24 Jul It’s time for banks to change tack in real estate financing

The real estate sector continues to experience rise in non-performing loans (NPLs), according to Central Bank of Kenya reports. In fact it had the highest NPLs in the first quarter of this year. This has inclined some pundits to believe that it could signal the culmination of the near decade boom. I disagree. Financial lending institutions have tightened money tap to this sector and the government appetite for domestic borrowing hasn’t made it any easier. Coupled with the tangling building collapse and the new kid – demolitions, this sector is limping.

While I acknowledge that the real estate and construction sector has had dismal growth, if any, in the last three years and could justify the rise in NPLs, a good percentage of real estate NPLs I reckon are as a result of the lackluster approach that banks have when scrutinising projects for financing and even during construction. It borders on indolence.

Over my practice years, I have come across projects financed by banks with glaring mistakes that ordinarily would be dismissed forthwith. In one case, the contract bill of quantities was front loaded with nearly fifty percent of the contract amount in the substructure work only, the contractor having made his money walked out of the project leaving the developer and bank with balance amount impossible to complete the project. In other cases, developers have hoodwinked banks with cooked project feasibilities or even some scenarios where monthly payments are overvalued without bank notice. These are a clear pointer on the need of the banking institutions to change tack if real estate financing is still their target.

Here is what they must do. Unlike a decade ago, the banks must be wary of emerging real estate challenges before financing a project. Time and cost overrun on projects is proving to be the new normal in this industry. In addition, due to our country’s ethics deficit, the respect for numbers in feasibilities is out through the window and a lot of numbers cooking is taking place. There is also the threat of overvaluing project progress payments or even diverting payment made for a specific project on to another, not to forget irregular construction approvals. In the wake of all these, it is clear that banks need properly trained construction experts to thoroughly review projects before financing. For instance, most foreign financial institutions seeking or already financing real estate projects in Kenya insist on appointing their own project managers. It is a pre-condition for financing.