21 August 2018

Uganda: Activity in Uganda Real Estate Picking Up Slowly

Rising occupancy rates in first-grade office buildings, residential areas in Kampala City and the growth of property inquiries captured investor attention during the first half of 2018.

Credit to the sector rebounded despite second-grade office property owners struggling to attract tenants.

Data from Knight Frank Uganda's half-year industry report for 2018 shows that occupancy rates registered by Grade A properties -- high-end office buildings that have ample parking space, and superior user services and location, grew by two per cent between January and June.

This trend was driven by price discounts offered by some landlords and the entry of multinationals into the market.

Occupancy rates in Kampala's prime residential areas increased by five per cent during the first six months of 2018.

Property inquiries registered by Knight Frank during the period rose by nine per cent, although few property sales were recorded on account of the high pricing.

A two-bedroom furnished apartment in Kampala's prime residential areas goes for $1,750-$2,000 per month, while the average selling price for these units is estimated at $200,000-$250,000.

In comparison, a three-bedroom apartment goes for $2,500-$3,500 per month while its selling price is between $300,000 and $350,000.

Credit growth registered in the real estate, mortgage and construction segment recovered from negative levels posted last year to around three per cent by end of June 2018, according to Bank of Uganda.

However, the sharp price discounts being offered by second-grade commercial office property owners could cause price distortions in the future.

Second-grade office buildings usually offer limited parking space, inferior user support services such as security management systems and less attractive physical locations, real estate experts say.

"To attract tenants, some landlords are reducing rents by 20 per cent below average rates for the less prime properties, which have been poorly built but sit in relatively good locations. This may appear to be a good short-term solution but actually it, distorts the market. Clawing back these rents to market rates when the sector's performance improves, will be difficult and will cause further distortion," the report noted.

"The rise in occupancy rates within the grade A commercial office space segment is largely due to significant discounts offered by landlords whose properties had remained vacant for more than a year.

"The considerable uptake of high-end apartments in Namugongo, Najjera, Kira and Kyaliwajjala is mainly driven by factors outside the traditional economy," said Richard Byarugaba, managing director of the Uganda National Social Security Fund.

"We have noticed some recovery in credit flows directed at the real estate and construction sector. As a result, credit growth pegged to this sector has rebounded from the negative levels recorded last year to around 3-4 per cent registered at the end of June 2018," said Kenneth Egesa, BoU's director for financial stability.

"This recovery is mainly influenced by the reduction in credit default rates that dropped to around 4.4 per cent in June. However, the biggest risk for this sector lies in exchange-rate fluctuations.

"A sudden decline in the value of the shilling against the dollar would affect imported building materials and tenants who earn in shillings but pay rent in dollars," Mr Egesa added.

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