The Independent (Kampala)

31 January 2013

Uganda: Real Estate Blues

Photo: Precious Birungi/Newvision
Kampala has a deficit of 100,000 housing units according to finance minister.

A volatile economy, poor regulation and speculation put real estate industry at risk

Kanjokya Street in Kamwokya, a busy Kampala suburb, currently has several empty office buildings, which less than a year ago, were occupied by high profile tenants. One tenant cited the high cost of rent as the reason for quitting - his company was paying rent in the region of Shs 6 million per month. The other areas which The Independent visited in Kampala face similar challenges.

At the Workers House in the heart of the city, a huge red Knight Frank notice announcing the availability of space for rent; is posted conspicuously at the entrance of state-of-the-art building. Two years ago, getting a square meter for rent at Workers House would be a miracle. Indeed, the demand for office space in many of the Kampala's modern office buildings is in steady decline - a situation that has got property owners and managers really worried.

The situation is attributed to 'speculators' who are blamed for inflating the price of properties, thus sending a bad signal to the buyers. The other is the abnormal cost of land and a volatile economy that have seen commercial bank interest rates go through the roof hence making the contractors and owners spend beyond budget, a cost that definitely has to be passed on to the tenants. But the tenants too are desperate to cut their costs, and are forced to make the inevitable decision to relocate to cheaper locations outside the city centre.

Available data from Ubos indicates that the average prices of inputs in the overall construction sector rose by 25.8% in 2011 compared to the 5.9% rise registered in 2010. All categories of the subsectors recorded a rise in prices of inputs. Inputs for gravel roads construction registered the highest price increase of 30.4% in 2011 compared to 22.1% in 2010.

Empty spaces:

The high rental fees together with the other factors have affected the demand for space in the expensively built buildings in Kampala. Sector experts have warned that if those market risks don't abate, property owners will continue suffering heavy losses.

Indeed, managers of some of the new buildings in the city including Kizito Towers, Gaggawala Shauriako, Kirumira Towers, Ivory Plaza, Zainabu Aziza Emporium and King Fahd Plaza among others are desperately searching for occupants. But the rental fees are a big problem. Some of the tenants on the buildings said that a lot of space has been unoccupied for the last over eight months or so.

Demand for rental office space however, is increasing outside the city centre. Residential houses have been converted into offices especially in city suburbs of Kololo, Ntinda, Bugolobi, Luzira among others. This is partly because they are not only relatively cheaper but most people also find it better to work in quiet places instead of competing with the din and traffic jams in the city centre.

For instance, an office space in the city centre goes for between $15 (about Shs 40,000) and $22 (about Shs 60, 000) per square meter. A standard one-roomed office could go for about Shs 500,000 - Shs 1m per month, yet in the suburbs that is enough for a whole residential house.

David Mugenyi, a consultant at Knight Frank, a real estate consultancy firm, told The Independent that if speculation continues in the sector there would be a crisis.

He said that land lords were particularly at risk because they ignored the issue of market research, which should be the key driver of profitability in this business.

"One needs to understand the type of customers he is targeting whenever they are putting up a building in a place," he says, "If that is left out, coupled with the current unfavorable economic conditions, they (land lords) would suffer."

For instance, he said, 85% of the properties in the sector are affected by foreclosures - a situation whereby a financial institution takes over a property for failure to pay back a loan.

In recent years, speculation in the real estate sector has been driven by the high expectations from the oil industry. Many property owners had expectations that high profile investors targeting to tap into the oil sector would need offices. Also, the number of NGOs was growing, which was expected to push the demand for rental space up. However, there has been stagnation as the oil industry was delayed, while funding to the NGO sector also declined as a result of the economic squeeze in donor countries.

Edgar Rugumayo, also a consultant at Knight Frank, said with few investors in the oil industry and with donors cutting funding to the old and the new NGOs, the demand for office space is down though the supply is growing.

Vicent Agaba, the chief executive officer of the Association of Real Estate Agents of Uganda (AREA-Uganda), says over the past ten years the sector has been hit by 'speculators' who at most times inflate the price.

"There is no feasibility study on the sector," Agaba said, yet its growth should be based on researched information.

He urges the authorities to come up with a policy to guide all the deals in the sector.

Moses Mubiru, a real estate developer and the managing partner of Stanfield Property Partners, also points at speculation and the lack of relevant and uniform information about the market prices. He said some property owners put up structures targeting particular seasons and when these seasons pass, they are out of business.

"The problem is that most owners want to recover their invested capital quickly," he said, and that is a problem because it puts pressure on tenants who at times have to close business. He said other land lords believe that charging rent in dollars would earn them a better return on their investment since the appreciation of those currencies would automatically translate into better earnings for them. Yet, this turns off many of the smaller tenants.

He said the amount of rentable space for office has increased by 30% in the last two years. Shalom Mutesi of Jomayi Property Consultants, blamed land lords for hiking rental fees.

"If you find empty space in most commercial buildings around the city just know they are very expensive to rent," Mutesi told The Independent.

Some of the recently constructed buildings in Kampala:

Rwenzori Towers

Mapeera House

Twed Towers

Park Royal

Freedom City

Ham Towers

Acacia Mall, Kololo

Sector constraints:

With that scenario, investors would be expected to put more money into residential houses and flats, whose demand continues to soar. The Uganda Bureau of Statistics (UBOS) statistical abstract for 2012 on various socio-economic indicators shows that the urban population in Uganda has increased rapidly from less than 800,000 people in 1980 to five million in 2012, representing an increase of more than six times. This increase is mainly attributed to the creation of new urban administrative units, natural growth, demographic factors and rural - urban migration.

If that trend continues, then chances are high that the demand for the real estate property will keep growing. The report indicates that Uganda has a housing deficit of 550,000 units and 160,000 of these are in urban areas. It says Kampala alone has a deficit of 100,000 units. However, this problem is unlikely to ease anytime soon because more people are converting residential houses into office space, thus creating more demand and hence making residential rent less affordable.

Stephanie Kwibuka, the general manager of Kensington Africa, a real estate company, says that some areas which were formerly residential have been turned into commercial buildings. "We haven't experienced a shortage in residential houses but the demand is growing," she said.

At Kensington Africa, the price of finished houses ranges from $89,000 and $289,000 and monthly rental charges ranges from $700 to $1,500.

Mubiru says with all those challenges, the future of the sector will depend on the steps the government would put in place to regulate the sector. He says the movements of most economic indicators like the exchange rate, inflation, interest rates among others will also give direction to the sector's growth. Bank of Uganda (BoU) and the Uganda Bureau of Statistics (UBOS) last year announced they were embarking on collecting data about the sector every year.

BoU said the data would capture information on the purchase and sale of land, residential houses and rent of commercial premises for business and industrial purposes. The index would focus on Kampala, Mukono, Wakiso and Entebbe before rolling out to the rest of the country.

The information gathered would be used in the formulation of polices to ensure financial stability in the country. BoU said some of the real estate indices would be included as a component of the consumer price index on a monthly basis.

With the growing middle class in Ugandan society, the demand of housing is expected to continue growing. Cameo Shay, the managing director for SBI International Holdings AG (Uganda), a construction company said, the real estate sector is a good sector to penetrate into and its future was bright. He says the government should come up with an arrangement where the people can obtain homes facilitated by banks in form of mortgages at a cheaper cost.

He adds that there should offer specific incentives for "foreign" property developers so that whatever they put on the market is affordable. Rugumayo also agreed that the government has a part to play. He said there should be a way of cutting interest rates to favor the property developers so that there is cheap supply of property for different uses on the market.

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