Default on mortgages jumped 41 percent to Sh38 billion, pointing to widespread distress in the real estate sector as Kenya’s economy slows down and property auctions pick up.
Latest Central Bank of Kenya (CBK) data shows that mortgages recorded the highest growth in non-performing loans (NPLs) last year from Sh27.2 billion in 2017, reflecting the struggle by investors to find buyers for their houses amid dwindling returns.
Unpaid mortgages increased by Sh11.2 billion or 41.1 percent, a rise that outpaced other segments like manufacturing (19 percent), traders (4 per cent) and personal loans (six percent) in growth of default on loans, the BK 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 in recent months across nearly all sectors as corporates intensify austerity measures to protect profits.
This has seen workers who took mortgages on the strength of their pay slips default with the slowdown in real estate hurting property developers who are finding it difficult to sell units that were built on loans.
Banks have stepped up debt recovery efforts to clean up their loan books, leading to a spike in property seizures by aggressive lenders.
About 16.9 percent of the Sh224.8 billion gross loans extended as mortgages were not being serviced at the end of December 2018, up from 12.2 percent in 2017.
"The ratios were above the industry gross NPLs to gross loans ratio of 12.7 percent in December 2018," said CBK.
"Deterioration in asset quality was mainly attributed to among other factors; subdued business activities, delayed payments from public and private entities and low uptake of housing and commercial units."
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.
The depressed property market was worsened by credit access constraints under the environment where interest rates were under government control.
The Treasury and the bankers had blamed the cap, which the government imposed in 2016 to curb high interest rates, for constricting private sector lending growth, especially to segments of the population deemed as risky.
President Uhuru Kenyatta last week signed a law that scrapped a cap on banks’ commercial interest rates, setting the ground for a return to lending.
Mortgage lending increased a measly 0.7 percent last year to Sh223.2 billion compared with a growth of 23.9 percent in 2015.
"This could be attributed to banks’ review of mortgage terms to offer mortgage loans on increasing credit risk in the real estate sector," said CBK.
The cap has also had an impact on the wider economy as credit-starved businesses had to lay off staff.
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More than 15 of the 62 companies listed on the Nairobi Securities Exchange (NSE) reported net profit drops by at least 25 per cent last year compared with 2017 as they struggled to grow sales.
While the Kenyan economy expanded 6.3 percent last year from 4.8 percent in 2017, private sector activity—which translates to jobs and higher pay-- has remained muted.
"If you look at employment index (in the PMI) since the beginning of 2017, it’s been quite neutral meaning it’s not like there has been improvement in new jobs," said Jibran Qureishi, regional economist for East Africa at Stanbic Bank—which tracks company performance monthly through the Purchasing Managers’ Index (PMI).
Official data show that 78,400 new formal jobs were created in the economy in 2018 compared to 114,400 in 2017, Economic Survey 2019 data shows.
This is the slowest pace of formal job growth since 2012 when the economy churned out 75,000, adding to the crisis of youth unemployment.
The data does not capture job cuts and net employment, which has a bearing on mortgage repayments for salaried staff.
Auctioneers reckon they held more auctions in 2018 compared to 2017 linked to mortgage defaults, arguing that banks were moving much faster to seize properties from defaulters since the cap was put into place.
There was a glut on the market of repossessed homes and office blocks, said Joseph Gikonyo, the managing director of Garam Auctioneers.
"The bad economic environment has made it difficult to get buyers even for property being put up for auction," said Mr Gikonyo. "The uptake has been lacklustre despite the rise in auctions."
The reduced credit growth also made it difficult for lenders to refinance seized assets.