What loan caps mean for property investors

Property developers could be the biggest winners in the law on bank interest rates signed by President Uhuru Kenyatta last week.

Players see a situation where property developers could get preferential treatment from banks, since they are considered low-risk to financial institutions.

The President assented to the Banking Amendment Act 2015, which caps interest rates to not more than four per cent above the Central Bank of Kenya rate.

There are concerns that with a more stringent credit regime, lenders will prefer to give money to less risky borrowers, who may turn out to be property developers.

For instance, a developer borrows money on an already existing asset supported by a title deed, which will be attractive to commercial banks since the risk is lower, according to Jubilant Microfinance CEO, Cyprian Kilonzo.

“Developers deposit a title deed in a bank, with the value of the land appreciating each day. In some instances, the lender pays the contractor directly without dishing out liquid cash, which is favourable to the lender. I am seeing a situation where developers will be among the biggest beneficiaries of the law given the low risk,” he says.

Anthony Murithi, Kenya Projects advisor, says there is need to review interest rates for old loans so as to have stability.

He says the law is bound to herald an era of certainty where a borrower has an idea of how much interest they will be charged over a certain period of time.

This is bound to encourage developers to seek loans to build housing units to address the current shortage of over 200,000 units annually, he noted.

 “This is a law that needs to be implemented to the letter. We hope it will not remain on paper because it is capable of addressing problems in the provision of housing to working middle class income earners who can easily secure loans so long as there is guarantee they will not be exploited by lenders,” he added.

Property developers also want financial institutions to lower the interest rates for mortgages further, given that these types of loans are normally long-term.

“Mortgage loans span up to 20 years, and to give Kenyans a chance to own homes, the rates should be lowered to single digit,” said Mwenda Thuranira, MySapce Properties CEO.

Dr Ojiambo Oundo, a lecturer at the University of Nairobi in the department of Real Estate and Construction Management, also shed some light on this new development.

HOUSING COST

To begin with, it is important for people to understand why borrowing is almost necessary in real estate investments. “Real estate is capital intensive, so it is unlikely that an individual can have enough personal savings to invest in it. The tendency therefore is to have a mix of personal savings and a loan from a financial institution.”

Dr Oundo, who is also a real estate consultant with Roack Consult Ltd, added that it is also an investment principle that an individual should not invest his or her personal equity alone. A smart investor should take advantage of tax incentive allowed on loan

interests, and therefore come up with a good mix between personal savings and loans to finance an investment. According to Dr Oundo, two things are likely to happen after the law becomes operational. One, the cost of housing will come down

tremendously, consequently increasing demand for houses. The construction cost will be lower since developers can access cheap loans and hopefully, they will pass these benefits to buyers. Secondly, lower interest rates will see many people qualify for

mortgages.

However, he pointed out that the impact of lower interest rates may not be felt by most Kenyans owing to the uniqueness of the property market. “About 68 per cent of Kenyans live in the rural areas and finance their investments, such as building a residential house, from their own sources,” he said.

This leaves 32 per cent of urban residents on the list of beneficiaries. However, a majority of urban residents are classified as low income earners, earning between Sh15,000 to Sh20,000, and thus may not qualify for mortgages.

“Considering that there are about 20,000 mortgages in the country, from a housing point of view, about half a million people stand to benefit from capping of interest rates,” said Dr Oundo.

Nairobi has been said to have an over-supply of commercial real estate in the recent past. Dr Oundo foresees a situation where this problem will be stabilised.

“Low interest rates will encourage expansion of businesses and starting of new ones. As a result, this will scale up demand for commercial spaces such as retail and office spaces that was starting to fall.”

 Therefore, investors looking to rake in some good returns should consider putting their money in commercial real estate.

Besides commercial real estate, an investor can never go wrong with residential house investment. With the cost of borrowing now reduced, more people would want to purchase or build homes. This makes it a wise bet for any investor.