High cost of loans slows down real estate boom

The recent sharp increase in borrowing costs is taking its toll on the construction sector, pushing developers to suspend new projects and easing the average price of middle income and high-end residential houses.

Real estate consulting firm HassConsult, has reported in its latest quarterly research note that several developers have shelved building plans and some are likely to stall, citing high borrowing costs since they rely on bank loans to fund housing projects.

As a result, the sector that has grown consistently in the past five years is expected to slow down, with a possible loss of jobs.

“We now see developers retreating at speed, and very many building plans have been shelved,” said Farhana Hassanali, the development manager at HassConsult.

The cost of homes in Nairobi eased 0.7 per cent to Sh21.1 million on average in the last quarter of 2011, according to Hassconsult.

The stand alone houses segment was the most severely affected, the study found, with prices declining by 1.8 per cent in the quarter alone, offsetting gains in town houses (1 per cent) and apartments (1.4 per cent).

HassConsult manages projects under construction on behalf of developers and is also a commission agent on homes in the high and upper middle income segments of the housing market in Nairobi.

The property firm says that developers are becoming more cautious of the rising interest rates — which are now eating into their margins while not all the additional financing costs can be passed onto the buyers.

Average lending rates have surged since the second half of last year to an average of 24 per cent, more than 10 percentage points higher than the end of June as the Central Bank embraced a tighter monetary policy to stem inflation and protect the local currency from a downward spiral.

The effect of this policy stance is beginning to be felt in the construction industry, which created 82,000 private sector jobs in 2010, about 42 per cent more than 57,900 five years earlier.

Another reality that developers have to contend with is the stagnating selling prices even as the construction costs soared.

Jane Nyakang’o, a director at Lynwood Properties, a private development firm, says the high cost of borrowing is devastating players in the construction industry because it has eroded the projected gains.

“When interest rates rise this much, one can only suspend any plans for building, but the only reason we are continuing (to build) is because we had started drawing on the construction loan the project was granted,” said Ms Nyakang’o whose firm is building apartments in Mlolongo.

Terry Mungai, the managing director at Temus Executive Apartments, terms borrowing to finance construction projects at prevailing interest rates “tricky,” saying that she would turn to alternatives means of raising funds including pushing for more off-plan sales.
Peter Kimeu, the head of projects administration at mortgage firm Housing Finance, also said the financier had noticed the slowdown in the uptake of development financing, owing to the rising cost of credit.

“The high cost of funds has had a major slowing impact on demand for construction finance because developers are finding it unattractive to finance their projects through loans,” said Mr Kimeu.

“A slowdown in the construction sector will be compounded by diminishing effective demand for homes by the eventual buyers,” he added, but projected that lending rates would decline to support further growth this year.

Analysts in the banking sector have said the rising interest rates have led to a decline in the amount of loans that commercial banks have extended to the private sector, which shrank for the first time in over a decade in November.

Data from the Central Bank indicate that banks had lent out Sh1.2 trillion in November compared to Sh1.213 trillion in October. Though the numbers do not exclusively show a slowing credit appetite from the building industry, credit to the sector has been the fastest growing since 2009.
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