Why Housing Finance is selling head office

Rehani House along Koinange Street, Nairobi. [Wilberforce Okwiri, Standard]

Mortgage financier HF Group wants to sell its head office building in Nairobi, convert some loans to equity and pursue defaulters in a bid to boost its capital levels. The Nairobi Securities Exchange (NSE)-listed lender says it will pursue the three strategies in addition to scouting for investors to get additional capital as it seeks to move out of regulatory breaches.

The lender says in the latest annual report that it wants to sell Rehani House building by end of this year in a move that will also help it meet the regulatory requirement that puts a cap on investment in fixed assets.

The Central Bank of Kenya (CBK) requires that a bank’s investment in land and buildings as a share of core capital should not exceed 20 per cent.

Rehani House, a 13-storey high-rise building located at the junction of Kenyatta Avenue and Koinange Street in Nairobi, has been HF’s headquarters for years. HF has not disclosed how much it is targeting to get from the transaction that will now make the mortgage financier a rent-payer in its main offices.

“The sale of Rehani House building by December 2022 will ensure compliance with investment in buildings to core capital and would also result in a one-off gain,” says HF in the annual report.

HF is trying to restructure its business which is currently heavily concentrated on mortgages as opposed to retail lending. Mortgages took up Sh24.14 billion or 63.4 per cent of its Sh38.05 billion loan book as at the end of last year.

Projects followed with Sh8.95 billion and commercial with Sh3.98 billion.

This means that mortgages, projects and commercial accounted for 97.2 per cent of the HF Group’s book.

The real estate market has faced challenges, especially in the Covid-19 environment with workers who had tapped mortgages on strength of their payslips struggling to repay loans.

HF says it last year acquired property worth Sh143 million through foreclosures — possessing mortgaged property when the mortgagor fails to keep up their mortgage payments.

The value of foreclosures for last year is nearly five times the Sh31.5 million mortgaged properties that HF possessed in the previous financial year.

HF, which in February last year received Sh1 billion from Britam Insurance as a shareholder loan, also says it is eyeing the conversation of an unnamed loan balance to tier-II capital.

The lender says it is also in discussions with one of its lenders to convert part of the borrowing into subordinated debt to offer a boost to its capital given that it was in breach of two CBK ratios by the close of December.

Another strategy being pursued is to raise additional capital to take it above the Sh3.17 billion it closed the year with.

“The Group, in conjunction with the significant shareholder, has appointed a transaction advisor to scout for potential investors to provide both tier I and tier-II capital,” says HF.

HF is also banking on aggressive recovery of non-performing loan books to reduce the statutory credit risk reserve resulting in a transfer to retained earnings to improve capital.

The lender last year cut non-performing loans (NPLs) from Sh10.79 billion to Sh8.67 billion and eyes to resolving Sh10 billion legacy NPLs within five years.

HF says it has engaged the CBK on the current regulatory breaches and informed it of the actions management is taking to rectify the position. “The Bank has shared a time-bound action plan on how and when each breach will be cured,” says HF.

HF also has debts to deal with. Its total borrowings stood at Sh4.3 billion last year, a rise from Sh3.6 billion in the previous financial period.

European Investment Bank (EIB) was the top lender to HF with Sh1.52 billion followed by Britam (Sh1.02 billion), Shelter Afrique (Sh615 million), Kenya Mortgage Refinance Company (Sh474 million) and East African Development Bank (Sh452.7 million).

HF was in breach of loan covenants agreed with all its lenders and obtained waivers from Britam and East African Development Bank.

For other lenders, except EIB, HF says the waivers on some ratios such as capital adequacy, the cost to income, NPL and investment in land and buildings do not exceed 12 months.