Financial Viability

Residual Land Value Analysis

Given the developments proposed in the master-plan, residual land value analyses for prototype developments were undertaken. Residual land value models are useful in testing feasibility and determining residual values for land subjected to Land Value Capture requirements. The residual values reflect how much private developers would be willing to pay for land in order to meet Inclusionary Housing requirements and achieve development feasibility taking into account a target rate of return and development risk.

Residual land value analyses enable determination of applicable number of affordable units of different affordability levels to be required, the market units attainable and the density and the floor area ratio (FAR) to be awarded to enable financial feasibility of the development. In this stage, the impact of a range of proposed development requirements on the residual land value for each development prototype was modelled. In implementing this model, the importance of sharing with developers the residual land value analyses cannot be overemphasized. It is proposed that concurrently with sharing the analyses, the government would invite developers to bid for the land with first priority going to the structure owners. Successful bidders would then be allocated the land and granted leases with stringent grant conditions.

1.The first condition or requirement should be payment of a premium to be treated as impact fees for developing (i) temporary accommodation for the slum dwellers during construction and by developing (ii) infrastructure such as access roads, walking paths and pavements within the immediate neighbourhoods. The main arterial infrastructure has already been developed under the Kenya Slum Upgrading Project. In order to protect the fund paid as impact fees, the government needs to dedicate a special kitty managed by an independent authority which would also monitor compliance with the lease conditions.

2.Secondly, successful bidders would be required to develop affordable housing through ‘inclusionary housing’ policy which requires the developer to accommodate at the existing or affordable rent the slum dwellers who would be displaced by the upgrading but also include some market rate units to recoup their investment. In this way, land value is captured for the common good by ensuring provision of affordable units at no cost to the government.

3.Lastly, it will be important for the developers to be compelled to develop the land within a certain period not exceeding two years. Should any allottee/developer fail to meet the conditions of the grant, the land should revert to the county or national government and be re-allocated as per the provisions of the Land Act Section 14.

Prototype 1

The prototype incorporates a seven-storey plus rooftop development with 43 units (3 shops and 40 residential units). Since most Kibera residents work in the informal sector, provision of shops in some of these developments will be instrumental in supporting livelihoods. Two of the shops are proposed to be available at affordable rent to Kibera residents and one to be offered at market rent/price. Out of the 40 residential units, 12 units are proposed to be affordable and 28 units are proposed to be market rate units.

Prototype 2

 

Prototype 2 also incorporates a seven-storey plus rooftop development with 42 residential units. Out of the 42 residential units, 12 units are proposed to be affordable and 30 units are proposed be market rate units. Prototypes 1 and 2 results into 27.9% and 28.6% respectively of the residential units within the prototype developments being affordable and being fully funded by the private developers and hence the market. This also translates into a 27.9% and 28.6% inclusivity (mix of different income groups) if inclusion is measured by the proportion of affordable units within upgraded developments.

To undertake the residual land value analyses, data from various sources was used in order to derive the expected revenues from the finished units and the associated costs of production. To arrive at market values adopted, we undertook market analyses of sales of similar housing in neighbouring estates including Kibera highrise estate, Nairobi dam estate, NHC langata housing estate, Karanja and Olympic Estates. Based on the prevailing rents in Kibera, our analyses indicate that affordable prices/rents would be approximately 25% to 30% of the market prices/rents. The housing units for Soweto East Zone A under Kenya Slum Upgrading Project were priced at approximately 40% of the Market values.