The High Cost Of Construction Materials: Why Kenya’s Housing Projects Are Slowing Down

The High Cost Of Construction Materials: Why Kenya’s Housing Projects Are Slowing Down

The housing industry in Kenya has been in stress in an attempt to support the needs of the fast growing population and increased urbanization. As big cities grow and new cities develop, the demand of affordable and quality housing has never been greater. Housing projects by the government and the private sector have been geared towards closing the housing gap, but the developments have been slow than expected. The increasing prices of construction materials are some of the greatest factors that have led to this slowdown.

The housing project consists of construction materials as its foundation. The cement, steel, timber, roofing materials, tiles, glass, plumbing, electrical, and finishing products are all necessary in assessing the total cost of the building. The developers experience increased financial strain when prices of these inputs shoot up. Projects are postponed, reduced in size or terminated in most instances.

Increasing cost of materials does not only impact on developers but also on homebuyers, contractors, suppliers and financial institutions. The rise in the cost of projects means that the housing prices have increased and ordinary Kenyans will no longer be able to afford to own homes. Simultaneously, the housing projects cannot be planned and have their budgets because of unpredictable changes in prices.

The high prices of the construction materials in Kenya are caused by a number of factors such as disruption in the global supply chain, reliance on imports, currency fluctuations, taxation, cost of energy, and local production restrictions. All these interrelated issues make the environment a complex one which is inhibiting faster housing development in the country.

This blog delves deeper into understanding the reasons why Kenya has been experiencing a slow pace of housing projects because of high cost of construction materials, the economic, structural, and policy aspects of this matter and the implications of the same to the housing sector at large.

Global Supply Chain Disruptions and Import Dependency

The reliance on imported construction materials and vulnerability to disruptions in the global supply chain is one of the key factors that make construction materials in Kenya very expensive. Despite the fact that Kenya manufactures some of its construction materials domestically, a number of the key materials, including the specialized steel products, machines, finishing materials, and some chemicals, are obtained in the international markets.

The effects of the global supply chains are felt almost immediately when they are disrupted in the local markets. The availability of raw materials and the costs of transportation can be decreased due to such events as pandemics, geopolitical conflicts, shipping bottlenecks, and trade restrictions. Delay in shipping, lack of containers and increased freight rates are some of the factors that make imports costly.

Since Kenyon imports majority of her products through maritime transport, changes in the world shipping rates have a great impact on the construction costs. Increase in freight costs is translated to the supply chain by importers to wholesalers, retailers and finally to developers. The end result of this chain reaction is the inflation of the housing projects.

The issue is also aggravated by currency volatility. The depreciation of the Kenyan shillings against the major currencies in the world increases the costs of imported materials. The amount of money developers spend on the equivalent amount of materials goes up in the local currency which tops up the total cost of projects.

Construction costs are also influenced by the global commodity price changes. International prices of steel and cement may be increased because of the demand in the global level or limited production. Given that Kenya is an importer of some grades of steel and other specialized materials, the local developers still are at the mercy of the world market.

Such external shocks bring uncertainty about project budgeting. Estimates of costs are made by developers months before construction commences. Financial projections may however be broken by sudden increases in prices that necessitate contract renegotiation, postponement of procurement, or acquisition of extra financing by the developers.

Therefore, the housing sector in Kenya is vulnerable to global economic uncertainties due to imports of construction inputs in Kenya. Increased local production and diversification of the supply chain would reduce the dependency on imports, and stabilize material prices and provide a stable housing development.

Rising Energy Costs and Their Impact on Local Manufacturing

Construction materials are largely involved with energy. The manufacturing of cement, and processing of steel and bricks, among other building materials, use a lot of electricity and fuel. In Kenya, the increased cost of energy has also made a huge contribution on the increased material prices.

The cost of electricity and fuel prices affect the costs of operations of manufacturers. Increase in the cost of electricity leads to increased cost of production in the factories. On the same note, the volatility in world oil prices has the direct impact on transportation and manufacturing processes that are oil-consuming.

An example is the use of cement which is highly energy consuming. It consists of heating raw materials in enormous high temperatures using kilns that are fuelled by fuel or electricity. Any rise in the cost of energy will raise the cost of production which will be transferred to the market price of cement bags.

Energy is also highly required in steel manufacturing and processing. To import scrap metal, melt, refine and roll steel bars, there must be a constant source of power and consumption of fuel. In case the price of energy increases or supply is no longer reliable, then the cost of production increases.

The effect is further contributed by the cost of transportation. The construction materials should be moved either in ports or factories to the building sites. There is an escalation of fuel prices, which raises costs of logistics particularly the heavy materials such as cement and steel. Most areas far away the manufacturing centers may lead to a high cost of transportation which may form a large part of the final price of the material.

Local manufacturing is also not encouraged due to energy related issues. Manufacturers have low profit margins because of high operating costs that restrict growth and innovation. Kenya is still import based, and this ensures that the high costs of materials are further perpetuated without competition in local production.

Costs of production could be cut by addressing the issue of energy inefficiency, increasing the usage of renewable forms of energy and stabilizing the cost of fuels. Reduced energy costs would bring the locally produced materials cheaper, serving the housing construction nationwide.

Policies and Regulatory Costs of Taxation.

There are the taxation and regulatory frameworks that have a huge impact on the prices of construction materials. Value added taxes (VAT), levies, and taxes charged on raw materials and finished goods are imported duties, excise taxes, and other taxes that have a direct market impact on prices.

Some of the construction inputs are imported at a certain duty that is meant to safeguard local industries. Although these kinds of policies are meant to promote manufacturing at home, it might also represent a cost when the local manufacturing facilities are not able to produce enough to match demand.

The retail prices increase because of VAT charge on building materials. The developers who buy in bulk in terms of materials have to include these taxes in their project budgets. Although the cash flow amount can be a burden in construction stages even with recoverable VAT in some instances.

There is also the regulatory compliance costs which add to the price. To manufacture and import products, manufacturers and importers should comply with quality standards, licensing, inspections, and certification. Although quality control is necessary in safety and durability, compliance cost may increase the cost of production.

It can take long to get the materials imported or distributed due to the lengthy approval process and bureaucratic inefficiency. The delays translate into storage expenses, port demurrage expenses, and penalties in the contract all which are ultimately absorbed in inflated prices.

Constant changes in policies bring about uncertainty in the market. Unexpected changes in the tax rates or regulatory norms disorient the supply chains and make the long-term planning more unsuccessful. The policy risks are potential and have to be included in the budgets of developers, which leads to higher contingencies in the projects.

There should be a moderate policy approach towards promoting local output at affordable levels. The simplification of the regulatory procedures, examination of the tax schemes, and the stability of the policies may decrease the material costs and contribute to the development of the housing.

Inflation, Currency Depreciation and Economic Pressures.

Inflation and currency depreciation all are macroeconomic factors that have major effects on the cost of construction materials. Inflation increases the overall price in the economy which impacts on the raw materials, labor, transportation and manufacturing inputs.

Increases in inflation lead to a response by the suppliers to preserve the profit margin. The developers have to deal with rising costs of materials, salaries and services. Projects even in progression would be affected by the increasing costs and might need changes to the budget.

The situation is worsened by the depreciation of currency. The lower Kenyan shilling makes imported materials costly. Their financial uncertainty is due to fluctuations in exchange rates since most of the construction inputs are foreign currency transactions.

There are also high costs of financing due to high inflation and currency instability. When developers borrow more funds to finance more material prices, there is a likelihood that they will incur high-interest rates. This may make it very expensive in terms of money to undertake a project that will not be viable.

Long term investment in housing is not encouraged by economic instability. Developers can wait until the economy stabilizes until the money supply is slowed down and shortages are worsened. It is now important to maintain the macroeconomic stability in order to regulate the cost of construction. A more predictable environment to the housing development can be brought about by sound fiscal policies, stable exchange rates and inflation management.

Limited Local Production Capacity and Market Concentration

The nature of construction materials business in Kenya is characterized by structural issues, whose major cause is the low capacity to produce and the existence of high market concentration. In some of the industry segments, just a few manufacturers control the supply, and thus the situation is characterized by minimal competition and price dynamics that these competitors have a key role to play. When a small number of companies monopolize the production process, the competition in the market decreases, and the necessity to maintain the prices at the competitive level is also minimized.

Such low competition may also result in an immediate response to price adjustments in regards to rise in the cost of raw materials because the manufacturers with high market power can avoid imposing extra costs on consumers as they can readily transfer extra costs to consumers without a lot of opposition.

Additionally, the non-competitiveness has a wider implication in other aspects other than price. The companies in highly concentrated markets are not always motivated to invest in innovation or operational efficiency. With competitive environment, the firms are compelled to embrace new technology, optimize their production processes, and produce products that are of a better quality in order to retain or increase their market share. Nevertheless, when a small number of actors control the market, having little incentive to be innovative and efficient is likely since they can be relatively safe in their market even without making any improvements. This has the potential to drag back the total industry development and lessen the supply of sophisticated construction solutions at an affordable cost.

The other issue that is critical to the market is the lack of enough production capacity to cater the increased demand. Urbanization and the development of infrastructure has been so fast in Kenya leading to a high demand of construction materials like cement, steel and aggregates. In the event that the production capacity falls behind this increasing demand, shortages are created and this exerts pressure on prices upwards.

The limited availability in the supply chain will be an engine towards increasing cost, especially in the regions that have rapid development. This is made worse by the fact that when the availability of raw materials or finished goods is not easily increased as a result of the logistical factors, high production costs, or investment in extra production facilities.

Prices become more vulnerable to changes depending on the cost of inputs and the lack of supply, and innovation and efficiency benefits are restricted. With the constant rise of demand, and the subsequent development of infrastructures as a result of urbanization, it is important to control such structural problems to stabilize prices, ensure a more reliable supply, and create a more dynamic and competitive industry.

The costs of investment in manufacturing facilities are high. Risks in the uncertain demand, regulatory risks and high operating costs may discourage expansion. It still depends on imports due to the lack of local capacity, which puts the market at risk of global volatility. Probably by promoting competition, encouragement of small and medium manufacturers, and investment in the industrial development, the supply can be increased and the prices stabilized.

The Impact on Housing Affordability and Project Timelines

The overall impact of expensive construction materials is slow development of housing and affordability. The developers who encounter increased costs tend to raise the prices of their properties to make profit. The increased selling prices make the homes unaffordable to a large number of prospective buyers.

Budgets of some projects are overrun and lead to delays or even suspension. Contractors can renegotiate contracts or stop the construction until prices stabilize. All this type of delay interferes with the supply of housing as well as bringing in doubt in the market.

Housing programs are a weak one especially those that are affordable. These projects are run on thin margins and attract price sensitive consumers. The viability of the latter can be compromised due to high cost increments. Finally, the material costs are high thus reducing the rate at which housing is delivered, increasing the lack of housing and frustrating the prospects of urban development.

Conclusion

Construction materials are relatively expensive and this is one of the reasons that the housing projects in Kenya have become sluggish. International supply chain interference, energy expenses, taxes, inflation, currency devaluation, constrained production volume, industry consolidation are all incorporating to the upsurge in prices.

These issues are escalating the cost of projects, construction schedule, and affordability of houses. The solution to the problem lies in the concerted policy changes, local manufacturing investment, stabilization of energy prices, regulation simplification, and macroeconomic stability.

The Kenya can focus on the underlying causes of inflation in material prices and hasten the development of housing, increase affordability and get closer to having no housing deficit. However, when the housing projects are sustainable, it will mean that they will be conducted effectively to help in economic development and social stability in the coming years.

Also Read: Affordable Housing in Kenya - A Case Study of Policy on Informal Settlements