High cost of borrowing is hurting the real estate sector as developers and home buyers struggle to adjust to the demanding financing requirements.
In its Q1 2012 report, the Kenya National Bureau of Statistics noted that the construction industry grew by 3.2 per cent compared to 7.0 per cent a year earlier – a clear indication that growth in the sector could be cooling off.
The report also stated that a major slow down was recorded in the consumption of cement which grew by 3.8 per cent in the first quarter of the year compared to 16.2 per cent in the same period last year.
Cement consumption is a major indicator of the state of the building and construction sector, which has been one of the main drivers of the Kenyan economic growth.
“The lethargic performance is mainly attributable to high cost of borrowing from the financial institutions,” noted the KNBS report.
Any changes in the interest rates have a direct bearing on the real estate sector as a significant number of developers and buyers rely on bank loans to fund their projects.
According to the HassConsult, a property firm that conducts Kenya’s only property index, a significant number of developers have postponed their projects due to financial pressure and this could slow down the previously booming real estate sector.
“Most developers rely on bank loans to fund their projects and the high cost of borrowing has put them under great financial pressure,” Farhana Hassanali, property development manager at HassConsult said earlier this year.
Interest rates in 2010 were quite favourable (13.5 -15.0 per cent in 2010 ) and this fuelled growth in the sector. However toward the end of 2011 when the central bank raised its benchmark lending rates (to 18 percent) the uptake of loans nearly halted.
“The uptake of the mortgages slowed by an average of 15 per cent to 20 per cent between June 2011 to around April 2012,” said KCB group director, mortgages, Joram Kiarie.
Most developers, according to Kiarie, shelved their new construction plans while others downgraded their preferences to more affordable property a move that greatly impacted on the uptake of loans.