Real estate loans cause jitters over rising defaults

Rising bad debts in the real estate sector have caused jitters in the banking sector, prompting lenders to apply pressure on borrowers to avoid a pile-up of non-performing loans.

The real estate sector attracted huge loans in the past decade when the industry was booming, but has been sluggish since late last year when a sharp increase in interest rates slowed sales.

Data released on Friday by the Central Bank of Kenya (CBK) shows non-performing loans in the sector rose to Sh6.8 billion from Sh6.5 billion in September last year.

In the credit survey report by the industry regulator, 67 per cent of heads of credit departments in commercial banks said that they intended to intensify debt collection in the building and real estate sector.

“Credit recovery efforts are expected to be intensified in real estate, personal and building and construction sectors,” reads the survey by CBK which got responses from 42 banks and mortgage lender Housing Finance.

Going forward real estate developers are expected to face more stringent conditions during loan appraisals, with 41 per cent of the credit managers stating they intended to tighten credit standards.

Developers have been having a hard time selling houses after interest rates rose to 24 per cent from 15 per cent, squeezing their finances as they await successful buys. This has strained their resources, leading to the defaults.

“When rates went up people were unable to meet their mortgage repayments as instalments doubled without a pay increase.

It also meant there was no one to sell to,” said Caroline Kariuki, the CEO of The Mortgage Company which sources for favourable credit financing for potential buyers.

In its quarterly Property Pricing Index, Hass Consult stated that the quarter between June and September this year witnessed the lowest levels of enquiries, viewing, and completions.

“The impact after several years of extreme cost pressures on developers, followed by a year of top-level finance costs for developers and mortgage takers, had brought the sector into a state of dwindling housing starts and slowing levels of sales and completions,” said Hass Consult.

Last year the Central Bank implemented policies that forced banks to increase their lending rates in its efforts to support the shilling and control the cost of living, which was being driven by too much cash in the economy.

Mortgage rates shot up to 24 per cent from 15 per cent implying that a 20-year Sh5 million loan previously serviced by Sh65,840 monthly instalment would require the borrower to repay Sh100,870 per month.

Ms Kariuki however noted that she was yet to see houses brought to the market as distressed property, indicating the banks were renegotiating the credit terms of the loans.

Rescheduling of the loans would be best for the bank as repossessions would transfer the burden of offloading the property to it, with the new laws requiring that it be done at market price.

The rise in defaults was also attributed to the increased funding accorded to the market during the period of high performance.

“The banks have given a lot of money to the sector so it is also an issue of scale,” said Daniel Ojijo, managing director of Mentor Holdings.

Distressed developers are however taking comfort in the recent drop in lending rates, which is expected to resuscitate property demand and ease their burden.

“The development market is lucrative enough to hedge against the high financing costs,” said Mr Ojijo.

CBK said that some banks expect the new land laws to adversely affect the performance of loans under building and construction as well as the real estate sectors, due to the envisaged lengthy and more complex credit appraisal procedures.

The land laws require consent for both husband and wife during submission of a property as security for a credit facility.

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