Bankers are unable to sell property on the auction market. PHOTO | FILE | FOTOSEARCH
Nothing describes frustration than the tale of a banker who has
to plead with his customer to choose their own terms on how they will
repay a loan they have already defaulted on.
The shoe
is usually on the other foot, with an overbearing lender deciding on how
long you will stay with their money, what rate you will pay and setting
up painful repercussions for missing payments that should whip you into
line.
The famous quote, “If you owe the bank $100,
that's your problem. If you owe the bank $100 million, that’s the bank’s
problem”, holds true until you are in Kenya in 2020.
Almost everyone who took out a real estate loan is defaulting, becoming the banks’ problem.
Bankers
are unable to sell property on the auction market and have now been
forced to renegotiate loans on their customers’ terms. A keen observer
will have noticed that auctioneers are finding it hard to dispose of
property, with the same assets appearing week after week in the papers.
“Customers
discovered that banks cannot sell the properties and when banks
approach them they tell them to go ahead and sell,” said Eric Oluoch,
group CEO at debt management firm Quest.
“Banks realised they will find themselves holding a huge
portfolio of property that cannot be disposed of and that is when they
came up with this new plan. I think what we are going to have is that
the terms of the mortgages are going to be longer,” he said.
Economist
Robert Shaw says he does not pity banks for falling into this quagmire.
He said lenders fuelled this unstainable system and are victims of
their own practices.
“It is not just a question of
customers, banks also made lending decisions without being aware of the
circumstances of the market. Banks must bear in mind that the
relationship with a customer is two way, they should look at themselves
and see that maybe there is a different way,” he said.
Mr
Oluoch, says this is a build-up from when bankers never used to lend to
people without property until Barclays started offering unsecured
loans.
This ushered in a period where loans could be
issued on the strength of a payslip, a balance sheet or even a history
of banking transactions, liberalising the market and causing a credit
boom.
HOUSING BOOM
During
this period of plenty, a housing boom was created in the market funded
partly by a thin mortgage sector but mostly unexplained cash.
These
houses were then used to take up more loans to build more for a
seemingly insatiable market for office space and high-end properties in
the Rundas and Kilimanis.
“At the time, a lot of people
were putting up houses, which fuelled a situation of speculation in the
real estate sector with superficial demand and crazy prices. You could
go to an empty plot kilometres away from Nairobi and because a
university had promised to build there or a road would be built there
later, prices would go up,” Oluoch said.
“Banks were giving loans on properties with crazy values,” he said.
But
when the rate cap was introduced, suddenly banks became defensive,
stopped lending to risky businesses and concentrated on those with
property, starving the rest of the economy of much needed cash to keep
up the demand.
Then the economy took a dip with
government delaying payments to suppliers and cutting down expenditure
on large-scale infrastructure.
DOMINO EFFECT
The
domino effect hit businesses denied loans by banks and starved of
cashflows by government, leading to losses in wider sectors of the
economy.
As a reaction, businesses themselves started
firing workers to cut costs, sending home thousands of employees, and
demand for houses vanished.
People stopped servicing their loans and banks started foreclosures, repossessing houses and selling them via auction.
“With
no disposable income, it became a case of whether you will eat and pay
school fees or service a loan, it was a no-brainer,” Oluoch said.
The
problem was that those who sit at auctions are looking for a bargain
and would not pay those crazy values the market boom had created.
But
repricing was almost impossible given the consumer protection laws
stopping banks from selling distressed properties for peanuts, requiring
them to get as much value as possible.
Section 97 of
the Land Act 2012 requires banks to exercise duty of care on reposed
properties and empowers defaulters to sue if their assets are sold off
cheaply.
It came up after several cases of collusion
had seen properties sold off for a song then banks would audaciously
demand more money from auctioned clients to top up the difference.
“The
problem is that nobody is offering 75 per cent so we keep advertising,
but we are not selling. So someone is sitting on money, but can’t buy
because the price is up,” said NCBA Group Managing Director John
Gachora.
MAKES NO SENSE
Houses
that were selling for Sh25 million in Kilimani two or three years ago
are going for Sh13 million and that is by their owners not the banks.
Deepak
Dave of Riverside Advisors said the costs and agitation involved with
repossession only to then find you are still in loss makes no sense.
According
to bankers who have talked to Smart Company, they are now forced to go
back to the property owners to renegotiate terms.
“The
customer shows you this are my Local Purchasing Orders, and he has not
been paid, at that point what can you do, we just sit with them and say
look, let us see what arrangement we can have rather than auctioning,” a
local banker, who did not wish to be named, told Smart Company.
National
Bank of Kenya CEO Paul Russo says the first option of dealing with
defaulters is not to auction but rather try and sit with them to find an
amicable solution.
“There are those willing to come to
the table, those we are going after their security and those who we are
pursuing over and above through courts. You can’t rule out that there
are people who take loans with no intention of repaying,” Russo said.
Deepak
said the strategy only makes sense if the restructuring is done with
enough cost attached or a recovery-dependent cash sweep that means the
developer is not getting a gift.
He said that he hoped the Central Bank of Kenya is keeping an eye on what is being signed off at the banks
“I
think what is happening is the defaulting developers are likely getting
a gift. If the market recovers, then their debt looks less expensive.
If it stays weak, then the lender is carrying the cost of waiting, not
the developer,” he said.
There is fear that we may have
blown a real estate balloon like the 2008 financial crisis and the
reason it has not burst is this accounting trick.
Deepak
said that fake restructuring is not repricing housing, it is falsely
padding bank capital. Sooner or later this freezes working capital and
capex in the economy, hurting the wananchi most of all as demand falls.
“The
2008 crisis did not affect us so much because we were not credit
intense but now we have fintechs lending, banks setting up fintechs to
lend and people are credit driven. Unfortunately for us it is driven by
consumption rather than creating cash-flow. The government needs to find
a way to pump money into the economy so that money starts flowing and
hopefully people can start paying,” said Oluoch.
STOPPED LENDING
To
survive, banks have stopped lending to real estate projects a trend
that has seen mortgage banks chase mobile loans and retail banking
rather than touch real estate.
“The prolonged troubles
in the real estate sector, and the economy at large, have weakened
banking asset quality. Based on banks internal models and expectations
of the economic environment, this potentially leads to increased
provisioning levels and write offs. Cautious lending by banks, in turn,
leads to economic constraints as PSCG is subdued,” said Patrick Mumu, a
research analyst Genghis Capital Ltdd
Last year HF
Group cut prices on 700 houses by 30 per cent and this year decided it
will exit the home-construction business once it completes the units it
is currently building. Shelter Afrique, another mortgage lender, froze
loans for two and a half years and announced restructuring and reforms
of its financing model.
Bankers know that these
attempts at surviving will not suffice and only removal of the law
limiting pricing will help them realise the value of their dud home
loans. Mr Gachora says the creation of a State-backed asset management
company that will shoulder the difference between what potential buyers
are demanding and the valuation of the distressed property could be the
solution.
“If the buyer in the market takes at say 10
per cent below the required minimum price, government should take that
hit and give a very long term loan to the owner of that asset to repay
over time,” said Mr Gachora.
STILL UNKNOWN
The
real burden of these restructured loans is still unknown given the
structures of loan agreements related to real estate that range from
mortgages, loans secured by properties and real estate properties
financed by banks.
According to Central Bank data, as of October last year, banks had lent Sh372.5 billion to the real estate sector.
About
17 per cent of Kenya Commercial Bank has been loaned out to real estate
while Equity Bank has given 23 per cent of their book to housing loans.
Cooperative Bank has packed 12 per cent of their loan book in housing.
Housing Finance, which primarily funds homes, has no indication of what percentage of their book is exposed to real estate.
Analysts say that we first need to get honest figures out of the banks and then get them to raise capital or write off the book.
Then
later, an “asset recovery agency” to help banks monetise and liquidate
their bad loans is now needed, and CBK should allow a local fund manager
to set up such a fund.
“Second option is to help the
banks hide the problem and ‘bless’ bad restructures so the banks can
corruptly hide the issue, then we all pray the problem just solves
itself. This would be highly risky not to mention unlikely, and I
believe the governor is not the sort to let that happen,” Deepak said.
Mumu
says all is not lost, the real estate market has experienced
appreciation in certain pockets though this has been supported by
infrastructure, not speculation.
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