Kenyan banks increase collateral demands amid fragile property market

Kenyan banks increase collateral demands amid fragile property market

A crane at a skyscraper construction site, Nairobi, Kenya Source: Nirian/iStock/Getty Images Plus Kenyan banks’ exposure to real estate has led lenders to demand more collateral from customers amid worries of a property sector slump.

A dozen Kenyan banks hold real estate collateral totaling $37.1 billion, according to a recent report by Egyptian investment bank EFG Hermes that warns lenders are among the most exposed to a property price correction.

Banks have now asked borrowers to provide more collateral should the value of their existing collateral depreciate, Dr Samuel Tiriongo, director of research and policy at the Kenya Bankers Association, told S&P Global Market Intelligence.

"The frequency of the revaluations would vary from one bank to another, based on respective bank internal policy," Tiriongo said. "In most cases, and from experience, the revaluations would happen every two to three years."

‘Stagnant’ property market

Land prices have dropped significantly from a 2017 peak as a lack of potential buyers and tenants for both commercial and residential property depresses valuations. Nairobi’s office vacancy rate more than doubled from 2011 to 2020 to reach 22.3%, EFG notes.

"Structural changes are needed to improve the outlook, which looks stagnant at best," EFG wrote, adding that banks were especially exposed. Real estate loan collateral is probably around 50% to 70% of the asset value, according to Eric Musau, head of research at Nairobi-based Standard Investment Bank.

Banks want borrowers to increase collateral following declines in property and land valuations to ensure that this still exceeds the value of the loan, providing sufficient cushion for their facilities, Musau said.

"If banks have a headroom of about 30% to 40%, and then the value declines so that this buffer falls below, say, 10%, that becomes a worry for them — especially when you consider that interest can ramp up the total amount payable quite quickly," Musau said.

Loan moratoriums to help borrowers during the pandemic have reduced banks’ interest income, adding to their concerns about falling property prices especially with slower sales in certain market segments.

Stock investors will go overweight on banks that do obtain sufficient additional collateral from borrowers to cover real estate loans and will cut their exposure to any banks that fail to reduce the risk associated with their real estate lending, said Ann Wacera, a senior investments analyst at Cytonn Investments in Nairobi."The bigger banks are better able to do this so they should benefit, and the smaller […]

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