Auctions, poor sales dampen once vibrant property market

After years of spiralling property prices, activity in the country’s real estate sector is slowing to a near-grinding halt.

Experts and players told Real Estate that a combination of factors are subduing what has been one of the region’s best-performing and most attractive property markets for the past few years.

They are warning that a sharp rise in interest rates - which has lifted borrowing costs - coupled with economic and political uncertainty is encouraging cutting costs or saving over spending on buying property and homes, hitting the sector hard.

“The growth for the last five years has been phenomenal but in the end, you just can’t expect the market to keep on climbing like that with the ongoing credit crunch and economic slowdown,” said Njoroge Magu, a Kiambu-based real estate agent. Players say the uncertainty surrounding the political situation and economic slowdown are dissuading potential homebuyers from making the decision to buy as they wait to see the end to the uncertainty.

“All the uncertainties surrounding the political situation are being used as a good excuse to pare down buying activity,” Mr Magu says.

Perfect storm

“There is also a perfect storm of interest rate rises and economic slow down that is putting off potential investors from tapping new loans to acquire property.”

After years of accumulating wealth and easy money, Kenya’s middle class - who have been dominant in snapping up property which for the longest time has been considered a safe asset - are now, just like other low-income groups, also stressed out about money. 

Biting inflation, job losses, a bank lending slowdown and prolonged political uncertainty are creating a growing pool of distressed borrowers whose assets are being seized by the day by aggressive lenders. Banks have stepped up debt recovery efforts to clean up their loan books, leading to a spike in property seizures.

In recent months just as over the last few years, thousands of Kenyans have lost their homes and cars to repossessions.

It’s the sad reality of the ongoing financial crisis, experts say.

Auctioneers have held more auctions in the last three years linked to rising loan defaults.

There has notably been a glut on the market of repossessed homes and office blocks as well as property, including cars, according to Joseph Gikonyo, the managing director of Garam Auctioneers.

“That has been the case for the last three years,” he said in an earlier interview pointing to the dozens of notices of auctions placed by his company and many others in local dailies.

All sectors of the economy are currently grappling with escalating costs of raw materials and soft demand as rising prices of final products hit consumers’ spending power.

Economists’ biggest worry is that Kenyans could further clamp down on spending as prices and taxes increase, throttling the economy’s largest source of momentum and potentially triggering a recession.

The African Development Bank (AfDB) warned earlier that African countries like Kenya risk sliding into stagflation — a cycle of slow growth and high inflation — as they battle the lingering effects of rising fuel and food prices caused by the Ukraine-Russia conflict.

“The deceleration in growth highlights the severity of the impact of the Russia–Ukraine conflict on Africa’s economy,” the AfDB wrote in its 2022 African Economic Outlook.

The bank is due to release its regular economic updates for Kenya this week.

A spot check by Real Estate shows the share of loan defaults has increased to a fresh high, pointing to a cash crunch in the economy that will continue setting up thousands of borrowers for property seizures.

The mounting defaults are a reflection of the struggles that Kenyans are undergoing in an economy marked by a string of job losses in recent months across nearly all sectors as corporates intensify austerity measures to protect profits.

Non-performing loans 

CBK said earlier that non-performing loans (NPLs) - borrowed money whose scheduled payments have not been made by the debtor for a period of time, usually 90 or 180 days - are mainly in the building, construction and manufacturing sectors.

This is as firms and individuals who had taken new loans on the strength of increasing cash flow with the reopening of the economy struggle to service their loans.

The real estate sector is also a victim of the loss of income among households and businesses as a result of the lingering economic effects of the coronavirus pandemic, with owners of land and developed properties taking longer to sell their assets or contend with lower asking prices. Bank credit, formerly easily available, is expected to dry up, compounding the economic crisis.

The CBK last month issued the highest key lending rate hike in seven years, raising the benchmark rate by 100 basis points from 9.5 per cent to 10.50 per cent. 

The rate hike left borrowers staring at a big jump in their monthly loan repayments.

This could translate into banks tightening their lending standards. 

The tightening of liquidity is expected to limit access to credit for individuals and companies.

A slowdown in lending could deny the economy new investments and threaten the projected domestic output target of nearly six per cent this year.

Kenya’s economy is expected to expand by 5.8 per cent in 2023, a slower pace than the previously forecast 6.1 per cent because of lower growth in the agricultural sector, officials said earlier.