Banks uneasy with real estate

Modern residential buildings, apartments in a new urban housing
The real estate sector is limping. Developers are struggling to offload new units, and as a result, many have a hard time servicing loans taken for development.

This, compounded by a lending regime that makes lending to the private sector too risky, has served to make an industry touted as one of the best performing one of the riskiest for lenders. Stories of houses and even entire estates being auctioned are common. As are stories of disputes between developers and lenders.

While many blame the interest rate cap introduced in 2016 — to ostensibly stimulate access to credit, developers have pointed an accusing finger at banks for ignoring their need for funds in favour of doing business with the government.

Mwenda Thuranira, CEO of Myspace Properties in Mombasa says lack of credit from financial institutions is having a negative effect on the economy since the buyer, who is a development’s end user cannot access credit owing to the choking regulatory regime.

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“Lack of credit on the part of the buyer has complicated matters for developers. If they are not buying, that means the developers cannot have enough cash for redevelopment,” he says. Thuranira adds that the notion that real estate is riskier than other segments of the economy are farfetched.

“Banks feel trading with the government has fewer risks. However, as a developer, I am dealing with a tangible item. A home is more dependable for collateral. It will not move and will only increase in value. It is much better to deal with a developer that someone selling cars whose value depreciates by the minute,” says Thuranira.

Two reports authored last year point to an increasing appetite for credit by the government, elbowing out the private sector. In December 2017, the World Bank released the Kenya Economic Update that, among other things, lays bare the effect of banks’ lending to the government.

According to the report, private sector credit growth has been on a consistent downward trend since the second half of 2015, falling from a peak of 25 per cent in mid-2014 to 1.6 per cent in August 2017 — its lowest level in over a decade.

The report adds that with the risk-free 364-day treasury bills and five-year government bonds trading at about 11 percent and 12.5 per cent respectively, “prices out several borrowers and encourages investment in government securities at the expense of lending to the private sector.”

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 “Credit to the government has increased significantly even as credit to the private sector continues to fall. So far (in 2017), growth in credit to the government has averaged about 15 per cent compared to the 2.3 percent to the private sector,” states the report.

This period also saw an increase in non-performing loans. The Central Bank’s Quarterly Economic Review covering the first three months of 2016 stated that real estate had emerged as the biggest culprit when it came to piling up non-performing loans (NPLs) on the lenders’ books. NPLs, according to Central Bank, increased by 15.8 per cent from Sh147.3 billion in December 2015 to Sh170.6 billion in March 2016. Real estate contributed to 42.3 per cent or Sh5.9 billion, “attributable to slow uptake of housing units.”

The effects of this is evident in the declining levels of growth in real estate. The World Bank states that the sector grew by 25 per cent during 2014-2015 but reported a 15 per cent decline in 2016-2017. 

Thus, adds the report, the interest rate cap is not the sole contributor to this fall.

“The weakness in credit growth started well before the enactment of the rate caps. First, banks have shifted lending to corporate clients and government at the expense of small and medium sized enterprises and personal household loans. Second, the proportion of new borrowers has fallen by more than half, likely impacting entrepreneurship and new job creation,” says the report.

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In a previous interview, Kenya Private Developers Association chairperson Muchai Kunyiha decried the negative effects the credit crunch is having on new and ongoing projects.

“There are tougher terms and a lending percentage that is far much lower than project cost. Financing used to be 75 per cent of the project but is now below 60 per cent thus a demand for more cash capital. The effect is fewer new projects,” said Kunyiha.

While acknowledging that developers are facing a credit crunch, Cytonn Investments senior manager for regional markets Johnson Denge says despite the government’s appetite for borrowing, we cannot wish away the effects of the interest rate cap introduced in 2016. He says the law put all borrowers under the same umbrella as far as risks are concerned.

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