BiG READ: Property developers in wait-and-see attitude

Two – plus years of surging prices and soaring demand, Kenya’s real estate sector is now staring at a prospect of being hampered on the back of recent radical move by the government and organic market forces.

President Uhuru Kenyatta Thursday last week signed into law the Finance Bill 2019 after the bid to remove a cap on commercial lending rates was passed in Parliament on Tuesday 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 face an increase in loan rates of up to three percentage points following the removal of the legal cap on commercial lending charges.

Experts in the property market now reckon that this decision has created uncertain environment for local investors even though the banks have vowed not to raise loans rates arbitrary as a result of the nod.

Property developer like Lordship Africa, believes the move will be very decisive for market trends in the coming months. Its Chief executive Anuj Kale says this will 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,” says Kale in an exclusive interview with Financial Fortune Media.

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.

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 founder, 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, according to Lordship Africa’s Kale, 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, its going to be tough in making these decisions,” he says.

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.

Published on Financial Fortune by Steve Umidha