Forex volatility, inflation slow construction boom

By Morris Aron

The recent foreign exchange volatility and runaway inflation has led to a rise in the cost of construction.

This is the verdict of a number of mortgage financiers, property dealers and real estate analysts who spoke to the Financial Journal on their forecasts for the real estate sector in coming months.

Speaking to journalists at a recent workshop to chat out the underlying issues in the real estate sector, Housing Finance (HF) Managing Director Frank Ireri said there was concern on the increase in costs on real estate projects currently underway.

"Exchange rates is a worrying trend as we are an import oriented economy," said Ireri.

"In the short-term, the cost of materials has gone up and this means an increase in the cost of construction."

Gone up

Similar sentiments were echoed by Housing Finance’s market rival, Kenya Commercial Bank and paint manufacturer Basco paints.

"The cost of construction materials has gone up considerably, especially imported material, and this is likely to lead to increased housing costs," said Joram Kiarie, KCB director of mortgage business.

The two mortgage companies that control up to 80 per cent of the mortgage business said that since inflation and the shilling rally began, construction costs have gone up by up to 40 per cent.

The two mortgage companies that control up to 80 percent of the mortgage business said that since the inflation and shilling rally began, construction costs have gone up in some up to 40 per cent.

Worst affected by the fall of the shilling and the rising inflation include materials for finishing a house that are normally imported.

Basco Paint Managing Director Kamlesh Shah said that while he expected the shilling free-fall to ease in the coming weeks, a dent to paint prices is slowly wafting through.

"The current exchange rate is causing a lot of concern in the industry," said Shah.

Unlike Kenya Commercial Bank that said it may be forced to review its interest rates, HF said that it will not increase its interest charged on mortgages but was keenly following the developments of the shilling.

"We are watching the market to see how dynamics change. For now our rates are still in the range of 14 to 15 per cent," said Kiarie. KCB controls up to 30 per cent of the mortgage market.

But as costs rise and mortgage financiers contemplate an increase in interest rates, developers are looking for ways to shield themselves from the rising costs.

Reports indicate that a number of developers are slowing down their projects as they wait to see where the shilling will finally settle.

Also there is an increase in the number of developers who are seeking fixed contracts with developers to lock in costs.

"We have seen a number of developers opt for fixed price contracts in a bid to escape the escalating costs of building imports while there are some who have opted to adopt a wait and see attitude," said Ireri.