. This is an important lens in thinking about sustainable solutions for slum upgrading programs. 

Nairobi’s slum narrative is starkly different from many. Over 90% of slum residents are tenants paying rent to structure owners who seldom own the land on which the structure is constructed. With high mobility and short-term residency for a majority of its dwellers, slums become a sort of transitory dormitory to other slums or formal housing. The abysmal conditions have been well documented with government upgrading plans often falling below 5% coverage of households to have any impact on overall conditions. Oftentimes, Governments think of subsidy affordability strategies and pay–to–own housing paradigm. However, if the numbers are anything to go by, slum dwellers have demonstrated the ability to pay for basic services at normal rates, and private real estate investors make a good return on investment. The problem is then not so much a money issue on making low-income housing affordable but a regulation and policy issue of how to ensure minimum standards of adequate housing are adhered to by service providers. 

Mary Wanza Mutinda was the Finance team leader in the IDRC funded Research project: “Unlocking the Poverty Penalty and Upscaling the Respect for Rights in Kenya’s Informal Settlements”

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