Why real estate agents need to be regulated

Property managers and developers are seeing the need to regulate their sector before it bursts into the financial meltdown that hit the West a couple of years ago.

It sounds detached, the possibility that Uganda could crash and sink into a financial crisis similar to what happened in the US in 2008, which we have been throwing about in tittle-tattle as the credit crunch. But it would only be foolhardily complacent, to dismiss it with indifference.
In the compelling case for regulation of real estate brokers, players in the industry are concerned about the free-range system of brokerage in the country. This, they fear, has the possibility of causing, among other effects, a stumbling of the financial system, on top of other issues like fraudulent transactions and a loss of investor confidence.

Everyone is a broker
Uganda does not regulate real estate brokers, in practice. “Currently, it is laissez faire. It is to whom it may concern. I think everyone is a broker. There is no law,” says Vincent Agaba, the chief executive officer of the Association of Real Estate Agents in Uganda.

If you are an unemployed youth, worried to senselessness about where your next meal will come from, starting out, as a real estate broker, especially in hot property locations, could be your stroke of luck. Just rush to a nearby tree, and nail a poster to it announcing the newest house and property broker in town, with your phone number of course. You will be in business. And it is easy business.

You do not need a trading license, because you do not need physical tangible premises to operate. The registrar of companies does not need to know you exist, heck, you are not even a company; you are just a simple street-smart individual, keen to make a quick buck.
Soon, you will be brokering the sale of prime pieces of land and houses in sought-after locations, bagging sacks of cash in commissions like crazy.

The trouble is that you will be adding joules to the negative energy making real estate business in Uganda an uncoordinated setup, where speculative brokers continually push for an artificialisation of property prices, easily defraud unsuspecting publics and create a bad name for genuine dealers, scare away would-be investors because they cannot tell the crook from the real deal.

Bad for business
This is what has got industry players worried, and, what should get the public worried too. It is the reason why, now, for the first time in Uganda, measures are being put in place to regulate real estate brokers.

“Unfortunately, (the lack of regulation of real estate agents) has given rise to so many problems: to unscrupulous real estate dealers; you have heard about these so-called bakayungirizi (brokers), who rise out of lack of regulation.

“They have actually contributed towards the chaos, in handling real estate and the land matters in this country. They have been a source of corruption, and fraudulent transactions.

“Problems come when you defraud somebody and we need to track back the source of this fraud. But we cannot get you because you have no fixed address,” says Dennis Obbo, spokesperson at the Ministry of Lands, Housing and Urban Development.

Exposure to financial system
A key worry is how the free-range system of brokerage has enabled real estate agents to heighten speculation of property prices.
“Someone will sell a property today at a very exorbitant figure. His neighbour looks through the window and says, ‘my neighbour sold at this much, I will add a little and sell also.” But who made this price in the first place? Maybe it is the broker who said, “I can get you much more, or maybe it was somebody from somewhere with a lot of money,” says Mr Agaba.

“If this is not stopped,” he adds, “It will translate into the financial system. The banks will start lending money based on these land titles with fake prices. You will find a bank sitting on mortgages that actually have artificial value. When the person fails to pay and the bank goes to sell the property, [and] they do not have a buyer.”

Banks use their customers’ deposits to lend money. If a bank cannot get back its money from lending gone wrong, say because property prices have fallen, then, the banks can easily run out of money and end up in the situation where the US was in 2008.

Dr Charles Augustine Abuka, the director financial Stability at Bank of Uganda, says, “The problem with housing and land is that people always think that prices will always go up. It is not the case. There are times when prices collapse, and when they do, it can be bad. We have seen this happen in Europe. What people should know is that prices for real estate are not only in one direction.

“When you are looking at the financial sector, you have to allow for any possibility. You allow for a genuine possibility that even without speculation, prices can actually fall. You should also allow for the fact that, you know, our real estate and housing market is still young and we are developing regulation.”

Although Mr Obbo says the Ministry runs a department offering valuation services, many people have not taken advantage of these services, and neither have they been well publicised. It is a case of shoddy valuation, which is partly based on prices generated by speculating real estate agents, which would lead to the mapping up of artificial prices.
“We do not have as many valuers as we would expect. But it is a skills gap and skills are being built,” says Dr Abuka.