Credit expansion ups outlook for real estate

House under construction in Soilo Estate, Nakuru County. [Harun Wathari, Standard]

The real estate sector is poised for growth on increased credit to developers and buyers, according to industry analysts.

This follows the recent move to reopen financial flows into the sector through removal of caps on interest rates.

The property industry has experienced a decline in financing in recent years that saw the sector’s contribution to Kenya’s gross domestic product halve from 8.8 per cent in 2016 to 4.1 per cent by 2018.

“The lifting of the caps has prompted renewed interest by investors in the Kenyan market, which marks a distinct and new development,” said Kfir Rusin, managing director of the East Africa Property Investment Summit. 

“Following the introduction of the interest cap in 2016, international and local investors shied away from investing in property funds, particularly in the high-end residential, retail and commercial segments. Only logistics investments withstood the financial clampdown.”

Mr Rusin issued the outlook ahead of the seventh East Africa Property Summit to be held in Nairobi on April 1-2, 2020, bringing together more than 500 local and international investors from over 250 companies.

The expected easing of lending to developers and home buyers comes as Acorn last month led the way with the launch of a Sh4.3 billion green bond to fund the building of environmentally-friendly student accommodation for 5,000 students in the capital.

Turning points

The bond, which was also being listed on the London Stock Exchange, is a significant step in Kenya’s mission of expanding affordable housing and coincides with a new flow of UK investments into the housing sector from the UK Africa Investment Summit.

“The opening of new routes to housing finance and lifting of restrictions on debt financing mark material turning points for the real estate market, which has become notably subdued,” said Mr Rusin.

Over the last three years, growth in property market activity has slowed as commercial credit from banking institutions tightened.

According to a Central Bank of Kenya Bank Supervision Report, the net growth in commercial loans fell to eight per cent following the introduction of the rate cap in 2016, compared to the 96 per cent growth rate recorded in 2015. 

Loans to the real estate sector dropped even more sharply, falling by nine per cent in 2017.

In 2018, property loans increased marginally by four per cent, but the majority of the new loans were distributed as refinance for affordable housing mortgages, rather than as real estate development finance.

The cap additionally saw banks and investors compensate for reduced interest income by offloading or avoiding stocks perceived to be less liquid or higher risk, such as real estate, and purchasing more liquid investments such as government bonds.

As a result, by the end of 2017 government securities accounted for 24.9 per cent of total banking sector assets, up from 23.4 per cent prior to the caps.

This shift from commercial loans to government bonds continued throughout 2018 and 2019.

As a result, construction slowed, with developers focusing on completing and selling existing projects.

According to Architectural Association of Kenya’s Status of the Built Environment report covering July to December 2019, Nairobi County alone had Sh57 billion worth of development projects approved.

The city collected Sh102.8 million in permit fees with 613 development plans applications approved.

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