Competition in the property and mortgage financing segment is set to heat up following regulatory approval of Housing Finance's Sh10 billion bond offering.

The mortgage financier is set to tap the local debt markets next month for the extra cash to build its property and mortgage financing muscle as lenders bulk up to ride the country's robust real estate market.

Since raising Sh12.5 billion in additional capital, KCB Bank has embarked on an aggressive marketing campaign as it seeks to sweat out its enviable capital position through the financing of huge property development projects.

According to HF's Managing Director Frank Ireri, the medium term note programme is part of its plan to source long term funding to bolster its business through mortgages and property financing.

"The approval and consequent listing will provide the requisite finance for Housing Finance to play an integral role in boosting the available supply of units with a number of major projects already in the pipeline" said Mr Ireri.

In the press statement released on Tuesday, Mr Ireri said HF would be playing an indirect role in the supply of these additional units by financing project developers sponsoring the initiatives.

The recent success of CBK's Sh31 billion infrastructure bond --the largest and at six per cent the cheapest todate-- proved to be positive litmus test for the possible reception of the HF bond and a pricing benchmark for the offer.

The CBK raised Sh30.6 billion from the issue as investors bid 1.29 per cent above the offered six per cent coupon rate.

Although details on the pricing of the bond are yet to be finalised, it is expected that the HF bond will use the CBK offer as a blueprint for its pricing model.

The medium term note is expected to have a tenor of between two to seven years and will feature both a fixed rate bond and a floating rate bond.

HF had earlier attempted to have the bond classified as an infrastructure one to qualify for exemptions such as the five per cent withholding that is enjoyed by infrastructure bonds.

The HF can almost be guaranteed success as interest rates hover at record lows and the liquid economy short of new investments.

For HF, the plan to source for long-term funds will allow the firm to match its asset with liabilities, hence providing cover for any potential risks of exposure.

The firm recorded a 53.5 per cent rise in half year earnings from Sh92 million in the first half of 2009 to Sh141 million in the first half of this year.

HF's earnings were driven by Sh1 billion in interest income from loans and advances to customers which raced by 46.2 per cent from Sh703 million in the first half of last year.

HF has in the past been unable to mobilise the level of deposits that it has the potential to.

Deposits grew by 46 per cent from Sh11.2 billion in June, last year, to Sh16.4 billion in the first half of this year, with firm mobilising deposits at a slightly more expensive rate.

HF's cost of funds was up from 2.3 per cent to 2.4 per cent in the first half of this year, meaning the mortgage financier needs to up the tempo with its retail strategy.

But the high demand for housing in Kenya's urban areas is making real estate industry a lucrative venture as better incomes among the middle class kindles the desire for home ownership.

The high returns arising from increasing property prices as well as high rental income from the sector have encouraged more investment, with the current payback period having significantly dropped from an average of 13 years about 10 years ago to the current 8.5 years, according to industry statistics.

Investment bankers say this could be a viable avenue to solve the housing problem, but are quick to point out that the individual company's financial strength determines the financing options that are available to the company.

The annual demand for houses is currently estimated at 150,000 units whereas the market can only supply 30,000 units, creating a shortfall of 120,000 units each year.