Real estate turbulence goes beyond Covid-19

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Almost all the sectors of the Kenyan economy have delightfully started to bloom after a tumultuous period in which the Covid-19 pandemic had cast a dark spell of stagnation over the business environment.

However, real estate has been like the dormant seed that refuses to break from the soil even when the conditions are favourable. Real estate is a laggard in this tale of recovery.

Indeed, there are fears that the worst might just have begun for the housing market which, even before the pandemic, was already grappling with an oversupply.  In the first half of 2021, the confidence levels in the economy have surprisingly surged as people and businesses learn to live with the pandemic.

Although the containment measures aimed at curbing the spread of Covid-19 continue to spread a dark cloud over the economy, there has been a flurry of activities with analysts projecting a more-than-expected rebound in Gross Domestic Product (GDP) – the size of the national cake by the end of this year.

Factories are roaring back to life and the movement of people has gained pace. The planes carrying cargo and passengers have gradually returned to the skies. Trading of shares at the Nairobi Securities Exchange (NSE) has been as lively as the auctioning of coffee at the Nairobi Coffee Exchange. Even exports of flowers and tea have picked up as demand in the global market surges.

Even the Kenya Revenue Authority (KRA) has revelled in this economic bonanza to beat its tax collection target for the financial year ending June 2020. But it has been a different story for real estate.

In the first five months of this year, the value of residential and non-residential buildings approved by the County Government of Nairobi declined sharply by 61.2 per cent to Sh67 billion compared to Sh109.5 billion in May last year. This is the lowest level in over a decade.

Commercial buildings including retail and office space declined by 69.2 per cent to Sh10.4 billion in May this year compared to Sh33.8 billion in the same month in 2020.

Residential buildings approved for construction by Nairobi were valued at Sh32.1 billion in the period under review compared to Sh75.7 billion in May last year.

After months in which it was hurtling down from its high tower, the real estate appears to have hit rock-bottom. For developers, in a downturn like this, is time to buy as from here, the only way out is up. But that is assuming that all investors are homo economicus – that they will always be rational.

For regulated banks, pension funds or insurance funds, which deal in people’s money, they would rather play safe than regret.

Consequently, banks have been avoiding real estate like a plague.

Over 55 per cent of senior credit officers of 44 local banks that were surveyed by the Central Bank of Kenya (CBK) in June said they had tightened standards for real estate.

It was an increase from half of the respondents that said they had been more cautious lending to the real estate three months before. The only other sector that had such a hard time in the banking halls is tourism, even as lenders relaxed their lending standards against the rest of the industries.

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CBK attributed the tightening of credit standards in the two sectors to the adverse effects of the pandemic. “This was to avoid the possibility of non-performing loans as a result of the pandemic,” said CBK in the credit survey. Expectations regarding general economic activity and removal of interest rate capping, said the financial regulator, led to tightening of credit standards in tourism and real estate sectors.

Not only were banks clamming up with credit, demand for credit from the real estate also reduced, according to the Credit Officer Survey findings for June 2021.

Of the nine sectors, only real estate recorded a decrease in demand. Perceived demand for credit significantly decreased in the real state sector due to subdued demand for housing units, said CBK.

Bad loans

Despite their ultra-caution, non-performing loans (NPLs) or loans that have not been serviced for three months or more have been trending upwards. In the first three months of this year, the real estate sector recorded the highest growth in bad loans at 14.9 per cent (Sh9.2 billion).

There was a decrease in the value of mortgages in the market by Sh5 billion “mainly due to repayments and decreased mortgage facilities advanced by banks due to effects of Covid-19,” according to the CBK report.

Lawrence Kimathi, the Chief Finance Officer for KCB Bank, the largest mortgage lender, noted that of the broad sectors of check-off, mortgage, corporate and small businesses, only mortgages showed an upward trend in NPLs is the mortgage.

It crept to marginally 10.5 per cent in the first half of the year compared to 10.3 per cent in the same period last year. “We are seeing a bit of pressure, especially in the commercial part. You all know that there is a bit of an oversupply of office space and also from a retail space…malls and that kind of developments,” said Kimathi. “We are seeing pressure coming through and our customers going through some a bit of strain.” That market has reached its limit was captured well in a tweet by Cytonn Investments Chief Executive Edwin Dande, whose real estate company is going through a rough patch. “The race to build the tallest building in Upper-Hill, decked with spires to increase height, seems to have come to an end,” said Dande.

Mr Dande explained that with office occupancies below 50 per cent and work from home here to stay, he does not race-to-the-skies coming back anytime soon. “It’s time for the appropriate observer to declare the winner. Who is the winner?” wondered Dande.

Real estate firm, My Space Properties Chief Executive Mwenda Thuranira however doesn’t work-from-home is here to stay. Mr Thuranira reckons that employers have already flagged some teething problems such as lack of power that have tended to reduce productivity when people work from home.

“Just before the beginning of Corona when the economy started going down, many developers were stuck with stock. The banks cut finances for many projects. The banks’ appetite for real estate went very low,” said Thuranira.

“So, now if it is that low, nobody could go for approvals or pay for drawings,” he said noting that what the market is currently through is the correction. Property developers such as Thuranira insist that the property market follows your typical business cycles – rising to a peak when the demand is high before it nose-dives to hit a trough when supply outstrips demand.

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For example, when former President Mwai Kibaki rose to power in 2003, there was a change in the law that allowed apartments to be issued with title deeds.

All of sudden, apartments mushroomed everywhere. But soon, the markets got saturated with products such as pre-sales and off-plans. Then banks stopped financing the real estate, fearing th at the market stretched to its limit.

People ran out of credit. A lot of projects went down. “It means there was a depression. The curve went downwards. “But the curve always goes down and up,” said Mwenda. Nonetheless, the downturn in the property market has found its way on the books of real estate companies.

Centum Investment recorded its first loss in four decades, with Two Rivers Mall contributing to the Sh1.4 billion losses in the year ending March. During this period, its real estate wing, Centum Real Estate, posted a 71.7 per cent drop in net profit owing to reduced demand of the residential units on the fallout of the coronavirus pandemic

It is not only Centum that had a rough patch owing to difficulties in the property market. Almost all the listed companies dealing in real estate have been hit hard by the Covid-19 pandemic.

Property investments

Britam’s decision to lock most of its property investments came to haunt it after the financial services company posted a record Sh9.1 billion loss before tax in the year ended December 2020. This compared to a profit before tax of Sh4.6 billion in 2019.

The drop was largely attributed to provisions of about Sh5.3 billion for investment losses related to its wealth management fund, with analysts noting that its subsidiary, Britam Asset Managers, might have sunk much of the investors’ cash into long-term assets such as property.

Mortgage lender Housing Finance (HF) Group’s net loss widened to Sh1.7 billion in the year ending 2020. This was an increase of 1,450 per cent compared to a loss after tax of Sh110 million that it posted in 2019, owing to a tough operating environment that saw its revenues decline even as expenses ballooned.

Things were not any better for HF Group in the first quarter of this year after its loss widened more than 300-fold, from Sh633,000 to Sh191.8 million. The only I-Reit (Real Estate Investment Trust) listed at the NSE, ICEA’s ILAM Fahari I-Reit reported a 51 per cent drop in profit for the six months to June 30, owing to the loss of revenue from the anchor tenant, Tuskys at the Greenspan Mall, Nairobi.

Earnings for the period closed at Sh42.2 million, down from Sh86 million in the same period in 2019, as companies in the property market continued to struggle. For Centum, unlike in the previous period when it disposed of assets worth Sh2.2 billion, it never disposed of any asset in this period.

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