Construction debt rises to Sh106bn as sector booms

Bank loans
The upsurge in credit is in tandem with the growth in the real estate sector. PHOTO/FILE
The amount of loans and advances extended to the Kenyan building and construction sector rose to an all-time high last year underlining the rapid expansion of the local real estate industry.

According to Economic Survey 2016, which was released by the Kenya National Bureau of Statistics (KNBS) in May, loans advanced by banks and saccos to construction projects rose by 32.3 per cent to Sh106.3 billion from Sh80.4 billion in 2014.

The upsurge in credit is in tandem with the growth in the real estate sector, which expanded by 8.9 per cent last year compared to 8.5 per cent in 2014.

The property sector, which is measured in terms of rent earnings, has enjoyed more than a decade long rally as investors rushed to meet the housing deficit in the country.

The scale of private projects completed in major urban centres rose to 367.1 in 2015 from 341.4 a year earlier while public works index rose to 116.2 from 106.1 over the same period.

The pile of debt was reported despite earlier reports that commercial banks had last year reduced credit to the sector to reduce their exposure to loan non-payment particularly in the high end residential market.

Industry sources said that commercial banks and saccos begun reducing credit to the sector as early as July last year when the Central Bank of Kenya (CBK) raised its base rate in a bid to beef up the shilling.

The central bank last July raised its key loaning rate by 150 percentage points to 11.5 per cent, up from 10 per cent to cushion the shilling against further weakening to the US dollar.

This saw banks raising their lending rates as high as 30 per cent, thereby discouraging borrowers from taking mortgages or loans to fund their construction projects.

The central bank has since lowered its base lending rate to 10.5 per cent and banks have also lowered their rates to lows of 14 per cent – a move that is likely to enable more developers to acquire credit.

A State-proposed housing kitty that will offer cheaper mortgages to low income earners mainly through saccos is also expected to significantly raise the amount of loans and advances to the cash-intensive real estate sector.