High interest rates in Kenya is hurting real estate investment. Interest is a cost to the developer of real estate as it is to the end buyer. Since October 2011 the Central Bank of Kenya (CBK) has increase the Central Bank Rate (CBR) from 7% to 18% in an effort to tame runaway inflation and stabilise the weakening shilling. Consequently commercial banks have increased their lending rates from low figures of 11% to about 25%.
While the intervention by the CBK brought almost immediate relief to the economy, the effects of high interest rates on real estate is yet to be felt. Real estate market is an imperfect market. Any changes in real estate market is felt several months later. This can be explained by the process and time it takes to deliver real estate.
High interest rates in Kenya mean that ongoing projects will cost more when finally delivered. This will be due to higher costs of material, labour and most importantly the cost of construction money. Halting or delaying work in progress would only escalate costs further. Developers will therefore want to pass the increased costs to buyers in the form of higher prices. Should they fail to do so, they will have to do with drastically reduced profits or suffer loses. New investors will shy away from real estate investment resulting in low investment.
High interest rates also translate into expensive mortgages. Any mortgage calculator on the internet will show you that an increase from 11% to 25% on a 20 year mortgage plan translates into a 100% increase in the monthly instalment . If your budget was Kenya Shillings 75,000 per month, you should now budget with Kenya Shilling 150,000 per month. Since real estate is mostly bought on margin, many potential buyers will shy away from mortgages as it is currently happening.
The Monetary Policy Committee of the CBK in February 2012 decided to maintain the CBR at 18%. This implies that commercial bank lending rates would remain high for the succeeding months. For existing customers, commercial banks have agreed to restructure their loans to ease their increased burden due to the high interest rates. This would be by lengthening the repayment periods and subsidizing the higher liability rather than increasing monthly repayments.
Upholding the CBR up while economic indicators show recovery will just delay the much desired market equilibrium.
Stephen Omengo
Real Estate Consultant at Tysons Limited, Nairobi-Kenya
Personal blog: www.omengo.co.ke
Personal email: stephen@omengo.co.ke
It is like a double edged sword; developers and end buyers alike have to pay for the high cost of interest rates. This stiffles growth and investment in the real estate sector as investment decisions are postponed. I Cannot agree with you more than this. This is very informative.
Thank you Joseph. You have driven the point home better.
Yesterday, Central Bank retained the Central Bank Rate at 18%. This mean the lending rates by commercial banks will likely remain high as before.
Very informative indeed,!!!!