Why property market was on wait-and-see attitude even before Covid-19

As Kenyans sit at home watching the value of their retirement funds crater, it is no surprise that the property market is about to weaken further, thanks partially to the unforgiving waves of COVID-19.

Industry experts however say, that Kenya’s real estate sector was somewhat expected to get a hit this year on the back of two critical factors key among them being last year’s radical move by the State and organic market forces. The deadly virus only rubbed salt in that wound.

In November last year, President Uhuru Kenyatta signed into law the Finance Bill 2019 after the bid to remove a cap on commercial lending rates was passed in Parliament on the same month following a quorum hitch, and potentially boosting the flow of credit to the economy and return of expensive credit.

As a result, high-risk borrowers like individuals and small businesses were expected to face an increase in loan rates of up to three percentage points following the removal of the legal cap on commercial lending charges.

Following that decision, property market observers reckoned that the decision was bound to create uncertain environment for local investors even though the banks had vowed not to raise loans rates arbitrary as a result of the nod.

Property developer like Lordship Africa, in a past interview with this writer believed the move would be very decisive for market trends in the coming months. Its former Chief executive Anuj Kale saying it would likely continue into the near future – albeit in a short term and that we should expect a ‘wait-and-see’ attitude from the market.

“The way the equity and debt markets behave affect developers directly – but that said it is a very unpredictable animal, until the banks and capital markets decide for themselves what the market will bear,” said Kale in an interview.

Adding that, “So yes the interest cap is lifted but the banks have not gone into the practice of lending without the cap yet – until we see what their competitive nature is, perhaps how that drives capital markets, it’s best to wait and see what happens in the near future,” says Kale, who cautions that by acting on a prediction and conjecture now could be a giant mistake.

But Covid-19 came a little early even before the banks could monitor those lending patterns in the post capping rate review. The Central Bank of Kenya (CBK) last week began negotiations with the World Bank and the International Monetary Fund (IMF) for financial rescue package, targeted at cushioning Kenya’s economy from the vagaries of COVID-19 pandemic. This coupled with the ongoing virus pandemic is further expected to affect lending patterns in the coming weeks, perhaps months.

Tim Kipchumba, another property developer at Questworks concurs, but believes that the long term impact would be dependent on government’s appetite for borrowing.

“In the short term I believe the market will panic but in the long term it will entirely depend on government’s pattern of borrowing locally, provided it doesn’t borrow much from local lenders, I believe the market will be under no pressure – provided there’s enough money in circulation and working capital in the market, local banks will compete effectively,” he says.

Kenyan property developers, homeowners and landlords have been benefitting from the property boom and buoyant housing market in recent years – even after the introduction of interest rate cap in 2016, but that time could now be mired by the growing uncertainty in the sector at least in the next four to six months, according to Questworks Chief finance officer Mr. Kipchumba.

In early 2016, Kenyan legislators passed the law imposing a cap on commercial lending rates at four per cent points above the Central Bank (CBK) benchmark to cushion Kenyans against prohibitive cost of loans – since then Commercial banks have been pushing to have the law repealed, and they had their way last week.

Interest rates, especially the rates on interbank exchanges and Treasury bills, have a profound effect on the value of income-producing real estate as on any investment vehicle. Because their influence on an individual’s ability to purchase residential properties (by increasing or decreasing the cost of mortgage capital) is so weighty, many people incorrectly assume that the only deciding factor in real estate valuation is the current mortgage rate.

Interest rates can significantly affect the cost of financing and mortgage rates, which in turn affects property-level costs and thus influences values. However, supply and demand for capital and competing investments have the greatest impact on investment values.

These changes in capital flows can also have a direct impact on the supply and demand dynamics for property.

The cost of capital and capital availability for instance, affect supply by providing additional capital for property development; as they also influence the population of potential purchasers seeking deals. These two factors, he says work together to determine property values.

Anyone investing is going to be affected by capital markets reaction. It is a good thing because it triggers change. But unpredictability of it makes it a bit of a concern but until we see a regular practice under the new freedom from the banks, it’s going to be tough in making these decisions.

To invest in real estate, one needs high capital and favorable interest rates when borrowing money since banks use stringent guidelines during vetting process before granting loans for investments.