Covid-19 hammer falls on auctioneers as dry spell persists

Timothy Owuor, a Nairobi-based auctioneer, looks at the assortment of items on his yard and nostalgically remembers years past, when such a trove would fetch him millions in just a few hours.

“You would have three or four guys fighting over an asset but today you may have one or none,” he says.

Not today. There are repossessed items everywhere, but few takers.

“You virtually have to fish buyers from their houses and convince them to spend their money,” says Mr Owuor, who runs Nairobi Connection Services Auctioneers.

This is a departure from the norm. Gone are the days when auctioneers were a feared and loathed lot. They are losing their sting, thanks to Covid-19.

As incomes fall through job losses and business closures, lenders are growing impatient and more and more people are being auctioned.

The only problem now is that few people come out to buy. Auction yards are filled up but demand is weak, with only “precious” assets such as cars and houses getting the attention of buyers.

Banks, the biggest losers in the rising debt pandemic, have begun inviting customers back to the discussion table – sometimes without telling the auctioneers. As the economy continues to be battered by the vagaries of the Covid-19 crisis, there is a swelling pool of distressed properties belonging to borrowers who have fallen behind in loan repayments. Even as banks give borrowers three to six-month breaks, the default rate is rising.

Economic headwinds

“Most of these assets are for commercial purposes and what it means is that if business is slow, there is no income to pay the loans,” says George Muiruri of Leakey’s Auctioneers.

Stanbic Bank Kenya has recently advertised bids for vehicles repossessed from customers who have run into economic headwinds. But the lender’s chief executive officer Charles Mudiwa knows he cannot count on auctions alone. His customers are distressed. The bank has therefore deferred interest collection on Sh1 billion worth of loans drawn by 460 people who purchased vehicles.

But the defaults keep growing.

“This (rising loan defaults) is an issue affecting the asset finance industry collectively as a result of cash flow pressure and a direct effect of the Covid-19 pandemic,” says Mr Mudiwa.

Stanbic last week invited buyers to submit bids for 72 vehicles, whose reserve price ranged from Sh460,000 to Sh6.34 million. The amount involved is Sh79.15 million. The vehicles are in different yards such as Leakey’s, Westminster Storage and Purple Royal Storage.

In early April, the same lender – which is synonymous with asset financing – advertised another auction for 49 vehicles with a combined reserve price of Sh70.56 million.

But the auctioneer’s hammer is not falling as fast as vehicles are being repossessed. This means higher storage fees, repeat advertising and diminishing property value.

“When business dynamics are down, demand and supply are affected. For instance, people are asking why they should buy commercial or pick-up trucks when there is no business to use them for,” says Mr Muiruri.

Lenders such as Stanbic Bank are, therefore, innovating; allowing distressed customers to try looking for buyers too. This is called a private treaty and is seen as the only way to beat the reserve price law.

Fixed auction price

The Land Act 2012 fixed auction price, technically called reserve price, at not lower than 75 per cent of the market value of the asset facing auction. This means that, for instance, the Sh5.85 million that Stanbic is seeking from one of the vehicles, a Mercedes Benz Actros 3340 manufactured in 2016, has a market value of Sh7.8 million. The buyer at the auction would save up to Sh1.95 million.

But in the prevailing economic environment of salary cuts, lay-offs and falling company revenues, potential buyers are running on tight purses and therefore seek more generous discounts.

An uphill task

“Meeting even half of the reserve price has become an uphill task. Disposal of seized assets has become a big challenge,” says Mr Muiruri, adding that auctioneers are now seeking the best price and urging banks to open private talks with customers to sell the assets themselves.

This is the only way to sell below the reserve price without running into legal problems. In addition, the people left with disposable incomes see the continuous spike in Covid-19 cases as a clear writing on the wall: that the dark cloud is yet to pass. They are, therefore, preserving the cash for a rainy day.

“With Covid-19 still there, the few people who have money to spare are not ready to spend it,” says Mr Owuor.

Those buying are speculating that the economy will pick up and usher in a period of demand, and so they are mostly going after land and commercial vehicles in the hope that prices will recover when the country overcomes the infectious disease.

Mr Mudiwa says the Lands Act 2012 has made it difficult for banks to sell assets of distressed borrowers since many potential buyers are seeking very generous discounts.

“In the past, if you did not attain the forced sale value within three auctions, one would easily settle for the highest bidder and unlock the case,” says Mr Mudiwa. “With these restrictions, we have found ourselves unable to dispose of assets, which is very expensive to the bank.”

The Covid-19 pandemic found an already fragile economy. Stanbic Bank itself late last year laid off 88 employees, so did many other companies such as Sportpesa, Betin, East African Portland Cement Company, East African Breweries Limited, Ola Energy, Sanlam, MediaMax, Radio Africa, Tala, Silverstone Air Services and Securex Agencies.

The lay-offs deepened this year due to Covid-19, forcing the government to announce measures such as curfew and closure of schools, hotels, bars and restaurants. Many businesses have cut down on their activities, leading to lay-offs, salary cuts and unpaid leave as revenues shrink.

This has seen workers who had mortgages and other loans on the strength of their payslips run into default.

For the unlucky ones, the unpaid loans are threatening to rob them of their houses and land. And this is affecting even the high and mighty.

For instance, Hosea Kiplagat, a one-time powerful operative in late President Daniel arap Moi’s government, guaranteed for his two firms, Eldoret Concrete Poles Limited and Timber Treatment Limited, a Sh378.61 million loan using 11 parcels of land as well as his Karen home, which sits on five acres.

Now, Bank of India wants to sell these properties to recover the money. The initial auction, which was stopped by court, required bidders to offer Sh5 million for the house and Sh10 million for the land. The two firms have sought a three-month grace period.

Between March and June, banks have allowed customers to extend repayment periods on loans worth Sh844.4 billion – nearly a third of the total loan book – but the non-performing loans ratio is racing towards levels last seen over a decade ago.

Central Bank of Kenya data shows the value of bad loans in the banking sector rose by Sh29.95 billion between March and June.

Covid-19 cases soar

And as Covid-19 cases soar by about 500 per day and government grapples with the full reopening of the economy, a health crisis is morphing into a deep financial crisis.

HF Group managing director Robert Kibaara says that Covid-19 has led to a drastic decline in real estate activity and the lender is using private treaties to handle distressed borrowers.

The mortgage firm last year repossessed property valued at Sh717.1 million. This year is no better. The bank in March advertised an auction of 87 properties, mostly residential and commercial houses, valued at Sh1.764 billion.

HF is now shifting from the real estate business to focus more on normal lending. But getting rid of these distressed properties from their books will not be a walk in the park.

Mr Kibaara says that applying the reserve price laws in the current depressed market has led to many stalled sales. He is now banking on private treaties on some of the properties to unlock value.

“The private treaty is not subject to the requirements of the Lands Act. If the customer is willing and is possibly represented by a lawyer, we enter into an agreement,” says Mr Kibaara.

For a song

The reserve price law was set up to protect customers from losing their precious assets for a song.

But with the prevailing economic conditions having parted ways with the current property valuations, customers are willing to settle for less.

Kenya Bankers Association chief executive Habil Olaka says the practice is gaining traction as banks seek to retain relationships that will give them business after Covid-19.

“Banks would rather go the treaty route and reach a good agreement, especially considering the current environment where most borrowers are having cash-flow challenges. This saves both the relationship and the borrower,” says Mr Olaka.

“It is much cheaper since it cuts out the costs associated with lawyers and auctioneers,” adds Mr Mudiwa.

NCBA Group last year broke ranks with the rest of lenders by setting up its own yard for storing repossessed vehicles.

The lender says that the yard has given it room to conduct basic maintenance like regular cleaning of vehicles and ensuring they have proper tyre pressure to restore their value.

In the end, the group says, it has seen a 15 per cent increase in the selling price of repossessed vehicles and faster turnaround in their disposal as opposed to relying on auctioneers.

NCBA managing director John Gichora says the lender now uses auction as the last resort, since it most of the time leads in severed relationships with customers and fetches less money.

“We explore every possible option, especially those that maintain the dignity of our customers. I believe that private treaty sales always work better for both parties. We are using auctions as the last option,” says Mr Gachora.

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