Banks face bad loans mess as property market slows down

Desperate commercial banks, keen to offload bad loans are finding it difficult to dispose of distressed assets in the auction market due to glut in the real estate sector amid a sluggish economy.

Business Hub has learnt that investors are wary of pumping in cash to acquire new property, citing meagre return in the housing sector due to suppressed tenancy.

Instead, rich Kenyans who preyed on land and houses in the auction market, are choosing to invest in Treasury bonds which have better returns.

“Why would anyone spend cash buying houses that give you very little income…tenants sometimes vacate the units at will, at the same time you are spending a lot of cash in maintaining the rental houses…it is insane,” said Mike Ochola, who own various properties in Donholm estate.

“But when you put your cash in government bonds, you sit and let the money work for you…no maintenance cost whatsoever.”

Market forces

Unlike rental income which is subject to market forces, Treasury bonds are usually secure, medium-to long-term investment that typically offer you interest payments every six months throughout the bond’s maturity.

Consequently, banks are unable to recoup their cash from sale of delinquent properties amid warning that toxic loans could, in the long run, trigger cash flow insolvency.

Kenyan banks have been involved in a spirited effort to fix their balance sheets since they were hit by billions of shillings of losses after a decade-long property bubble crashed.

And bid by banks to persuade defaulters to pay up loans has also failed, as most of them flatly say they don’t have cash. 

Ordinarily, lenders cannot force customers to pay. University of Nairobi Economics lecturer Samuel Nyandemo says there is no respite for banks since the economy is still struggling hence the constrained tenancy.

“We can see a lot of heavy investment in the real estate which has created a glut…you have houses and buildings with no one to occupy them. Unless the economy is fixed, nothing much will happen,” he said on phone.

Data from Central Bank of Kenya (CBK) has indicated that the property market has been recording the highest growth in non-performing loans with no respite in the current economic climate.

“The real estate sector registered the highest increase in NPLs by Sh6.1 billion (15.8 per cent) due to slow uptake of housing units,” it indicated in the Quarterly Economic Review.

Experts argue the influx of distressed assets flooding the market could be a symptom of an over-collateralised banking sector. 

Garam Auctioneers senior auctioneer Milanya Odhiambo said things have not been good in the economy since last year.

“It shows in reduced cashflow in the pockets of people for several reasons part of which is loss of jobs and bad business environment,” he added.

He said the motor vehicle sector  leads in auctions as many Kenyan households finding themselves unable to service their loan obligations.

Though Kenya’s economy has grown at an average of five per cent per annum in the past six years, the growth has been overshadowed by a steady fall in corporate profits, a stagnation in workers’ incomes and a series of employee retrenchments that have slowed down businesses.

This has seen workers, who took mortgages on the strength of their pay slips, default with the slowdown in real estate hurting property developers who are finding it difficult to sell units that were built on loans.

Banks have hence stepped up debt recovery efforts to clean up their loan books.

Idle land

Odhiambo, however, appears not to agree with the contention that auctioneers are finding it hard to dispose of property, saying that properties that are hardest to auction are idle land that were originally acquired in speculation of appreciation.

“Most people these days buy property that generate income, either residential or commercial,” he said. – Additional reporting by John Otini