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Bad loans in real estate jump by Sh9b in first three months of 2021

By Dominic Omondi | Dec 30th 2021 | 3 min read
By Dominic Omondi | December 30th 2021

An estate in Nairobi. In the second quarter of 2021, the real estate sector grew by 4.9 per cent?.  [File, Standard]

Bad loans in the real estate sector jumped by Sh9.1 billion in the first quarter of this year, as the property market struggled to shake off the adverse effects of the Covid-19 pandemic.

Latest data from the Central Bank of Kenya (CBK) shows that non-performing loans (NPLs) or loans that have not been serviced for more than three months - increased to Sh70.5 billion in March from Sh61.4 billion in December last year.

This was an increase of 14.9 per cent - the highest across all the 11 economic sectors.

Nonetheless, banks still warmed up to the sector with credit to the housing market in the period under review increasing to Sh444 billion from Sh439 billion in December.

Real estate is one of the sectors that was hard hit by the adverse effects of coronavirus, with a lot of developers putting off their building plans even as tenants that had been negatively affected by the pandemic struggled to pay their rents.

Other tenants also downgraded to cheaper houses, leaving behind empty buildings in the high-end market. In 2020, the real estate sector grew by 4.1 per cent, the slowest in seven years.

And while almost all the other sectors of the economy have delightfully started to bloom after a tumultuous period in which the Covid-19 pandemic had cast a dark spell of stagnation over the business environment, real estate is still struggling.

In the second quarter of 2021, the real estate sector grew by 4.9 per cent, a slight increase from a growth of 4.6 per cent at the height of the pandemic in June last year.

The total output in the property market was valued at Sh264.9 billion compared to Sh248.6 billion in June last year.

In the first nine months of this year, the value of residential and non-residential buildings approved by the County Government of Nairobi declined by 49 per cent to Sh60.9 billion compared to Sh120.8 billion in September last year, according to data from KNBS.

This is the lowest level in over a decade. Commercial buildings including retail and office space declined by 55.2 per cent to Sh16.4 billion in September this year compared to Sh36.7 billion in the same month in 2020.

Residential buildings approved for construction by Nairobi were valued at Sh44.5 billion in the period under review compared to Sh84 billion in September last year.

Section of Upper Hill, Nairobi. December 3, 2021. [Elvis Ogina, Standard]

After months in which it was hurtling down from its high tower, the real estate appears to have hit rock-bottom. For speculators, in a downturn like this, is time to buy as from here, the only way out is up.

For regulated banks, pension funds or insurance funds, which deal in people’s money, they would rather play safe than regret. Consequently, banks have been avoiding real estate like a plague. Over 55 per cent of senior credit officers of 44 local banks that were surveyed by the CBK in June said they had tightened standards for real estate.

It was an increase from half of the respondents that said they had been more cautious in lending to the real estate three months before.

The only other sector that had such a hard time in the banking halls is tourism, even as lenders relaxed their lending standards against the rest of the industries.

CBK attributed the tightening of credit standards in the two sectors to the adverse effects of the pandemic.

“This was to avoid the possibility of non-performing loans as a result of the pandemic,” said CBK in the credit survey. Expectations regarding general economic activity and removal of interest rate capping, said the financial regulator, led to tightening of credit standards in tourism and real estate sectors.

Not only were banks clamming up with credit, demand for credit from the real estate also reduced, according to the Credit Officer Survey findings for June 2021.

Of the nine sectors, only real estate recorded a decrease in demand. Perceived demand for credit significantly decreased in the real state sector due to subdued demand for housing units, said CBK.

And there are a lot of properties that have fallen under the auctioneer’s hammer due to a depressed market where developers are struggling to find buyers.

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