Mondays have turned into dreaded days for more reasons than just being the start of a work week. For anyone who owes a bank money for property they bought through a loan, and has started getting calls and emails about the pitfalls of default, this is the day they find out just how close their lender is to repossessing it.
Whether by coincidence or design, auctioneers contracted by banks to sell defaulters’ property announce the planned auctions in Monday newspapers. And they are a busy lot.
The number of properties going under the hammer has been on the rise, with auctioneers paying for up to six pages in the dailies to list what they have available for sale.
Owners of residential houses and commercial properties have found themselves in situations where the amount of money they owe banks is much higher than the revenue they receive from either selling off or renting their real estate.
Several of the listed properties appear to have the potential to be salvaged, with a glance through recent adverts showing a six-storey hotel in Nairobi’s prime Westlands area as being one of the buildings that have fallen on hard times.
There is also an 11-storey building in Thika town housing one of the leading retailers in the country and a six-storey hotel in Machakos town owned by former Cabinet minister Gideon Ndambuki.
The fact that this prime real estate is unable to pay for itself, analysts say, is a clear sign of an economy in turmoil.
“(When) you see a lot of auctions through newspaper adverts, it points to the fact that the real economy is bleeding; it is not quite as vibrant as it is expected to be,” said Churchill Otieno, a senior research analyst at Genghis Capital.
And this sale of distressed properties through auctions as banks try to recover the money advanced to struggling customers is expected to continue in the coming months.
Linda Mokeira, a property consultant, said 30 per cent of the properties on sale today have failed to meet their repayment schedules with lenders.
“There is a tremendous increase of properties under auction since 2017. The situation has steadily risen in the past three years to alarming numbers. Every third property in the market is a distressed sale, either on auction or on private treaty between the creditor and the owner or borrower,” she said.
“Borrowers are no longer able to sustain the monthly repayments either due to job losses or loss of business.”
Ms Mokeira added that the market was undergoing a correction and in some instances buyers were opting to default rather than end up with an overpriced property.
Rise in defaults
“Another cause for increased foreclosures is that the property market is gaining its real value as opposed to the overrated prices in the last decade or so, where properties were sold for more than double their real market values,” she said.
“Any borrower who bought a property that was overpriced five years ago would rather default on repayments (maybe running for 15 to 20 years) than commit themselves to a lifetime on a property whose real value would be half, or even less, of the purchase price.”
Real estate consultancy Knight Frank, however, says the industry has not hit rock bottom yet in pricing.
In its report on the local real estate market, it indicated that the increased number of distressed properties in Nairobi had seen lenders intensify efforts to recover non-performing loans through the sale of collateral.
The firm added that there were fewer real estate deals and at discounted rates, and projected that property prices would further come down “in the near term until macroeconomic and local situations improve”.
This is a cause of concern for banks such as KCB Group, HFC, Standard Chartered Bank and Stanbic Bank, who jointly account for 66 per cent of all mortgage accounts in the country.
Already, defaults on mortgages have been on the rise, going up 41 per cent in the year to December 2018, according to the latest banking industry report by the Central Bank of Kenya (CBK).
Unpaid home loans have hit Sh38.1 billion from Sh27.3 billion in 2017. HFC holds the largest portfolio of defaults at Sh5.1 billion, followed closely by KCB at Sh5.0 billion.
An official with one of the leading mortgage providers said some of the banks had burned their fingers owing to careless decisions to lend, even in circumstances where it did not make business sense.
“Foreclosure is the last resort for any lender, but looking at some of the properties and where they are located, we could say that some of those lending decisions were bad from the start. It was only logical that some of the contracts would end in foreclosure. The credit decision was flawed from the beginning. Theirs was bad lending decision and it was largely expected,” said the official, who asked not to be named as he is not authorised to speak to the media.
The official added that the crisis in the property market was a self-correction of the “wanton escalation in property prices that we saw in the early 2000s. There is an oversupply, where most developers deemed there was demand. The yields, whether rental or capital gains, are coming down … it is just a mechanism where the market is correcting itself. In early 2000s, developers were making over 200 per cent returns on investment on their projects.”
The uptake at auctions, however, has not been successful, added the official. Banks are now looking for alternatives to get back their money, including getting into agreements with defaulting customers.
According to CBK’s report, the rate of defaults on mortgages is much higher than on other loans, which stood at 12.3 per cent in 2018.
“The mortgage NPLs (non-performing loans) to gross mortgage loans was 16.9 per cent in December 2018, as compared to 12.2 per cent in December 2017. The ratios were above the industry gross NPLs to gross loans ratio of 12.3 per cent in December 2017 and 12.7 per cent in December 2018,” said the sector regulator.
A handful of the big banks control the Kenyan mortgage market, with CBK data showing that six institutions control 76.1 per cent of mortgage loans.
The five largest mortgage lenders are KCB (market share of 28.59 per cent), HFC (14.99 per cent), Standard Chartered (11.52 per cent) Stanbic (11.40 per cent) and Co-op Bank (5.21 per cent).
HFC and KCB lead in the largest value of non-performing mortgages, followed by SBM Bank (Sh2.17 billion), Jamii Bora (Sh1.8 billion) and Standard Chartered and Co-op Bank (both at Sh1.2 billion).
Notably, SBM Bank, which had a mortgage loan portfolio of Sh2.84 billion, has a total of Sh2.17 billion - or 76 per cent - of this loan book being non-performing. This means no payment has been made on the amount borrowed for at least 90 days.
The Mauritian bank acquired some of the assets of Chase Bank, and many of the loans may have been advanced before the lender was placed under receivership.
Banks, responding to a CBK query on the challenges they face in mortgage lending, identified the high cost of housing units, high cost of land for construction units, high incidental costs (such as legal fees, valuation fees and stamp duty) and limited access to affordable long-term finance as the major impediments to the growth of their mortgage portfolios.
The lenders that have a huge portfolio of mortgage customers in distress have started offering solutions that try to balance the interests of the institutions and that of the borrowers.
HFC has in the recent past said it entered into a private treaty to sell houses for some of its customers in distress. As opposed to an auction, this arrangement allows the lender to sell the property at market rates, recover what is owed to the bank and give the balance to the owner.
KCB has recently set up its property centre, which in addition to being a meeting place for buyers and sellers, also aims at helping mortgage customers who cannot service their debts meet potential buyers and sell property at market rates, with the bank retaining what it is owed.
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