High cost of loans dampened property growth in last quarter

The high cost of borrowing slowed down activity in the real estate sector during the fourth quarter of 2011, as property developers put on hold their construction plans.

A new property index released by real estate company Hass Consult indicates that during the quarter under review, new building contracted with future phases of constructions underway being postponed and current phases downsized.

“This is where we see the real impact of government policies and economic trends on the housing market. We now see developers retreating at speed. Very many building plans have been shelved at least for the time being,” said Farhana Hassanali, property development director at Hass Consult.

The situation according to Hass is more prevalent in the middle level market as both developers and buyers at this level are heavily dependent on loans.

Further, the company cites the impact of the prevailing economic trends both in the local economy and outside as having dictated home buying habits in the high-end market, which has mainly thrived on cash purchases from a mixture of corporate and individual buyers.

The property index also noted a rise in rental prices, especially in the middle level real estate market that is now targeted as home buyers and tenants shift focus from the high-end market.

“This situation has been worsened by the mismatch between demand and new construction, which has been created by an ongoing tendency to flood the high-end construction market almost ignoring the lower markets in the property chain,” said Ms Hassanali.

Last year, the Central Bank of Kenya through its monetary policy committee decided to raise its base lending rate as a measure to stem inflation and save the home currency from losing its value against the dollar; a decision that informed the increase in bank loans with most banks charging above 25 per cent in interest.

While acknowledging the impact of current government policies, developers are upbeat that innovative financing channels will come up to revamp activity in the sector.

“At the moment, new borrowing can be challenging to developers.

However, this is a temporary challenge and soon we should be able to see a turn to other sources of funds,” said Mr Mbugua Kamau, board chairman of Home Africa Community Limited.