High interest rates hit real estate sector hard in quarter one

Property developers bore the brunt of high interest rates more than home loan-takers in the first quarter of 2012, analysts at Renaissance Capital has said.

The investment bank’s report says that contraction in the real estate sector was due to a slowdown in new houses and offices coming to the market than fewer home owners taking mortgages.

“Our sub-Saharan Africa banks’ analyst has been more concerned for property developers than mortgage holders in the high-interest rate environment. Her view is that most banks would react by withdrawing the remainder of approved loans to current but uncompleted projects. We think this partly explains the slowdown,” said the report.

Kenya’s mortgage industry, while small, still had an effect on the real estate sector which grew slower in the first quarter of 2012.

Of most concern is the supply side of the market. The report says that the sector grew by 2.6 per cent in the first quarter of 2012 compared with 5.6 per cent in the first quarter of 2011.

The Central Bank of Kenya’s Bank Supervision Annual Report 2011 shows that there were 16,135 mortgage loans as at the end of last year, which developers have said is a tenth of what an economy Kenya’s size should have.

Property developers said that market conditions have been tough since the end of last year as the rates began to climb. The CBK last year increased its base rate to 18 per cent from six per cent to tame inflation, which in turn saw commercial banks raise their rates up to 30 per cent.

As a result developers are slowing supply of new homes and offices for fear of dead stock.

Loans

Moses Wekesa, the chief executive of property development firm Grade East Africa, said that the choices of potential mortgage takers had influenced developers’ decision on new loans as home loan borrowers shelved their decisions.

Mr Wekesa said that since houses are built based on future cash flows, if future sales are not guaranteed it is too risky to continue to build since there is a danger that developers will be left with stock that is not moving.

KCB had earlier said that mortgages had slowed down by between 15 and 20 per cent.

For now developers are looking for cash buyers.

“Developers are chasing a lot of diaspora buyers who buy in cash and partly investment buyers,” said Mr Wekesa.

Investment buyers tend to have liquid cash which is an advantage at the moment since they can get bargains from developers who may need cash to service loans.