Skyrocketing public debt, rate cap law strangle real estate

By Henry Wahinya

Real estate stakeholders attribute the current stagnation of the building and construction sector to lack of liquidity in the money markets and the ballooning public debt. 

The continued presence of capping laws on interest rates on bank lending (currently under review in Parliament) has also seen less credit reaching the private sector. 

In general, investors single out the poor performance of the Kenyan economy as a serious bottleneck. For instance, the housing sector recorded the highest growth in non-performing loans of 15.8 per cent last year due to slow uptake of housing units.

Political talk of an impending national referendum on Constitution changes such as Punguza Mzigo and the Building Bridges Initiative (BBI) are also worrying investors by fuelling political uncertainties. 

“The ‘I can’t buy’ decision is arrived at by an investor as a result of a poorly performing economy, while ‘can I buy?’ is a position taken by a hesitant investor,” says Sakina Hassanali, head of research and marketing at real estate developer, HassConsult.  

Sakina has commended initiatives by the State to invest in infrastructure development, but at the same time pointed out this had contributed to lack of liquidity. “Ambitious investments in infrastructure are good. But the spending does not leave much to spur economic growth,” she said in Nairobi when she released the House and Land Price Index Reports for Quarter Three this year. 

Worse, State borrowing contributes to the ballooning high debts the country is incurring. “Liquidity is tightened. Things stagnate. Those in the upper end of the real estate market may not in the short term be affected, but those in the lower ranks feel the pinch most,” she says.

The Chairman of the board of trustees of Kenya Private Sector Alliance (Kepsa), Lee Karuri, also moans the high cost of sustaining the runaway local and international debts as a major drawback. Karuri is also executive chairman, Resorts and Cities and co-founder and chairman of Home Afrika, a real estate developer listed on the Nairobi Securities Exchange. 

Quoting data from the Central Bank of Kenya, Karuri said public debt has doubled from Sh2.4 trillion in 2014 to Sh.5.4 trillion – 54 per cent of GDP— by March this year. “This is frightening for business. Our main concern is the cost of servicing the debt and its implications of the State borrowing domestically,” he told the media last week. 

Ballooning debts 

He said besides servicing debt, the government has other obligations, meaning for every Sh100 revenue, government’s figures show it spends Sh38 on debt service, Sh45 on salaries and that includes pensions and Sh40 on other recurrent expenditure. “We are borrowing to meet debt service, salaries and recurrent expenditure. There is nothing left to spend on development outside of borrowing,” he said.

He does not take it kindly that heavy domestic borrowing has impacted negatively on performance of the private sector that has been crowded out of the borrowing process to secure funds to invest.

 Growth in private sector credit has declined from as high as 18 per cent in 2014 to 2.4 per cent in 2018. This has direct impact on business growth and economic activities in the country. For purposes of making it possible for investors to access credit by availing more money, Karuri wants the decision to increase public debt ceiling to Sh9 trillion be revoked and instead the debt management framework be strengthened.He proposes that local borrowing by the government be capped at 50 to 50 between the State and the private sector. Earlier, players in the real estate sector broke into a celebratory mood after President Uhuru Kenyatta declined to assent to the Finance Bill 2019. Going forward developers, buyers and other investors are anticipating that the land market will get a boost if the cap is repealed.

There is now hope that MPs, who are set to debate the interest rate control law, will save the stagnant market from reaching a ‘diving point’. “We have seen access to credit by developers and buyers become difficult as commercial banks have become conservative at lending, but we expect this to change,” says Hassanali. 

Cap ceiling

“Repealing of the rate cap is expected to result in banks increasing lending to the private sector, which will spur the general economy.  Developers and mortgage borrowers expect to benefit from increased lending by commercial banks,” she says.

Kenya Bankers Association Chairman, Joshua Oigara says the memorandum asking Parliament to support removal of the interest rate controls maintained by the Finance Bill, 2019 will open doors for more credit to borrowers.

However, the Institute of certified Public Accounts of Kenya (ICPAK), CEO Edwin Makori warns that while the interest cap has had its fair share in contributing to the stated problems, other macro economic, social and political factors  significantly affect the economy and private investments such as in the real estate.

“Removing the cap ceiling without taking into consideration other measures to develop the credit market and protect consumers would mean that the problems of abuse and over indebtedness remain,” he said.

Makori, however admits the interest rate cap is a healthy debate for the economy.