Banks cut credit to real estate as defaults hit Sh70b

Developers who had pegged their loan repayments on rental income or receipts from selling finished properties have seen their calculations complicated by the low uptake of units. [iStockphoto]

Commercial banks are slamming brakes on their lending to property developers to shield themselves from further defaults after unpaid loans crossed the Sh70 billion mark.

Central Bank of Kenya (CBK) data for January 2022 shows the pace of annualised credit growth to the real estate players slowed for the fourth straight month to hit 0.5 per cent, compared to 2.9 per cent in September last year and 8.8 per cent in January 2021.

Developers who had pegged their loan repayments on rental income or receipts from selling finished properties have seen their calculations complicated by the low uptake of units.

From the loan book of Sh413.4 billion in September last year, the loan book has slowed to Sh409.9 billion in January 2022, signalling that banks are not adding as many fresh loans as old ones mature.

Gross loan defaults in real estate jumped from Sh61.4 billion at the end of 2020 to Sh74.7 billion or 18.2 per cent of the loans book last year.

Developers have not fared any better in bringing down the figure this year, according to the CBK report for March.

CBK last month, when announcing that the portion of value loans that had remained unpaid for at least three months had hit 14 per cent, the regulator cited real estate as among the sectors that drove up the defaults in the banking sector.

At 0.5 per cent growth, credit to real estate is below the average lending to the private sector (8.8 per cent) and is the slowest pace in 28 months since the 0.4 per cent growth in October 2019.

The share of real estate loans in the Sh3.09 trillion total lending to the private sector has dropped to 13.3 per cent compared to 15.8 per cent five years ago.

The slowed growth in lending to real estate contrasts with that of other sectors such as manufacturing and quarrying (24.9 per cent), transport and communication (20.7 per cent) and consumer durables (14.6 per cent).

CBK data to December last year showed defaults in real estate had jumped eight per cent in three months, making it the sector with a steep jump in unpaid loans, followed by energy and water (5.1 per cent).

The regulator said the low uptake of completed projects left developers unable to service loans, worsened by the Covid-19 economic fallout.

"Real estate and energy and water sectors recorded the highest increases in NPLs mainly due to low uptake of completed contracts,” noted the CBK.

Many real estate developers are taking longer to sell apartments and are holding back on launching new projects due to weak demand in a subdued property market.

The increasing prices of construction materials such as steel, paint and cement look set to hurt growth in the real estate sector that is still weighing the impact of e-commerce on demand and uptake of physical retail spaces.

Resumption of business operations by firms is driving up office occupancies but not at a rate real estate developers would want, thanks to the shared office concept.

But the aggressive entry and expansion by local and international retailers such as Naivas, QuickMart, and Carrefour are offering some boost to sellers of commercial spaces who had been hit by the woes of Tuskys and Nakumatt.

Cytonn, an investment and real estate company, expects the pace of activities in the real estate sector to be impacted by the August general elections.

"As 2022 is an election year, we expect a slow-down in market prices and sales volumes since investors and prospective buyers are expected to adopt a wait and see,” says Cytonn. 

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