It costs more to live in Mukuru than Kilimani!

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

naipolitans_mukuruImage 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 rents to structure owners who seldom own the land that the structure is constructed on. 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 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”


[1] KNBS. (2018). Basic Report. Kenya Integrated household budget survey 2015/6. Nairobi: Kenya National Bureau of Statistics.

[2] In the Housing and Sustainable Development (HABITAT III) Conference, UNHABITAT defined adequate housing as: measures that provide for habitability (protection from natural elements, hazards, and disease), access to basic services (including to water, sanitation, lighting, electricity, and garbage disposal), legal right to secure tenure (including compliance with a continuum of land rights, promotion of gender-equal land rights, and prohibition of housing discrimination and forced eviction); 
http://habitat3.org/wp-content/uploads/Habitat%20III%20Policy%20Paper%2010.pdf.


[4] This covered two IDRC funded projects: 1) Improving Access to Justice and Basic Services in the Informal Settlements of Nairobi 2013 – 2015 and 2) Unlocking the Poverty Penalty and Upscaling the Respect for Rights in Kenya’s Informal Settlement 2016 – 2019 


[5] See also (Mutinda & Otieno, 2015) (Gulyani & Talukdar, 2008) (Mendoza, 2011)


[6] Service provision small independent and unregulated service providers were initially driven by need but are now institutionalizing informally into cartels


[7] The economic valuation ignores the value of home ownership after purchase of the formal unit. It also assumes there are no associated mortgage costs.

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