Private investors to get a piece of property pie
Rising lending rates have significantly pushed up the cost of mortgage in the country, putting over 15,000 Kenyans servicing housing loans on the brink of default. Many are unlikely to cope with the increased repayment rates, and this turn of events has made mortgage take-up one of the most unattractive ventures to both existing and potential customers. Photo/FILE
The local property market is headed for a major shake-up once proposals to list real estate companies at the Nairobi Securities Exchange are confirmed in the next few weeks.
Such a move, coming at a time when the housing sector is experiencing exponential growth, would put a lot of money in the hands of developers through Initial Public Offers, which would then translate into high-end housing units and a stable operating environment.
Last month, the capital markets regulator indicated that plans to create Real Estate Investment Trusts (Reits) were at a final stage, meaning it is just a matter of time before investors get the chance to buy shares in real estate companies.
However, Capital Markets Authority chief executive officer Stella Kilonzo says that regulations guiding the operation of Reits will first have to go through a public review before they are enacted.
That would then set the framework for licensing of firms operating as Reits, which would be listed at the Nairobi Securities Exchange.
“We expect the draft framework to be ready for public exposure and finalisation in the course of January,” says Ms Kilonzo.
But, noble as the idea is, analysts say investors risk losing their money should they go for the Reits at a time when interest rates are at an all-time high.
That risk is also compounded by the fact that it is hard to determine the financial stability of some of the real estate companies that may float their shares at the NSE.
Also, rising lending rates have significantly pushed up the cost of mortgage in the country, putting over 15,000 Kenyans servicing housing loans on the brink of default.
Many are unlikely to cope with the increased repayment rates, and this turn of events has made mortgage take-up one of the most unattractive ventures to both existing and potential customers.
Harun Nyakundi, chairman of the Joint Building Council, argues that the property market is at the moment very volatile, especially because of the rise in leading rates.
“The purchasing power of those who would like to invest in the sector had been eroded by about 25 per cent because the cost of money has also gone up by those percentage points,” says Mr Nyakundi. “Not surprisingly, what has followed is a significant drop in the number of houses being snapped up by buyers.”
As a result, Mr Nyakundi argues, the planned offer of shares at the NSE is ill-timed since the prevailing inflationary currents have eroded the faith most investors had in the market.
“No one is sure how long the current situation will take to calm down. While the Central Bank of Kenya says it should not take long, there is little commitment from market regulators, therefore all indications are that we are in for the long haul. I see a situation where the share values would grow beyond the reach of most Kenyans, triggering an unprecedented tumble of property prices that will translate into losses,” he says.
Mr Nyakundi warns that, if CBK continues to raise interest rates to check inflation and stabilise the shilling, Kenyans’ purchasing power will fall and people will set aside more money for basic goods, transport and school fees.
This would mean less cash for investing in the real estate sector. Developers will have to push down the cost of homes to attract buyers.
While that might be a good thing for the consumer, those already servicing mortgages will realise that the values of their homes, acquired previously at inflated rates, has taken a beating.
However, Daniel Ojijo, executive chairman of the Mentor Group that owns real estate firm Villa Care, says there is likely to be a high take-up of Reits once the regulations are in place.
“Because of the good returns in real estate, I expect a lot of interest in Reits once they are floated. The sector is likely return capital gains of between 15 and 20 per cent,” says Mr Ojijo, adding that the current appreciation in property prices is justified because rental properties have been fetching good returns, with apartment houses in some Nairobi estates earning their owners between Sh150,000 and Sh300,000 per month.
Though the Finance Act 2011/12 allows floating of securities under Reits and gives some tax incentives, it tasks the CMA with the responsibility of formulating detailed guidelines on how this would work. As of now, says Ms Kilonzo, there is no company that has applied for a Reits offer yet.
Though Africa Reits Ltd is the only such company currently operational in Kenya, it remains unquoted at the NSE.
The firm, which has invested in several housing developments around the city and its environs, two years ago raised equity valued at about Sh1.2 billion through a private placement that is not currently regulated by the CMA.
The markets authority is now proposing a dual regulatory framework that provides for the introduction of traditional rents-based Reits and the development or construction of new houses.
Traditional Reits involve pooling funds for investment in stable, income-generating rental properties, particularly commercial leases with limited investment in development projects.
This, Ms Kilonzo says, should be attractive to the public because income streams will be predictable, much like in bonds.
The other type of offer is called development Reits, and this is used to pool funding for construction of housing and other priority sector construction projects.
Through this approach, investors would be allowed to put their money into higher-risk development and construction activities.
“These (development Reits) will not be open to the public because of the significantly higher risks associated with construction but, upon completion, the properties would be eligible to be rolled into a traditional Reit once they establish a stable rental income flow,” explains Ms Kilonzo.
Currently, there are thousands of home owners who are stuck with mortgages they cannot service and houses they cannot sell because there are scarce buyers willing to take the dive into the unpredictable property business.
Many of these were enticed by interest rates as low as 10 per cent months ago, only to get the shock of their lives after banks adjusted their lending rates to an average of 23 per cent, double the initial deal.
This steep rise in interest rate levels has shaken the spending and investment habits of most Kenyans to the core, especially because most of them were weaned into a market characterised by a relatively low cost of borrowing.
And while the doubling of the interest rates may not sound that much to the undiscerning ear, real estate analysts warn that every one percentage point added to the cost of borrowing adds as much as 10 per cent to the total cost of acquiring a home.
Unless something is done, and done fast, they warn, many borrowers will default on their loans, and this will put lending institutions in a rather uncomfortable position.
Kabaki Wamwea, a director at County Developers, says mortgages are a very important component in the real estate sector, and that no economy can expand home ownership without creating favourable borrowing climates.
“That is why we hope that the current rates of lending are temporary,” says Mr Wamwea. “We hope that things will stabilise soon so that banks can revert to affordable rates, otherwise the consumer will not be able to shoulder such a huge burden on top of the pain in his food basket.”
A couple of two weeks ago, the Central Bank of Kenya increased its indicative lending rate to 18 per cent, and banking institutions took the cue to adjust their rates as well.
Currently, banks are charging between 23 and 25 per cent interest rates on new clients and up to 18 per cent on existing customers.
That means that the cost of acquiring a home has doubled over the past few months, yet rental income has not risen by a corresponding margin.
Borrowers are feeling the pinch, but some banks have moved in to ensure those high interest rates do not translate into bad loans.
One such institution is Family Bank, whose head of mortgages division George Laboso, though regretting the raise of rates, says they are “holding discussions with clients” to see how best they can approach this issue.
“We are ready to extend the repayment period from, say, 10 years to 15 years to reduce the burden,” says Mr Laboso.
At present, demand for housing in urban centres has outstripped supply by at least five times, according to the Kenya National Bureau of Statistics (KNBS).
This has led to high housing prices that have locked out low and middle-income earners from acquiring homes.
“We are thus projecting a slowdown in the mortgage business due to the high interest rates,” Mr Laboso says.
The current boom has pushed the cost of homes to more than 140 times the annual incomes of most Kenyans, according to a survey of Africa’s housing market carried out in March last year.
