Commercial banks are holding back funding to real estate firms hit by the rising shift to e-commerce, which has punctured occupancy of offices, shops, and malls, leaving property developers with loan repayment struggles.
A new report by the Central Bank of Kenya (CBK) said banks have cut back on credit to real estate developers as a precaution to curb a pile-up of bad debt.
“The low demand for commercial, detached, and semi-detached houses is reducing the ability of the real estate and construction sectors to repay their loans. As a result, lenders slowed financing construction projects to mitigate underlying risks,” the CBK said
in a newly published financial sector stability report.
CBK data shows that real estate credit growth hit a 10-month low of 3.6 per cent in July, reflecting the hold back by commercial bank.
Data by the apex bank also shows that real estate, trade topped banks’ loan defaults. For example, as of the quarter ended March 2024, top bank loan defaults were in trade (Sh142.5 billion), manufacturing (Sh124.7 billion), and real estate (Sh117.1 billion), with the three segments making up 60 per cent of the defaults in the banking sector.
The CBK financial stability report, which has captured developments in real estate sector since 2022, notes that expensive mortgages due to high interest rates and tough economic situations have hit the real estate sector as many businesses cut costs.
More businesses in the country have also embraced the remote working culture since onset of the Covid-19 pandemic in 2020, which limited movement and forced companies to innovate alternative working formulas.
“The real estate remained subdued for two consecutive years to 2024, partly reflecting low demand for commercial and residential units as some organisations moved to virtual offices. The situation has been compounded by rising interest rates that have made mortgages more expensive,” the CBK said.
The financial sector regulator noted that since last year sales, purchases, rental, and occupancy rates of residential, office, retail, and hospitality properties have slowed, compared to 2022.
The report also notes that a slow growth in the income of households has seen more families renting units in apartments than take up space in costlier detached and semidetached units.
