The boom in Kenya’s real estate a few years ago made property developers plunge in without considering market fundamentals such as the fact that property cannot easily be liquidated. Therefore, some investors are now stuck with property for which they are still repaying loans, writes ALLAN OLINGO

The speculative wave that has been evident in the real estate market is dying away, as market fundamentals become realistic. Developers are now finding themselves with property they cannot sell and are facing foreclosures as banks seek to recover unpaid loans.

Residential buildings in Kilimani, Kileleshwa and Lavington in Nairobi. Most of the properties affected by the melt down are from such high-end areas. [Photos: Martin Mukangu/Standard]

A 2010 report by the Central Bank of Kenya (CBK) showed that the number of outstanding mortgage accounts have doubled since 2006 from 7,275 to 15,095 in 2010. The current default rate on mortgages is around six per cent, but with the hard economic times, this is bound to worsen. Investment analyst Martin Mwadilu says there is no immediate solution to the mess because it is market based.

“The only effective solution is waiting for the interplay of market supply and demand forces. The situation is made more difficult by the fact that we are in an election year and major economies all over the world are in turbulence,” says Mwadilu.

Considering the state of the global economies, the crisis in the euro zones, an election year for Kenya and implementation of the Constitution among other factors, it is hard to predict how long the real estate crisis may last.

Corrective measure

“It is a complicated interplay of several factors whereby if we are to save the real estate market, we must be willing to lose the shilling and thus mess the other sectors of our economy. It might be better to remain firm, move on and get prepared for what might be tough times ahead,” says Mwadilu.

The challenge is that with growing inflation, income has remained at the same level and, therefore, many are opting to dispose off the mortgaged properties at what the market can offer. The cost of borrowing has risen as financial institutions adjust base lending rates to reflect a weak shilling and CBK’s increased interest rates.

Mwadilu says as much as CBK’s action to strengthen the shilling is painful, it is an effective corrective measure and is anticipated to be short term.

Real estate conveyance lawyer Muthoni Wagenga says when a bank forecloses on a property, it means the developer’s rights on that property cease to exist.

“Where there is default on repayment, a bank will ordinarily pursue such a developer and issue reminders, demands and notices to the non-payment default,” says Muthoni.

According to valuer and property consultant Peter Mwangi, most of the properties affected by this melt down are from the high-end markets, including Kilimani, Kileleshwa, Lavington, Runda and Muthiaga.

“The market in this area seems to have flattened out, with the asking prices falling in some areas. The amount involved is high and out of reach for most Kenyans during these difficult economic times,” says Mwangi.

Mwangi adds that properties costing more than Sh10 million are the most affected, but there are also others within the range of Sh6 million that are not selling.

“People are apathetic on real estate properties in this kind of market where interest rates are quite high,” he says.

The local dailies are awash with properties being auctioned, signaling inabilities of people to service their loan and mortgage commitments.

CBK’s Monthly Economic Review Data released last week showed that in the eight months to August last year, the real estate sector was third as compared to households and the trade sectors in terms of credit advancement from commercial banks.

The real estate sector had $429 million (Sh36.5 billion) while the trade sector received $576 million (Sh48.9 billion) and the households took second place receiving $437 million (Sh37.1 billion).

Injunction orders

According to Mwangi, investments in real estate have had more to do with speculation than market indicators, explaining the dilemma developers are currently faced with.

“There was a lot of money in circulation and investors decided to try their luck in real estate. This caused prices to skyrocket, creating heightened interest. So many projects have come up and have been doing pretty fine until the market started to flatten out,” says Mwangi.

Property buyers, especially of apartments, are now spoilt for choice and can afford a bargain, unlike several years ago. This is because developers are desperate to close the sales and avoid foreclosures. Some developers, however, have opted to rush to court to stop the banks from taking their property.

Says Muthoni: “Some developers opt to seek the courts’ intervention by obtaining injunction orders barring the banks from disposing off the property. However, this is never a permanent redress and serves only to buy time or stall the auction process.”

Muthoni adds that some banks are flexible and can, upon issuance of the final notice, halt the foreclosure process if they can reach an agreement with the developer on the repayment.

Muthoni adds that an out of court settlement can also be reached if a repayment plan can be agreed upon between the developer and the bank.

“It’s, however, important to note that any such agreements are entered into without affecting the banks right to exercise its powers under the mortgage charge instrument,” she says.