Wednesday January 15 2014

Real estate market trends last year and projections for 2014

Last year, the property market was very slow,

Last year, the property market was very slow, with more people opting to rent instead of buy property. Many people also defaulted on mortgages due to increase of interest rates. PHOTO by ismail kezaala 

By Sarah Tumwebaze and Collins Hinamundi

As more people aspire to own property –land or houses— it is important to look at how that real estate business is doing, economically that is. Today, we look at how the property market performed last year and how it is expected to perform this year.

When people were asked how 2013 was, many said it was financially tough.
Research indicates that it was not just individuals going through this as the performance of the economy last year was not good compared to the past years.

This was evidenced by the high interest rates which shot from 16 per cent to 30 per cent. It was also coupled with the low exchange rate which saw business slow down. And as expected, the performance of the economy did not only slow down businesses, but the real-estate sector was also affected.
According to a 2013 market overview report, concentrating on the last half of the year, property did not sell as much as it usually does. The report was compiled by Knight Frank, a property management firm, and it highlights the following.

The residential property market
Judy Rugasira Kyanda, the managing director of Knight Frank, says the residential property market last year went through a slump. “We went through an acute depression.”
She explains, “Property prices dropped [as] there were not that many buyers. It took longer to let houses. It was not easy to sell houses. There was very little to no demand for houses. There were also fewer discounts on houses since the people who were selling them were operating in losses.”

Cause of the poor performance
The quarterly report indicates that the depression was as a result of the general slowdown in the economy. Kyanda explains that due to the fact that the interest rate rose from 16 per cent to 30 per cent in 2012 and continued into 2013, this led to many defaulters on the mortgages.

“This [people defaulting on mortgage payments] meant that the banks had to recover their money. To do this, they put the properties these defaulters had put up as security on the market but they put quite a number of them at the same time. This pushed property prices further down and caused an oversupply on the market because If you have too much of something on the market, the price goes down.”

The chief executive officer, Akright Projects Limited, Anatoli Kamugisha, agrees that the distress policy that was used by banks to sale off property affected the property market.
“They sold the houses they had at a giveaway price so developers who had similar houses could not sell what they had. This approach was very hostile and it brought business to a standstill.”

The second effect was that in the Ugandan market, buyers of residential property are usually mortgage buyers –they get a loan to finance payment of the house, with the house as collateral. “They depend on mortgage financing but because the interest rate was so high, even the property which was on the market and was relatively cheap could not be bought because people could not borrow at

Houses and rent

Because of the high interest rate, people who wanted to buy houses were looking for those in the affordable range. Kyanda explains that houses that were priced above Shs300m were not selling well.
“We found that houses which continued selling were those in the affordable bracket of between Shs150m and Shs300m. The other houses continued selling but very slowly.
“But even with the ones that were considered affordable, the payment terms were affected because buyers were paying in installments,” she says.

The research also indicates that more people opted for renting because they could not afford to build their own houses since the mortgage rate was high.
The managing director offers that even with renting, the more affordable the houses were, the higher the demand for them and the highest demand was for the relatively low income houses which ranged between Shs500,000 to Shs1m.

Projections for 2014

Kyanda says mortgage financing has picked up slightly this year. “We expect the number of people seeking mortgages to increase since people’s businesses have picked up, especially in downtown Kampala, where most of the demand for property comes from.”

“This year, the property market should have come up because people’s businesses have recovered and we have things like [the situation in] Southern Sudan which are coming into play,” Kyanda says. The situation Kyanda is talking about is the on-going conflict in South Sudan, which has led to several refugees coming into Uganda. Some of these refugees are buying houses or renting them and Kyanda is confident that this will boost the property market.

However, she points out that no one is sure how long this will last since they may decide to go back to South Sudan when the conflict is resolved.

Judy Rugasira Kyanda of Knight Frank says people were looking for houses from the relatively affordable areas: “It was in the greater Kampala areas like Naalya, Najjera, Kisaasi, Kira, where people wanted to rent because the rent there is relatively affordable and these are growth areas in terms of residential property.”

She adds that the once popular residential areas like Bugolobi, Nakasero, Kololo, Naguru and Ntinda have over time become too prime (first rate) and commercialised. So by last year, people were moving out. They were selling plots and moving out and all these plots are being redeveloped for more prime apartments and town houses.

“So such places have become unaffordable and people were moving to the next obvious areas which are Bukoto, Mutungo, Luzira and the other greater Kampala areas.
“The next growth areas are places like Naalya, Najjera, Kisaasi, Kira, which are new residential places opening up in the suburb. So the demand for houses was high in these areas last year,” she said.

The demand for low cost housing
Last year was a trying year for the real estate sector, especially in residential properties, where more areas like Gayaza and Namugungo turned into prime addresses.

And while the sector seemed to be ending the year on a high note, with more than 10,000 housing units expected to be added in the Kampala metropolitan area alone, residential properties in some areas remain empty, and the cost of these houses has been cited as one of the reasons for this, with the average cost of a two-bedroom house now at Shs150m in some areas.

Robert Kikomeko a real estate transaction advisor says those who have already bought land are in better position since the prices of construction materials is actually going down, which is a good thing for the real estate sector going forward. For instance cement that cost Shs30,000 at the start of 2013 is now between Shs24,000 and Shs25,000 “it is now cheaper to construct a house than buying an already finished property. ”

Is there a chance for low cost housing?
Judy Rugasira Kyanda, the managing director of Knight Frank, a property management company, says low cost housing is usually a one bedroom house and could go for about Shs50m. She says this is still very high for the average Ugandan and also does not make business sense for the developers to put up low cost housing that Ugandans will not be able to buy. The middle class that could afford doesn’t want such houses.

Kyanda cites the prices of inputs, and lack of infrastructure as the reasons for the lack of interests in this potentially lucrative section of the housing market: “There is no way the private sector is going to build affordable houses in places without roads, water and electricity and other social infrastructure.”
However, according to a Bank of Uganda report on the real estate sector in 2012, the government of Uganda is paying for or subsidising the establishment of social infrastructure in real estate developments.

The future
While the future always predicts doom for the real estate sector, especially with the distortions in the sector, there is a new kind of developer, the ones who are develop a relatively small piece of property and leave it half finished.

These houses according to Kikomeko are easier to sell, and do not require huge financial commitments, while Moses Kaketto a resident in one of these properties says he likes this kind of arrangement because the fact that they are few means you can mobilise your friends to occupy all of them. However the price is still too high for the average Ugandan consumer.

Kikomeko predicts that this year, there will be a higher demand for low cost housing even as developers continue building for the high end market, leaving low cost housing development to the government.