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Experts fear ensuing financial crisis could render death blow to already depressed industry

What started as a public health crisis has fast spiralled into a financial one and is now threatening an already troubled property market.

As the full effects of the coronavirus are expected to manifest in the country in the next few weeks, auctioneers and real estate agents are desperately trying to dispose of properties worth billions of shillings.

But there are no takers owing to an already depressed economy.

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This, coming on the back of an equally “bad” 2019, has led to a sharp dip in the property market that experts warn can only get worse.

Euclid Capital Chief Executive and a former director of the Public Debt Management Office at the Treasury Wahoro Ndoho says in a financial crisis, there is likely to be a “massive transfer” of wealth from the liquid owners of capital to the illiquid.

This simply means that while the houses or properties will be there for disposal, the cash to pay for them is not readily available.

And where the cash is available, it is likely to be below market price, and investors are, therefore, bound to make significant losses.

Mr Ndoho says the situation has been compounded by the fact that the markets were already depressed even before this latest upset.

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“This pandemic has now triggered a collapse in people’s confidence,” he says.

The year did not start well for property owners as an economically tumultuous 2019 spilt over.

Property indices released in January by organisations such as Hass Consult painted a desperate scenario in the market.

People were racing to dispose of their assets in a bid to service loans and enjoy some liquidity, but in vain. 

Potential buyers remained cash strapped as harsh economic times bit, meaning they could not buy at market prices.

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“The uptake (of property) is not as fast as it used to be. Demand is still there, but disposable income is no longer at the levels it was, and this has seen all of us in the property sector struggle to a certain degree,” Edermann Property Head of Planning John Rajwayi told Home & Away earlier this month.

This was the situation even before the emergence of the global cataclysm that is Covid-19, which now threatens to cripple economies.

While a majority of Kenyans worked hard to invest in property over the last one year, non-performing loans in lenders’ books have escalated as the run on the market gained momentum.

Central Bank of Kenya (CBK) data shows that defaults on mortgages rose 41 per cent in the year to December 2018 to Sh41 billion, up from Sh27.3 billion in 2017.

Default rates on mortgages were much higher when compared to other loans by banks, which stood at 12.3 per cent in 2018.

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“The outstanding value of non-performing mortgages increased from Sh27.3 billion in December 2017 to Sh38.1 billion in December 2018. The mortgage NPLs (non-performing loans) to gross mortgage loans were 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,” CBK said.

In the ensuing economic contraction, companies relocated, others closed, and workers were laid off in droves.

Ndoho warns that this means that a majority of them will no longer be able to service their mortgages leading to foreclosures.

“The fired employees cannot service their mortgages. As such, the banks will soon be on their backs aiming to repossess the mortgaged property,” he says.

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“Again, as many people seek to dispose of their properties in a market where others are unable to buy, prices plummet. Supply exceeds demand, creating a glut in the property market.”  

This radical price deflation leads to a race to the bottom on house prices, an attempt at addressing liquidity problems.

The collapse of international trade means that fortunes for a majority of companies, especially those that depend on imports for production, are on a free fall. Most goods in the Kenyan market are sourced from China, which is in total lockdown.

Kenya’s annual import bill stands at about Sh1.76 trillion, with China accounting for about 21 per cent of Kenya’s imports.

This means that at least Sh377 billion worth of products may need to be sourced elsewhere or substituted by local production due to the disruption caused by the Covid-19 virus.

A difficult liquidity crunch is often identifiable by a struggling mortgage market.

Vicious cycle

A vicious cycle happens where mortgagees, laid off from their workplaces as a result of debilitating economic conditions, are hounded out of their properties by lenders.

They then resort to rentals, driving up rent prices. This is because of the markets being fully demand-driven.

It also leads to an economically battered population, which is suppressed from every front.

According to Ndoho, it is high time the government took action to increase liquidity even as the situation threatens to boil over.

The government, he says, should suspend economic prescription to help the economy recover by taking extraordinary measures.

He said one of the measures would involve the regulation of the property market because evidently, the economy cannot sustain higher pricing.

Ndoho reckons the market, especially for Nairobi’s high rise buildings, will have to go through a correction.

The city’s property market is overvalued for, among other reasons, the capital’s inarguable position as the region’s business hub. A correction would lead to the market finding its right level.

“The property market right now is driven by speculation more than by fundamentals,” laments Ndoho.

Nairobi usually experiences a huge price bubble, which is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behaviour.

The attractiveness of investing in the city makes the corrupt put their money in property.

The value of the property is consistently overrated, and the coronavirus scare might be the most potent regulator yet. 

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