Why banks are avoiding real estate developers
By John Otini
Commercial banks are asking property developers to take a second look at their business plans after real estate credit started becoming bad eggs in their loan books.
Developers and analysts say banks are asking property investors to review and research their investments plans again owing to the difficult market environment.
“You find that someone has been given a loan by a foreign bank through a local lender, but the local bank is still insisting that they should reconsider their investment plan,” former Cyton Investments project architect Wachira Macharia said.
“The real estate market is down at the moment. We are trying to diversify into other areas”.
Analysts at Genghis Capital say real estate and manufacturing credit take the largest share of non-performing loans (NPLs).
“Most of the bad loans in the biggest banks are in real estate and manufacturing and they are making them to reconsider extending capital to the ailing sectors because they will have to cater for loan loss provision,” said Gerald Muriuki, an analyst at Genghis Capital.
The most affected banks are Standard Chartered, KCB and Housing Finance but most of the big banks have large positions in real estate.
“Construction is the most affected unlike mortgages which banks can recover through property repossession,” said Muriuki.
In Stanchart’s earnings report released yesterday, NPLs continued to be key a factor for the last three years worsening in the third quarter of 2019, according to the Genghis report.
“Yes, real estate is a whole new animal now most of the bad loans are coming from the sector,” said the head of banking sector research at Standard Investment Bank Martin Kirimi. The Central Bank said in its 2018 banking sector supervision report that it would monitor the sector to ensure banks give adequate provisions for the bad loans.
A poor uptake of units, especially in high end residential market, has left developers with vacant houses for years even after cutting prices by more than 25 per cent.
Lack of credit and high interest rates has seen mortgages remain small over the years as war on graft cuts the number of cash buyers in the property market.
Trade, manufacturing, real estate and household sectors accounted for the highest value of NPLs by registering 71.4 per cent, central bank said in the 2018 Banking Sector Supervision report.
This was mainly due to delayed payments from public and private sectors and slow uptake of commercial and housing units.
A sharp drop in liquidity in the market has pushed many companies and households into debt forcing President Uhuru Kenyatta to repeal section 33B of the Banking Act that removes interest rate caps on commercial bank loans.
Banks have said they are not increasing interest rates just yet, but they had argued that high rates give them room to absorb risk.