High input costs subdue Kenya’s construction sector–CBK
Players in Kenya’s building and construction industry experienced a slowdown in 2023, attributable to increasing input costs and declining uptake in the market even as the government rolled out new projects under the Affordable Housing Programme.
According to the Central Bank of Kenya’s (CBK) Kenya Financial Sector Stability Report 2023, the sector’s growth dipped sharply last year, with further declines projected into 2024.
Last year, the country’s building and construction industry grew at a rate of three per cent, down from 4.1 percent in the previous year. This downward trend reflects subdued demand for both residential and commercial units, which continues to exert pressure across the value chain.
The CBK report attributes much of this slowdown to rising input costs, particularly for critical materials such as fuel, BRC mesh, steel, and cement.
Overall, the construction price index, which stood at 4.16 points in December 2022, surged to 7.1 points by December 2023, underscoring the steep rise in these material costs, the report notes.
CBK added that despite the increased costs, the supply of new housing units, particularly apartments, continued during 2023. However, there was limited supply of commercial space, office space, detached, and semi-detached houses.
Low demand
The low demand for these types of properties has had a ripple effect, making it harder for the real estate and construction sectors to service their loans. As a result, many lenders in the country have slowed down financing for construction projects to mitigate the risks associated with this market downturn.
The real estate market has also faced headwinds as demand for both commercial and residential units continued to weaken in 2023 and in the six months to June 2024.
According to the CBK, rising interest rates have made mortgages more expensive, further suppressing the uptake of houses in the country. This slowdown in demand has been exacerbated by a shift toward virtual offices, as more organizations adopt remote working models, reducing the need for physical office spaces.
At the same time, sales, rentals, and occupancy rates for residential, office, retail, and hospitality properties all experienced slower growth last year compared to 2022, as reported by the CBK.
Impact on retail and hospitality sectors
The slowdown in foot traffic to malls and shops, coupled with an increased reliance on online shopping and remote work, has compounded the challenges facing the retail and hospitality sectors, CBK disclosures show.
The industry regulator noted that rental prices in these sectors have continued to decline, as fewer businesses require physical locations. CBK explained that while rental prices have dropped, the reduced demand has led to an oversupply of commercial spaces, particularly in retail and office sectors, further increasing the credit risk for developers unable to sell or lease their properties.
Another trend highlighted in the CBK report is the growing preference for apartment rentals over more expensive detached and semi-detached houses.
This shift is partly driven by the slow growth in household incomes, making apartments a more affordable housing option. The limited uptake of new properties has made it difficult for developers to offload their units, CBK stated, creating a build-up of unsold stock and increasing the credit risk in the real estate sector.
The continued pressure on property developers is expected to further complicate the sector’s recovery in the near term.
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Rising credit risk in real estate
With the continued reduction in demand for high-end properties and commercial spaces, developers have faced significant challenges in servicing their loans. The CBK report states that banks have increasingly become more cautious, scaling back financing for new projects to reduce exposure to potential defaults.
Kenya’s banking sector has reported a steady deterioration in non-performing loans (NPLs) ratios to 16.34 percent from 15.5 percent experienced in February 2024. Borrowers in the building and construction industry has been cited as one of those adversely affected.
“Notable decreases in NPLs were observed in real estate, manufacturing, trade and building, agriculture and transport and communication sectors. Market concerns linger on the prospects of a further deterioration in NPL ratios should a high interest rates regime be prolonged,” KBA explained in their October 3rd research note while calling for a cut in CBK’s benchmark lending rate.
The persistent decline in demand, coupled with rising input costs, is likely to weigh heavily on the construction and real estate sectors as they navigate a challenging 2024.
