Property Auction in Kenya: It is no longer a secret. Kenya’s real estate sector is in soup. Developers are facing imminent collapse and the auctioneers’ hammer for failing to pay back the loans they took to set up their property. And how can they repay when there are no customers willing to buy? With no customers will to spend on property and an economy that is in ruins, even banks have been left in dilemma on whether to attempt and auction off their borrowers or negotiate more flexible repayment plans.

This is because unlike years before, it has become extremely difficult for banks to sell recovered property in the auction market. In fact, so tough have things gotten that auctioneers are also struggling to sell recovered property.

But when did the rain start beating Kenya’s real estate? Mondays have turned into dreaded days for more reasons than just being the start of a work week. For anyone who owes a bank money for property they bought through a loan, and has started getting calls and emails about the pitfalls of default, this is the day they find out just how close their lender is to repossessing it.

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Whether by coincidence or design, auctioneers contracted by banks to sell defaulters’ property announce the planned auctions in Monday newspapers. And they are a busy lot.The number of properties going under the hammer has been on the rise, with auctioneers paying for up to six pages in the dailies to list what they have available for sale. Owners of residential houses and commercial properties have found themselves in situations where the amount of money they owe banks is much higher than the revenue they receive from either selling off or renting their real estate.

Several of the property auction in Kenya appear to have the potential to be salvaged, with a glance through recent adverts showing a six-storey hotel in Nairobi’s prime Westlands area as being one of the buildings that have fallen on hard times. There is also an 11-storey building in Thika town housing one of the leading retailers in the country, a six-storey hotel in Machakos town owned by former Cabinet minister Gideon Ndambuki, a section of the NextGen Mall and more privately owned commercial and residential properties.

The fact that this prime real estate is unable to pay for itself, analysts say, is a clear sign of an economy in turmoil.“(When) you see a lot of auctions through newspaper adverts, it points to the fact that the real economy is bleeding; it is not quite as vibrant as it is expected to be,” said Churchill Otieno, a senior research analyst at Genghis Capital on the ongoing property auction in Kenya.

And this sale of distressed properties through auctions as banks try to recover the money advanced to struggling customers is expected to continue in the coming months. Linda Mokeira, a property consultant, said 30 per cent of the properties on sale today have failed to meet their repayment schedules with lenders.“There is a tremendous increase of properties under auction since 2017.

The situation has steadily risen in the past three years to alarming numbers. Every third property in the market is a distressed sale, either on auction or on private treaty between the creditor and the owner or borrower,” she said.“Borrowers are no longer able to sustain the monthly repayments either due to job losses or loss of business.” Ms Mokeira added that the market was undergoing a correction and in some instances buyers were opting to default rather than end up with an overpriced property.

Kenya borrowed Sh. 1.021 trillion in the 12 months to June 2021

“Another cause for increased foreclosures is that the property market is gaining its real value as opposed to the overrated prices in the last decade or so, where properties were sold for more than double their real market values,” she said.“Any borrower who bought a property that was overpriced five years ago would rather default on repayments (maybe running for 15 to 20 years) than commit themselves to a lifetime on a property whose real value would be half, or even less, of the purchase price.”

Real estate consultancy Knight Frank, however, says that despite the high rates of property auction in Kenya, the industry has not hit rock bottom yet in pricing. In its report on the local real estate market, it indicated that the increased number of distressed properties in Nairobi had seen lenders intensify efforts to recover non-performing loans through the sale of collateral.

The firm added that there were fewer real estate deals and at discounted rates, and projected that property prices would further come down “in the near term until macroeconomic and local situations improve”. This is a cause of concern for banks such as KCB Group, HFC, Standard Chartered Bank and Stanbic Bank, who jointly account for 66 per cent of all mortgage accounts in the country.

An official with one of the leading mortgage providers said some of the banks had burned their fingers owing to careless decisions to lend, even in circumstances where it did not make business sense.

“Foreclosure is the last resort for any lender, but looking at some of the properties and where they are located, we could say that some of those lending decisions were bad from the start. It was only logical that some of the contracts would end in foreclosure. The credit decision was flawed from the beginning. Theirs was bad lending decision and it was largely expected,” said the official, who asked not to be named as he is not authorised to speak to the media.

The official added that the crisis in the property market was a self-correction of the “wanton escalation in property prices that we saw in the early 2000s. There is an oversupply, where most developers deemed there was demand. The yields, whether rental or capital gains, are coming down … it is just a mechanism where the market is correcting itself. In early 2000s, developers were making over 200 per cent returns on investment on their projects.”The uptake at auctions, however, has not been successful, added the official. Banks are now looking for alternatives to get back their money, including getting into agreements with defaulting customers.

A handful of the big banks control the Kenyan mortgage market, with Central Bank of Kenya data showing that six institutions control 76.1 per cent of mortgage loans.The five largest mortgage lenders are KCB (market share of 28.59 per cent), HFC (14.99 per cent), Standard Chartered (11.52 per cent) Stanbic (11.40 per cent) and Co-op Bank (5.21 per cent).

Banks, responding to a CBK query on the challenges they face in mortgage lending, identified the high cost of housing units, high cost of land for construction units, high incidental costs (such as legal fees, valuation fees and stamp duty) and limited access to affordable long-term finance as the major impediments to the growth of their mortgage portfolios. The lenders that have a huge portfolio of mortgage customers in distress have started offering solutions that try to balance the interests of the institutions and that of the borrowers.

HFC has in the past said it entered into a private treaty to sell houses for some of its customers in distress. As opposed to an auction, this arrangement allows the lender to sell the property at market rates, recover what is owed to the bank and give the balance to the owner.

KCB has also set up its property centre, which in addition to being a meeting place for buyers and sellers, also aims at helping mortgage customers who cannot service their debts meet potential buyers and sell property at market rates, with the bank retaining what it is owed.