Trouble brewing in Kenya’s house loans market

Wednesday December 12 2018

Low cost houses under construction in Athi River, Kenya. The country's housing sector recorded the highest growth in NPLs of 15.8 per cent due to slow uptake of housing units, underpinning its contribution to the banking sector’s gross NPLs, which increased by 3.9 per cent from $2.7 billion in the first quarter to $2.8 billion. FILE PHOTO | NMG


Kenya’s housing loans market is going through a rough patch that has seen the premier mortgage lender HF Group slide into a loss-making territory with two other commercial banks opting out of the business altogether.

Even as the Kenyan government prioritises the construction of affordable houses as part of its Big Four Agenda, the mortgage market is in a crisis owing to increasing cases of payment default, slow uptake of new units and lenders avoiding a market segment that has become one of the biggest contributors of ballooning non-performing loans.

The problems in the mortgage market have reached an alarming level, with latest Central Bank of Kenya statistics showing the real estate sector posted a decline in growth in the second quarter of this year to 6.6 per cent compared with the 6.8 per cent recorded in the first quarter.

More critically, the sector recorded the highest growth in NPLs of 15.8 per cent due to slow uptake of housing units, underpinning its contribution to the banking sector’s gross NPLs, which increased by 3.9 per cent from $2.7 billion in the first quarter to $2.8 billion.

“The trading environment continued to be unfavourable, leading to a slowdown in the real estate sector growth. The tough operating circumstances have led to an increase in NPLs, which has adversely affected business performance,” said Sam Waweru, HF Group managing director.

The group, which posted a $3.2 million loss in the first nine months of this year, saw its NPLs increase by 10.4 per cent to $86.1 million, from $78.3 during the same period in 2017.


The high cost of housing units and land for construction as well as high incidental costs and difficulties with property registration are the major impediments to the growth of the banks’ mortgage portfolios.

Other impediments include borrowers’ low levels of income and the lenders’ limited access to affordable long-term finance.

According to the CBK, commercial banks have now introduced tighter credit standards that have put many borrowers off the mortgage market.

Last year, the interest rate charged on mortgages averaged 13.57 per cent compared with 18.7 per cent in 2016, mainly due to interest rate capping, which became effective on September 14, 2016.

Last month, Kenya’s Monetary Policy Committee retained the policy rate at nine per cent, effectively fixing lending rates at 13 per cent.

While this has stimulated demand for housing loans, Kenyan banks are not willing to issue them on a long term basis, instead opting to channel their funds into government securities that offer high returns after three months, six months or one year.

Last year, 75.5 per cent of lending to the mortgage market was accounted for by six institutions: One medium sized bank at 20.9 per cent and five banks from the large banks peer group contributing 55.6 per cent.

However, the value of non-performing mortgages increased to $273 million in December 2017 from $220 million in December 2016.

Notably, the number of financial institutions offering mortgages to customers fell to 31 from 35 after two banks quit the business while two others were bought out.

To address the financing obstacles, to uptake of mortgages, Kenya has set up the Kenya Mortgage Refinancing Company to act as a financial intermediary between the capital markets and financial institutions, particularly commercial banks that offer mortgage loans by providing them with liquidity.

According to property consultant firm Knight Frank, the retail property sector continues to be a major focus of development activity, with the shopping mall concept taking root in a wide range of sub-Saharan cities.

The real estate sector which was previously dominated by individual developers, has seen the entry of more institutional developers such as saccos, private equity firms and foreign institutions.

While Kenya aims to invest a staggering $22 billion over the next year to put up at least 500,000 units as parts of efforts to tackle the two million units annual deficit, the slowdown in mortgage uptake could scuttle these plans.

Currently, only about 25,000 Kenyans have signed up for mortgages and the majority are in financial distress owing to interest rates oscillating between 13 per cent and 17 per cent, resulting in a significant surge in non-performing mortgages.

In Rwanda, the housing demand is estimated at 186,163 units, with an average demand of 16,923 affordable units per year. Uganda has an estimated housing deficit of 1.6 million, with Kampala having an annual deficit of 100,000 houses.

In Tanzania, access to credit is a major problem for real estate investors, falling from 24.8 per cent in 2015 to 7.2 per cent in 2016 and to 0.3 per cent in 2017, attributable to a rise in NPLs. Thus, banks preferred to lend to the Tanzanian government.

Unfavourable government policies have also hindered investment in the property sector.

These policies include implementation of austerity measures such as surplus income cuts for government employees thus restricting their property purchasing capabilities as well as a strict new tax regime introduced by the new government since 2015 resulting in reduced spending.

It has also resulted in the closure of firms and scaling back of multinational firms. Tanzania imposed 18 per cent VAT on all property purchases, increasing the cost of buying property, as compared with countries such as Kenya where VAT is only imposed on commercial real estate purchases.

The country’s housing demand is estimated to grow by 200,000 units annually, with the cumulative deficit currently at three million units.