High cost of borrowing slows down construction sector

Kenya’s construction sector slowed down in the first quarter of 2012, weighed down by the high cost of borrowing, with the trend expected to continue for months.

According to the Kenya National Bureau of Statistics (KNBS) first quarter 2012 report, the sector recorded 3.2 per cent growth compared to 7.0 per cent in the same period last year.

This is the first concrete evidence that the previously booming sector employing about a million people could be cooling off.

KCB Group Director, Mortgages, Joram Kiarie said with elections next year and the CBK policy rate still high, there is little hope that growth in the sector will pick up fast.

“We don’t expect CBK to reduce 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 Mr Kiarie.

The CBK rapidly raised its benchmark lending rate to 18 per cent in December to bring down double-digit inflation. Commercial banks subsequently raised their rates to as high as 30 per cent.

The average mortgage lending rate has risen from 12 per cent in 2004 to current as high as 28 per cent. The lowest rate offered by mortgage lenders is 19 per cent with a high of 28 per cent. Potential borrowers have tended to avoid the loans.

The interest rates in 2009/2010 were relatively favourable, standing at between 13.5 to 15 per cent and spurring the sector to grow. But the sharp rise in interest rate in the second half of 2011 nearly halted the uptake of mortgages according to Mr Kiarie.

“The uptake of the mortgages slowed by an average of 15 per cent to 20 per cent between June 2011 to around April 2012,” said Mr Kiarie.
“Most of the new developers halted their plans, while others downgraded their preference to cheaper property that they can afford and that really impacted on the uptake of the mortgages,” added Mr Kiarie.

The sector is one of the key drivers of Kenya’s economic growth and accounts for over five per cent of the country GDP. But most significantly, it has the deepest penetration in the real economy supporting transport, manufacturing, building material suppliers and importers amongst other sectors.

“The last slow down was also caused by higher exchange rate, which made the cost of the imported materials expensive,” said Carole Kariuki, managing director of The Mortgage Company.

According to Ms Kariuki the interest rate on mortgage will take a while to fall to last year levels and it will take time before the growth of the sector gains momentum.

“The lethargic performance is mainly attributable to high cost of borrowing from the financial institutions,” states the report by KNBS.
Changes in the interest rates directly affect the construction industry with a significant number of home buyers depending on the mortgage to own homes.

Until the rate hike by the Central Bank, the mortgage uptake in Kenya stood at about 20,000 accounts, up from 16,000 accounts in 2010, according to statistics by Hass Consult.

“The constrained growth was reflected in cement consumption which increased by 3.8 per cent in the first quarter of 2012, compared to 16.2 per cent in the first quarter of 2011. The lethargic performance was mainly attributed to high cost of borrowing from the financial institutions,” states the report.