Kenya real estate lending slows as rates rise

Commercial banks advanced more credit to businesses compared with the real estate sector in 2011, as lenders moved to reduce their exposure to rising loan defaults in the property market largely due to high interest rates and a slowing economy, new data shows.

The latest Monthly Economic Review indicates that the trade sector received $576 million, in the eight months to August 2011.
Households took second place receiving $437 million, while the real estate sector came in third with $429 million.

Analysts say that because of the low interest at the beginning of the year, many businesses took loans for expansion or working capital. A contributing factor is that commercial banks are looking to lend to businesses that offer sufficient collateral such as those dealing in fast moving goods.
“Lending on inventory is perhaps more secure than on real estate especially if there is a good history and the deal is well structured,” said analysts from Suntra Investment Bank. “Perhaps its (trade sector credit) to finance current assets which turn over very frequently.”

Households also took advantage of the low interest rates to access credit for consumption such as purchase of consumables and luxury items like cars.

This was aided by commercial banks’ drive to enhance delivery channels to customers such as setting up more branches as well as enabling mobile phone and Internet banking for consumers to access more loans.

“Interest rates peaked in the second half of the year,” said analysts from Sterling Investment Bank.

”The increased lending to personal household is a result of increased penetration of banks, which has intensified access to loans.”

Commercial banks started cutting back on lending to the real estate market due to fear that the property market, especially in the high end residential areas, was slowing down because of high interest rates, discouraging borrowers from taking a mortgage or borrowing funds to buy property.

In the eight months to August 2010, real estate sector was tops receiving 33.5 per cent of the credit to the private sector as individuals and property developers sought loans to put up buildings, houses or buy land. In fact, the amount extended to the sector doubled to $998 million, from $494 million in the same period in 2009.

Real estate has been seen as a safe haven for investment because it yielded high returns compared with other channels of investment such as the stockmarket or government securities in 2009 and 2010.

So, the reversal of fortunes for the real estate sector is pegged on the declining demand for the loans and fears of increased default especially in high end rental houses, according to several bankers who spoke to The EastAfrican.

“The industry is cautious about lending to the real estate sector. Some high income property is not selling as fast and some banks have had to seize the property used as collateral,” said a banker who spoke on condition of anonymity due to the sensitivity of the matter.

But businesses have also been cutting back on borrowing because of a steep rise in interest rates in the second half of 2011.
“We have done most of the loan approval processes for some of the businesses but when it comes to crediting their accounts, customers are asking us to wait,” said the banker.

The amount of credit extended to the private sector is expected to fall especially in the fourth quarter because of a steep rise in interest rates.

Central Bank of Kenya has raised Central Bank Rate, by 11 percentage points since September 2011, in attempts to rein in on inflation and stabilise the shilling