The Central Bank of Kenya’s (CBK) latest Quarterly Economic Review revealed that gross non-performing loans in the building and construction sector increased by 15.8% year-over-year to KES 44.7 billion in Q2 2024, up from KES 38.6 billion in Q2 2023. This uptick reflects the deep operational challenges developers face due to rising costs, project delays, and a weakened demand for real estate. Meanwhile, the IMF has urged Kenya to avoid aggressive interest rate cuts, warning that too much easing could destabilize the economy and pressure the shilling. Conversely, the CBK and Treasury have pushed for rate cuts to stimulate economic growth and alleviate the burden on borrowers — many of whom are grappling with loan repayments in a high-interest environment.
In recent years, higher interest rates have made borrowing more expensive for both developers and prospective homeowners, adding financial strain to the already challenged real estate sector. Many developers have struggled to complete projects, leading to delayed timelines and, in some cases, defaulting on loans. This high-interest rate environment, while necessary to curb inflation, has restricted access to affordable credit and deterred new investment, contributing to a slowdown in the real estate market.
From the CBK and Treasury’s perspective, lowering interest rates would make borrowing cheaper, providing a boost to real estate developers and enabling consumers to take out mortgages, which could help drive demand in the property market. However, the IMF’s caution suggests that an excessive rate cut could jeopardize financial stability, potentially increasing inflation and weakening the shilling further, which could worsen borrowing conditions.
The sharp increase in NPLs is also a result of broader economic challenges, including inflation, supply chain disruptions stemming from the Russia-Ukraine conflict, and reduced consumer purchasing power. High inflation has eroded disposable incomes, making it more difficult for individuals and businesses to meet debt obligations. The geopolitical tensions have disrupted the supply of key materials, driving up costs and delaying projects, which in turn impacts the cash flow and loan repayment capabilities of developers.
If the CBK opts to reduce interest rates in the coming months, it could provide some relief to the real estate sector by reducing borrowing costs. However, such a move must be balanced carefully to avoid triggering new inflationary pressures, which could undo the benefits of a rate cut by weakening the shilling and making imports more expensive.
To address the current challenges, Kenya’s real estate industry may need to explore alternative financing mechanisms, such as private equity or partnerships, to reduce reliance on traditional bank loans. Additionally, policy interventions that encourage affordable housing and support the local production of building materials could help alleviate cost pressures and mitigate project delays.
Both the CBK and industry stakeholders may also benefit from revisiting the structure of loans and payment schedules, offering flexible terms to support developers and businesses struggling with cash flow issues. Meanwhile, an increased focus on lower-income housing and rental markets could help stimulate demand by targeting segments of the population that continue to need affordable housing options.
The outlook for non-performing loans within Kenya’s real estate sector hinges on the ability of policymakers and stakeholders to strike a balance on interest rates, while addressing the sector’s underlying structural challenges. For the real estate industry to thrive, a moderate interest rate policy could be key to maintaining financial stability while spurring investment in property markets. As inflationary pressures hopefully ease and global supply chains stabilize, the sector could see some relief, potentially leading to a reduction in NPLs over time.
