NSSF PLAYING IN A SMAL POND

In recent weeks NSSF has been showing off the real estate developments they are involved in.

Residential estates in Lubowa and Temangolo, which will bring more than 7,000 housing units to the market – 2,417 and 5,000 respectively over the next few years, are bound to change the housing market irreversibly. Their initiative to have a rent-to-own model, with longer tenures with comparable offers, should send shockwaves through the industry.

As it is now most homeowners go through the arduous process of building their homes brick by brick, literally, years after the start of the build occupy it when it is half done (which is illegal) and put in the finishing touches at leisure.

We build our houses like this because we can. Enforcement of the building code is lax. Also because we cannot afford to buy our own houses, mortgage terms are too onerous and anyway there were not enough houses to buy.

You can see why the NSSF estates become a more attractive proposition, their seemingly high prices notwithstanding. At the Lubowa estates entry price is $150,000 (sh570m).  NSSF management argues that the additional cost of laying down infrastructure – roads, water and electricity, is the reason the prices cannot be lower.

But one has to wonder too, what is NSSF doing building houses?

In an ideal world NSSF with its mountains of cash should be funding developers to build, but not itself building. They should stick to their expertise, which is collecting money and investing it. Some would even argue that it should even outsource the investment function.

NSSF finds itself with two problems. The first is that it has too much money. A nice problem to have. The Fund is the biggest in the region with assets under management of sh17.2trillion. This too much money is a problem because NSSF needs to pay its members annual interest.

While by law they can get away with paying interest of 2.5 percent, the management has committed to paying two percentage points above the 10-year inflation average. This year they posted an underwhelming 9.65% down from 12.15% last year. Us members used to double digit interest for more than a decad,e have been spoilt rotten.

In the same week NSSF Kenyan counterpart reported they would be paying 10% to their members the highest in the last seven years they have ever paid out.

NSSF’s real estate portfolio -- 7% is dwarfed by the 78% committed to fixed income portfolio. NSSF is the biggest uptaker of government paper. But arguably this honey moon may not last. Government could lose its borrowing appetite or that appetite not grow as fast as NSSF’s need to fix money. Hence one of NSSF’s motivation to move into alternative investments, as its ability to invest outside the region is restricted.

 

Secondly, the natural partners for NSSF, are the National Housing Construction Corporation (NHCC). NHCC have already played their part in the Lubowa project. The land on which the project stands was surrendered to NSSF for monies it owed the Fund.

In an ideal world NSSF would have an equity stake in NHCC as a way to bring building costs down. NHCC borrowing from NSSF to build would just increase the price. The first phase at Lubowa estate, which is 10% of total project cost, cost $73.3m.  

NHCC financial statements are hard to come by, but in 2011 NHCC had assets of $70m. Assuming the asset base has doubled in the interim, NSSF would have to take over NHCC and add even more equity to finish Lubowa...

The truth is NSSF is playing in a really small pool compared to its potential.

Next to government it has the best business model of any company. It mobilises savings from many people with a promise to keep this safe, with interest, ready for one when they retire. As such they are the biggest pool of long-term savings in the country. Stanbic Bank at the end of last year had savings of just over sh6trillion, mostly short-term deposits, about a third of NSSF’s war chest.

So it needs partners of comparable heft in order to deliver a quality, affordable product to the public.

Which leaves the government. For starters the government would do well to underwrite the infrastructure costs on these developments. NSSF boss Richard Byarugaba suggested at the Annual Members Meeting that this would easily lope off 30 percent of the cost of the project, a savings they would happily pass on to their members.

NSSF through no fault of its own, and its struggle to show a return to its members, is exposing the glaring deficiencies in the real estate industry. Government will be well served if it took note.