High cost of loans slows down Kenya’s construction boom

Analysts have predicted a break 2012 for the Kenyan construction industry, saying high interest rates and double digit inflation were likely to stall growth in the industry.

HassConsult, which conducts the only property pricing index in Kenya, said Thursday that developers were already cutting back or postponing new construction plans, as they struggle to meet financing requirements.

“Developers completing their buildings are under great financial pressure. Material costs have climbed sharply and now their financing costs have jumped,” HassConsult property development manager Farhana Hassanali told journalists.

In September 2011, the Central Bank of Kenya increased its base rate in effort to tame the runaway inflation and to strengthen the Kenya shilling, a move that saw commercial banks raising their lending rates to as high as 28 per cent. This has discouraged many borrowers from taking mortgages or borrowing to buy or build property.

To throw a spanner in the works, banks are cutting back lending to the real estate sector amid fears that developers may default on their loans due to high interest rates.

“Banks are cutting back lending to property developers in order to reduce their exposure to rising default,” a bank executive told CBR on condition of anonymity.

The construction industry has been booming for the past ten years, mainly in the major towns, fuelled by rural to urban migration and a growing middle class.

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