why banks were not leading to the real estate industry in 2017
The real estate sector has been struggling, developers finding it hard to offload new properties. At the end of the day, these developers are finding it hard to meet the requirements to service the loans taken for development. The lending regime by banks has discouraged lending to the private real estate sector as it is termed as one of the riskiest industries for lenders. We have all heard or seen of scenarios where a whole real estate company was auctioned for being unable to repay its loan as per the agreement. This is one of the reasons why banks are keeping off the real estate industry.
Many have blamed the interest cap rate that came into effect in september14,2016 which was established to make credit affordable by the common mwananchi,which in result caused a decline in the profits made by the commercial banks in Kenya. However, developers have a different point of view as they blame the banks for not taking into consideration the need for finance to transact business with the government in the big four Agenda.
Lack of credit from banks has led to a negative impact on the economy of Kenya as the buyers.the end users of developments,cannot access financing hence suffocating the regulatory regime. This means that developers will have to deal with low sales, resulting in them nor acquiring enough capital for redevelopment.
Mwenda Thuranira, CEO of Myspace Properties explained during an interview with the standard newspaper that banks feel safer trading with the government more than in real estate.
“However, as a developer, I am dealing with a tangible item. A home is more dependable for collateral. It will not move and will only increase in value. It is much better to deal with a developer than someone selling cars whose value depreciates by the minute,” says Thuranira to the standard newspaper.
In the year 2017, a report by the world bank on the economic update in kenya showed that the credit growth in the private sector had been declining continuously since the second half of the year 2015, falling from 25% in the mid of 2014 to 1.6% in the year 2017. This raised concerns for being the lowest level in over 10 years. The report also stated that With the risk free one year treasury bills and five-year government bonds trading at about 11 percent and 12.5 per cent respectively, the banks were encouraged to invest in government securities instead of risking and lending to other sectors. This led to the increase in credit to the government and fall in the credit to the private sectors.
Also, the report stated an increase in the non-performing loans. In the year 2016, the real estate sector was recognised as the biggest culprit in non-performing loans as recorded on the lenders book. According to the central bank, there was an increase by 15.8% of the Non-performing loans in the year,real estate making up the largest portion of the percentage by 42.3%.
However, real estate responded to this result blaming the performance on the slow uptake of units in the year. Further, the impact of the slow uptake led to the slow growth rate in the industry evident by the 10% decline in the growth of the sector between the year 2014-2017.
The report made it clear that the credit growth did not start after the establishment of the interest rate caps. It pointed fingers on the shifted lending to the government and corporate clients at the expense of the small and medium businesses and personal growth. Also, the fall in the rate of new borrowers had fallen by half, impacting the state of entrepreneurship and new jobs creation.
As we hope to recover from the effects of the coronavirus pandemic, real estate is dependent on the bank financing, to help in creating more developments. Although the future after the pandemic is unpredictable, all we have is hope for better days in the real estate industry.