Solving the Middle Income Housing Challenge in Nairobi

A 2018 report by Kenya Property Developers Association (KPDA) shows 22% of Kenyans live in cities, and the urban population is growing at a rate of 4.2% every year. It is estimated that the current housing deficit stands at 2 million houses with nearly 61% of urban households living in slums. This deficit continues to rise due to fundamental constraints on both the demand and supply side and is exacerbated by an urbanization rate of 4.2%, equivalent to 0.5 million new city dwellers every year.

With this level of growth, Kenya requires approximately 200,000 new housing units annually to meet demand, yet only 50,000 homes are built, leaving the housing deficit growing by 150,000 units per year. As a result of this mismatched supply and demand, housing prices have increased by 100% since 2004.

The government of Kenya, through its Big 4 Agenda, outlined a plan for affordable housing which has led to development of some 19,282 units in Nairobi county. These projects include:

  • Ngara (2,720 units)
  • Pangani (1,562 units)
  • Mukuru Enterprise Road (15,000)

Traditionally, most private investors have gravitated towards building housing for high end regions in Nairobi like Kileleshwa, Lavington, Kilimani, thereby neglecting accommodation targeted at the middle income earners. Most developers targeting middle income earners (middle income housing) have resorted to construction out of the city centres in areas like Ruaka, Ruiru, Athi River, and Ngong.

Increasing Demand for Middle Income Housing

In 2019, the demand for Middle Income Housing in Nairobi was estimated to reach 18,000 units. This is expected to grow at a 5.4% Compound Annual Growth Rate to reach 23,400 units by 2024. Averagely, 11,500 households will join the middle income housing segment each year until 2024, driving the demand for housing in this segment.

Although this research commissioned by Actis estimates only an average of 3,000 new middle income housing units will be supplied annualy in the next 4 years, the forecasted supply is largely concentrated within areas such as Kilimani, Westlands, Lavington, Parklands, and Kileleshwa. This, in the long run, will cause congestion in these areas thus decreasing their attractiveness.

The country enjoys an oversupply of high-end housing, yet there is increasing demand from potential homebuyers in the middle income housing market segment. Based on the Compound Annual Growth Rate (CAGR) data for the period 2019-2024, the middle-income population in Nairobi is forecast to increase by 5.6% to reach 250,000 households by 2024.

Challenges Facing Middle Income Housing

If there is growing demand for middle income housing in Nairobi, then why are most developers still shying away from this segment? In our research we found a number of challenges that have resulted in this.

1. Income Levels

Most people in formal employment in Kenya earn a gross income of less than KSh100,000. This means they won’t be able to access mortgages or formal financial assistance to acquire these housing facilities. Mortgages are difficult to obtain for the average Kenyan household, given mortgages are short term in duration, making them expensive, and that they require formal employment. In addition, the process to obtain a mortgage can take significant time and funds are not release until the titling process is complete.

According to the Central Bank of Kenya’s Bank Supervision Annual Report 2020, the residential mortgage market recorded a 3.7% decline in the number of mortgage loans accounts, to 26,971 in December 2020, from 27,993 in December 2019. Mortgage access and penetration in the country still remains low mainly due to low-income levels that cannot service the high mortgage initial deposits and subsequent instalment payments.

2. High Construction Costs

Exorbitant land prices have led to increased development costs as land costs account for 25.0% – 40.0% of development costs in urban areas. The average cost of construction in Kenya ranges from KSh34,650 per square metre to about KSh77,500 per square metre.

3. Inadequate Supply of Development Land

There is an inadequate supply of serviced land ready for development in most locations around the country. When available, this land is expensive especially in urban areas like Nairobi Metropolitan Area. Most of the land owners are also not willing to sell off land as they await long term price appreciation while others generally feel the need to maintain their ancestral land.

4. Inefficient Titling Processes

According to the 2017 Doing Business Survey, Kenya has a ranking of 121 out of 190 with respect to property registration. It takes 9 procedures and an average of 61 days to register property in Kenya. The registration process is further complicated by devolution with different counties showing different levels of efficiency.

5. Absence of Infrastructure & Proper Urban Planning

Few urban centres have implementable urban development plans and a large number of land parcels are unserviced, forcing developers to incur an additional infrastructure cost when constructing. Average land and infrastructure cost in Kenya makes up 10% to 35% of the total cost of development.

6. Adverse Construction Finance Terms

Construction finance loans are challenging for developers to obtain, particularly since the interest rate cap and the bank’s investment in government securities. Developers incur high financing costs during the period and consequently price this cost in when selling property.

7. High Incidental Costs

There are hidden cost in real estate development, including an additional 6% needs to be added to the unit cost for incidentals, including stamp duty, legal fees and valuation fees, or facilitation fees.

Because of these challenges, most developers are forced to put up their own infrastructure to attract customers but they are happy to pass the costs incurred to the end user by selling houses at higher prices.


The gap between demand and supply of middle income housing that is within Nairobi is ever increasing. To address this issue, both the government and private sector need to work together to help incentivize construction companies to build homes for the middle income earners as well as enable customers to be able to purchase these homes.

Some interventions that can be put in place include:

  • Government incentives for companies building middle income housing
  • Financing via banks and the Kenya Mortgage Refinance Company
  • Flexible payment plans

See Also:

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