Poor property valuation blows ill wind for banks

Published on 10/07/2009

By Morris Aron

Financial institutions could be sitting on collateral worth much less than the amount of loans issued against them.

This follows revelations that property values in the market are highly distorted and could be misleading.

Experts warn that the development brought about by the absence of a common property valuation approach during yearly appraisals and accentuated by the on-going market correction in the high end residential market—is bound to raise the value of bad loans held by banks.

“There are huge disparities in the market between the price at which properties are sold or bought, and the actual value,” said Mr Justus Munene managing director of Dayton Valuers, a property firm based in Nairobi.

While most valuers rely on a comparative model which leans on valuation-based on the latest sale transaction in an area internationally, valuers are required to factor in the construction costs and the income it is generating.

If the distortions prove to be widespread in the coming months, banks which offer mortgage and their customers may find themselves in a fix.

Financial institutions give out loans worth 80 to100 per cent of the value of collateral—mainly land and property—risking losses in case of even the slightest of changes in valuation.

But the worst hit will be individuals who have taken up mortgages to buy homes as value distortions mean they will be servicing loans valued much higher than the houses they were advanced against.

Most affected

Value distortions came to the fore recently when a number of firms contacted to value Grand Regency came up with different figures.

Property analysts say distortion threats are also very real in areas frequented by flippers investors who buy property with the aim of selling them at high profits to third parties.

Worst affected areas include, land and commercial properties in Nairobi’s Central Business District on the lower side of Moi Avenue, Mombasa’s old town and a 10 Km stretch along Malindi’s coastline.



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