Interest caps hurting mortgage uptake, say real estate investors

A real estate development in Kiambu County. The government might not achieve much in its efforts to shoulder the burden of housing through development pacts, say investors. PHOTO | salaton njau  

By MWANGI MUIRURI

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Summary

• Cytonn is rooting for review of the credit ceiling law to address urban housing shortage.
• The firm argues that building a house is about spending money and that money has to be sourced as capital from some credit partnership with a financial institution.

An investment firm is rooting for review of the credit ceiling law to address urban housing shortage. It says the move will encourage many financial institutions to venture into mortgage financing, unlike the current situation.

Cytonn says the government will not achieve much in its efforts to shoulder the burden of housing through development pacts and floating of financial and legislative rebates.

In its January 2018 report titled The Total Cost of Credit Post Rate Cap, the firm says financing mortgages is the key to addressing housing shortage.

It argues that building a house is about spending money and that money has to be sourced as capital from some credit partnership with a financial institution.

The report argues that after the government implemented a policy of interest rate cap, readjustments undertaken by lenders as they struggle to stay in business have handicapped the housing sector.

The Treasury has, however, dismissed banks claims that the interest caps were to blame for the credit crunch to the private sector.

“The private sector credit crunch cannot be fully explained by the caps. It was at four per cent when the rate cap law came into effect,” said Principal Secretary Kamau Thugge on Wednesday.

He said the slowdown in credit growth was not unique to Kenya. “Uganda and Tanzania are experiencing a similar situation, yet they do not have rate caps,” he added.

READ: CBK governor says capping of interest rates has hit economy hard

Cytonn argues that despite gross loans accessed for quarter three of 2017 rising by 1.0 per cent, demand for credit remained unchanged in all sectors, except in real estate, which recorded a decline.

“Most of the banks (55 per cent) interviewed in the survey indicated that interest rate capping negatively affected their lending as it compelled them to tighten their credit standards,” the report reads. It says non-performing loans increased in seven sectors: building and construction, trade, real estate, tourism, transport and communication, manufacturing and household sectors. This scenario is said to cause anxiety to would-be new recruits in mortgage, with the end result being “low financial participation with fewer than 25,000 mortgages in the country.”

This comes as the World Bank proposes having a Kenya Mortgage Refinance Company (KMRC) that adapts from other successful models such as Malaysia and Morocco that guarantee up to 70 per cent of mortgage loans. Nigeria, too, subscribed to a bond scheme for citizens to acquire own homes.

“This will see the number of mortgages in Kenya that average 25,000 a year rise to an average of 60,000 mortgages,” says the report.

Currently, the government mortgage scheme greatly benefits the elite, leaving out the middle and low income earners. Cabinet secretaries and governors can enjoy up to Sh40 million mortgage loans from a billion-shillings revolving fund that also serves top State officials.

Other senior officials can borrow between Sh25 million and Sh35 million, depending on one’s rank. The fund is managed by the Ministry of Land, Housing and Urban Development.

Cytton Investment doubts the recently announced Sh40 billion housing incentives by the government will realise the target.

The incentives for the private sector are aimed at helping developers deliver 4.3 million housing units by 2030, equating to 358,000 units per year, a 617 per cent increase from the current annual supply of 50,000 units. 

READ: State targets innovation in Sh2.3trn affordable homes plan

Of the planned affordable homes, 52 per cent will target low-income households earning Sh25,000 and below, per month, who are unable to finance a home loan.

According to the government, the move aims at fostering public-private partnerships (PPPs) towards addressing the housing shortage, which currently stands at a cumulative two million units, growing annually by 200,000 units, according to the National Housing Corporation (NHC), through eliminating the challenges that investors cite as hindrances to the partnership model.

But Housing Principal Secretary Aidah Njeri Munano says interest caps should not be seen as a hindrance to mortgage uptake.

“When we say we are floating incentives to development partners, we have not locked out banks, savings and credit institutions, and even property brokers from the discussion table,” she says.