Commercial banks in Kenya are cutting back lending to the real estate sector amid fears that developers may default on their loans due to high interest rates.
According to industry sources, banks began reducing credit to the sector as early as September 2011 when the Central Bank of Kenya (CBK) raised its base rate in a bid to tame inflation and stabilise the shilling.
CBK’s move saw commercial banks charging interest rates as high as 28 per cent, thereby discouraging borrowers from taking mortgages or borrowing to purchase property.
“Banks are shying away from lending to real estate firms in effort to reduce their exposure to rising defaults especially in high end residential market,” a banker told KHG on condition of anonymity.
Analysts say that high interest rates, rising property prices and the recent government sanctioned demolitions of private property in various parts of the country are to blame for the reversal of fortunes for the real estate sector.
“It is a cause for concern for real estate developers with banks cutting back lending to the sector, especially in the wake of rising construction costs,” an executive with a real estate company said.
“This may lead to delays in the completion of housing projects in several parts of country,” he said.
Real estate sector has been considered a safe haven for investment and it received 33.5 per cent (US$998 million) of the credit advanced to the private sector in the eight months to August 2010.