Business Daily (Nairobi)
Morris Aron
15 April 2008
Lending to the real estate industry dropped for the second consecutive year after peaking in 2006, signalling that the excess supply of houses in the market may have reached a tipping point.
If economic growth does not pick up pace to boost demand, house prices could start coming under pressure and falling.
In the last three months, the real estate market has suffered as both local demand and that from Kenyans abroad fell in a hostile political environment that kept most buyers at bay.
Kenyans abroad have been major drivers of demand in the local housing market, but as easy money continued fuelling new housing developments and encouraged buyers to take up mortgages, demand from the diaspora has not kept pace with the excess supply.
This out-turn has had the effect of tempering developers' demand for loans and encouraged banks to be more vigilant about reckless lending in a hostile housing market. Locally, land around urban centres has become expensive translating into largely un-affordable houses, especially for middle class families.
Coupled with high pricing of houses, expensive bank loans and lengthy legal processes involved in buying a house, many Kenyans are turning to affordable financing options such as taking development loans from co-operatives.
Central Bank of Kenya's latest year-to-year mortgage loan figures indicate that the value of real estate loans advanced by commercial banks dropped by four per cent from Sh23.9 billion last year to Sh22.9 billion by February 2008.
The highest mortgage loan advancements were recorded in 2006 when it stood at Sh27.2 billion down from Sh20.1 billion registered in 2004.
According to the statistics, the biggest drop was between 2006 and 2007 when the value of real estate loans by banks dropped by 15 per cent - a four year record - to stand at Sh23.9 billion down from Sh27.2 registered the previous year.
An economist at Central Bank told the Business Daily that the development was an indication that the number of people servicing their mortgages had overtaken the number of new investors taking up mortgage loans.
"For a net drop in lending to be witnessed it means that 'less people are taking up new mortgages while more and more are struggling to service their mortgages," he said.
Property experts said that the number of investors buying houses on an arrangement where one investor (normally a land owner) donates land and the other brings in capital for building materials - known as equity financing - is rising.
Last year Housing Finance launched a construction finance product to help individuals who already have land build houses and cash in on this category of investors.
This is a break from the common practice where if one wants to own a home, they apply for a mortgage loan.
Building under construction
Mr Maina Mwangi, the head of property at Knight Frank, said that as the number of Kenyans in the diaspora and foreigners buying property increased in the recent past so has buying without relying on mortgage loans grown.
"Kenyans in the diaspora and foreigners move in and buy straight from their savings without applying for mortgages," said Mr Mwangi.
Other players see the wait-and-see attitude adopted by a number of investors after the elections as the reason for the drop in the value of mortgage loans.
More recently, a number of mortgage companies have secretly classified certain areas and some economic activities as high risk.
From the guideline, land in areas which witnessed disputes and certain economic sectors such as tourism and agriculture are considered high risk due to the ability of violence to diminish their returns.
Mr David Harber, the managing director of Kenya Valuers and Real Estate Agents, said that skirmishes witnessed in late 2007 and early 2008 could have lead to the drop in lending to real estate.
"The events just before and after elections must have had an effect on the number of people taking up loans to build or buy new houses," said Mr Harber.
Mr Chris Chege, a senior relationship manager in charge of mortgages at Housing Finance, said that the development could have been as a result of non disclosure by banks on mortgage loans while reporting to central bank.
"Sometimes it is hard to specify whether a loan was for personal business or house construction," said Mr Chege.
The number and value of building plan approvals at Nairobi City Council also registered the same trend.
The number of building plans approved in Nairobi dropped from 312 in November last year to 216 in December 2007 and by mid January 2008 only 83 approvals had been made.
The Nairobi City Council's development control section reported that the value of building plans submitted to the council dropped by Sh13 billion in three months-from Sh14 billion in November last year to Sh1.21 billion in mid January 2008.
Property experts are predicting that the trend may continue.
"As more investors leave the predominant investment targeting the middle income and focus on low-middle and upper income groups, such a trend will most probable continue," said Maina.
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