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Banks descend on builders as loan defaults hit real estate

The sector recorded the highest growth in bad loans in three months ended June.

Updated

Property auctions in Kenya
A huge number of investors have lost their properties to creditors. PHOTO | FILE

A huge number of property developers are unable to service their mounting debts, official data shows, underlining their struggle to find buyers for their houses amid dwindling returns.

According to the Central Bank of Kenya’s Quarterly Economic Review released last month, the real estate sector recorded the highest growth in non-performing loans in three months ended June, a situation that has seen a spike in asset seizures by aggressive lenders.

Non-performing loans (NPLs) in the sector rose by Sh6.1 billion, or 15.8 per cent in April-June to Sh44.4 billion compared to the previous quarter as developers outpaced manufacturers (11.7 per cent) and traders (7.3 per cent) in growth of default on loans, the CBK said.

This means that 11.3 percent of the Sh392.7 billion gross loans extended to investors in land and houses by banks over the years were not being serviced at the end of June.

“The real estate sector registered the highest increase in NPLs by Sh6.1 billion (15.8 per cent) due to slow uptake of housing units,” noted the Quarterly Economic Review.

A loan is considered non-performing if it remains unserviced for more than three months.

As a result of financial difficulties, a huge number of investors have lost their properties to creditors – leading to a glut of repossessed homes that are being sold off cheaply countrywide.

Auctioneers say they held more actions in 2018 compared to 2017, following a growing pool of borrowers whose assets have been seized by banks.

“Things got worse and the auctions were more compared to (2017)” Stephen Kang’ethe, an auctioneer with Dalali Traders said in an interview.

“The irony is that there are no buyers even for property being put up for auction. Things are bad. There is no money.”

Industry sources say that property developers are increasingly finding it hard to obtain credit from commercial banks – a situation that is likely to further slowdown the sector.

The distress in the property market is best reflected in the performance by mortgage lender HF Group which posted a Sh332 million net loss in nine months ended September, on loan defaults.

Real estate has been one of the country’s fastest growing sectors in the last 15 years, with returns from property outpacing equities and securities. The sector has, however, suffered slow growth in sales and rental prices recently due to a huge stock of unsold units.

Quarterly surveys by consultancy HassConsult and the Kenya Bankers Association (KBA) show that house selling prices reduced by about 4.10 per cent in the last quarter of 2017, compared to a jump of 10.21 per cent in 2016 amid a housing glut and reduced purchasing power for homes.

Danson Kagai is a skilled architect with a degree from the University of Nairobi. He has a wealth of experience in covering mega projects in Kenya, and is passionate about the built environment.