High interest rates are hurting the construction industry as builders and home buyers struggle to meet stringent financing requirements.
According to the Kenya National Bureau of Statistics (KNBS) Q1 2012 report, the industry recorded 3.2 per cent growth down from 7.0 per cent in the same period last year – an indication that the previously booming sector could be slowing down.
The report further stated that a slow down was reflected in the consumption of cement which recorded a 3.8 per cent growth in the first quarter of 2012 down from 16.2 per cent a year earlier.
“The lethargic performance is mainly attributable to high cost of borrowing from the financial institutions,” said the report.
Alterations in the interest rates have a direct bearing on the building and construction sector as a significant number of builders rely on bank loans to finance their projects.
Earlier this year HassConsult, the firm that conducts the only property index in Kenya, said several developers had shelved new construction plans a move that could cool off a sector that had experience consistent growth in the past decade.
“Most developers rely on bank loans to fund their projects and the high cost of borrowing has put them under great financial pressure,” said Farhana Hassanali, property development manager at HassConsult.
Players in the sector are of the opinion that with the general elections just some months away and the CBK benchmark rate still high (18 per cent), there is a weak likelihood of a quick recovery in the sector.
“We don’t expect central bank to lower interest rate drastically. The reduction if any will be gradual and I think it may take a while before the sector goes back to where it was last year,” said KCB group director, mortgages, Joram Kiarie.
Late last year, the central bank raised its benchmark lending rates aggressively in a bid to tame inflation leading to a jump in commercial bank lending rates.
“The stick used to tame inflation has regrettably hurt the construction sector. Currently developers need at least 30 per cent just to cover their cost of loans,” said Johnson Mwaniki, a construction project manager based in Nairobi.
Booming construction across the country created 82,000 private jobs in 2010, about 42 per cent more than the 57,900 jobs created five years earlier, but all these jobs are now under threat if the high cost of borrowing prevails.