The recent decision by the Central Bank of Kenya to revise upwards a key credit pricing signal is bound to dampen demand and new projects in the real estate sector in the short to medium term, reversing the upbeat mood of a segment that has been battered in the past three years.
A cross-section of economists, finance and property experts have in addition warned that the current appetite for less risky government securities is bound to divert the much-needed capital from ongoing and planned development projects as financiers re-evaluate their investment priorities and portfolios.
“The cost of money is bound to rise from the decision to raise Central Bank Rate (CBR) as lenders align themselves with the announcement, which was made to target inflation expectations,” said Odhiambo Ramogi, an economist.
“The ripple effect of this is that this additional cost of credit will be eventually passed down to the end consumer who in this case is the developer of a project or a buyer of a property in terms of costlier capital and upward price revisions final units offloaded into the market.”
In late June, Central Bank’s Monetary Policy Committee reviewed the CBR from 9.5 percent to 10.5 percent, the highest rate in seven years citing inflationary concerns.
Equity Bank followed swiftly by becoming the first financial institution to make public an increase in credit prices following the directive.
Equity customers will be required to pay an adjusted lending rate of 14.69 percent compared to 12.5 percent, which was announced in January, a 2.2 percent rise in the cost of credit in barely four months.
NCBA Group followed suit with an announcement of an adjustment to 13 percent effective August up from 10.5 percent.
All financial institutions are understood to be working on revising their costs of credit and will make the adjustments soon.
“The close to 16 percent tax-free yield for the government is very difficult for any asset market let alone real estate to compete against on a hurdle rate basis and leveraged players are at the sharp and bleeding edge,” said Alykhan Satchu, a seasoned economist.
“Real estate prices are coming under downside pressure locally and globally as interest rates continue to rise.”
Mr Satchu, however, contends that Kenya’s wider financial system is shielded because mortgage penetration remains very low.
“The short and medium-term story for the real estate sector is essentially a demographic story and remains largely intact,” he said.
Experts say they see the rate averaging 18 percent in the not-so-distant future given the concerns around the government’s quest and ability to service the debts and reduced overall demand in the economy.
Mortgage rates in Kenya are priced based on the prevailing average interest rates that lenders charge for credit.
To make it worse, Kenya is a predominantly average-rate mortgage regime, meaning, that a rise in interest rates automatically results in a rise in mortgage rates.
In more developed economies, mortgage rates are fixed and do not sway with the seasonal changes in interest rates as central banks affect monetary policies from time to time to reduce the money supply and tame inflation.
In Kenya, none of the mainstream lenders offers fixed-rate mortgages outside seasonal promotions that are fixed for a maximum of five years, company mortgage schemes for employees and the recently launched Kenya Mortgage Refinance Company that is yet to get its footing and make a tangible impact on mortgage rates.
Experts say one of the immediate effects of a higher-priced mortgage rate will see cases of defaults rise among those already servicing such loans while those intending to take any might take a back seat.
“We are likely to see an increase in foreclosures among those already with mortgage loans. For those offloading units in the market and had finished their loans, there might be price reviews to attract demand,” said Mr Ramogi.
“Developers depending on loans as capital, we are bound to see them slow down on their projects or offload them at revised prices when they do to factor in the new cost of loans.”
As far as buying and selling are concerned, there are some tale-tell signs of a ‘wait-and-see’ attitude creeping in.
“We are already witnessing potential buyers who had expressed interest in properties asking us to give them more time before making formal binding offers,” said Robert Nyangweso, an agent based in Mombasa.
“They are citing economic pressures for their decisions.”
