Markets & Finance

Property developers feel pinch of expensive loans

Apartments

Only 4.5 percent of women in Kenya aged between 15 to 49 years own a house alone. PHOTO | SHUTTERSTOCK

Property developers are suffering from rising borrowing costs, a trend that risks hurting their profits or slowing sales if they pass the charges to customers.

Most builders of residential and commercial properties rely on loans for construction and acquisition of land, making them among the groups feeling the heat from the rising interest rates on credit facilities.

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In its 2023 first-half report, Knight Frank says the cost of capital has continued to rise, extending a trend that started in the wake of Covid-19.

The Central Bank of Kenya (CBK) increased its benchmark rate successively to 10.5 percent in an effort to combat inflation.

Banks have taken cue from the hiked Central Bank Rate (CBR) and rising returns on Treasury bills, increasing the interest they charge customers including real estate investors.

“Consequently, the cost of capital has been on the rise since 2021, making it expensive for developers to access capital — a situation that has coincided with subdued high-end real estate activities such as the construction of grade A office in the pipeline,” the Knight Frank report reads in part.

Some banks also started the implementation of risk-based pricing models that saw interest rates shoot above 20 percent for higher-risk profile customers.

Across the industry, the average bank lending rate rose to 13.5 percent as of July from 13.06 percent in February. In earlier months, the average lending rate was below 13 percent.

Besides raising developers’ cost of capital, the higher interest rates also threaten real estate investors by hurting demand for houses and commercial properties.

This comes at a time when demand for office space is weak due to oversupply while the sale of residential units has slowed down due to bureaucracy.

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“Residential sale transactions continue to be prolonged in Nairobi because of the red tape associated with digitisation of the lands’ registry. Consequently, the residential sale market has slowed down,” the report said.

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