Mortgage defaults hit Sh70bn, auctions jump

Defaults on mortgages jumped 48 percent to Sh70.5 billion in the year to March, pointing to widespread distress in real estate in the wake of Covid-19 economic hardships as property auctions pick up.

Latest Central Bank of Kenya (CBK) data shows that mortgages recorded the highest growth in non-performing loans (NPLs) from Sh47.5 billion in March last year, reflecting the struggle by investors to find buyers for their houses amid dwindling returns.

Unpaid mortgages increased by Sh9.1 billion or 14.8 percent in the three months to March, a rise that outpaced other segments like manufacturing (three percent), agriculture (10.7 per cent) and personal loans (three percent) in growth of default on loans, the CBK said.

The mounting defaults in the property market are a reflection of the struggles that mortgage holders are undergoing in an economy that has witnessed a string of job losses across nearly all sectors since the onset of Covid-19 in Kenya in March last year as corporates intensify austerity measures to protect profits.

This has seen workers who took mortgages on the strength of their pay slips default. The slowdown in real estate is hurting property developers who are finding it difficult to sell units that were built on loans.

Banks that had gone slow on property seizures last year following the pandemic

have stepped up debt recovery efforts to clean up their loan books, leading to a spike in auctions.

Thousands of defaulters have since January been appearing in the books of Kenya’s three CRBs — Metropol, TransUnion and Creditinfo International—after the CBK lifted the suspension of listing for loans that were defaulted after April 1 last year.

The CBK has linked the sharp rise in mortgage defaults — credit that goes unpaid for 90 days — to skipped repayments on covid-19 disruptions.

“The real estate sector registered the highest increase in non-performing loans by 14.9 percent (Sh9.1 billion) as a result of disruptions by Covid-19 pandemic,” said the CBK in the banking sector review of first quarter of the year.

Real estate has been one of the country’s fastest growing sectors in the last 15 years, with returns from property outpacing equities and government securities.

The sector has, however, suffered slow growth in sales and rental prices recently due to a huge stock of unsold units, which has seen developers who tapped loans to build and sell houses default.

Low occupancy rates have meant that developers who were dependent on rent collections to repay loans are also struggling.

Industries and other businesses have since cut down their activities in response to the infectious disease, leading to job cuts and unpaid leave for retained staff as profitable firms move into losses.

Businesses that tapped loans based on their projected cash flows are also struggling to meet the loan obligations.

CBK data to April shows that net domestic credit to the real estate sector grew by 5.8 percent to Sh409 billion, the slowest in nine months.

Auctioneers reckon they are holding more forced sales in 2021 linked to mortgage defaults compared to previous years, with banks moving much faster to seize properties from defaulters since the cap was put in place.

But the auctioneers are not selling as fast as they are repossessing due to the minimum bid price, leaving a glut of repossessed vehicles, land, houses and office equipment as cash-strapped buyers seek to buy the properties cheaply and at outsized discounts.

The Land Act, 2012 bars banks from auctioning seized assets at below 75 percent of the prevailing market value.

This has led banks to eye private settlements.

Under private treaties, distressed borrowers agree with banks to look for the best available price for their properties and sell to repay loans as opposed to relying on the auctioneer’s hammer.