Real estate paying price for slow oil sector activity

Friday February 13 2015

The Akright Housing Estate on Entebbe Road. As oil activity

The Akright Housing Estate on Entebbe Road. As oil activity slows down, the real estate sector has seen demand for office and residential space also gone down. PHOTO BY RACHEL MABALA 

By Mark Keith Muhumuza

Kampala- Excitement about oil appears to have withered as office and prime residential rental uptake within the city has dropped.

This is, according to the latest Knight Frank report for the third and fourth quarters of 2014, which indicates that the commercial office segment has been affected by the “property market depression.”

Ms Judy Rugasira Kyanda, the chief executive officer Knight Frank Uganda, revealed that developers had anticipated activity in the oil and gas sector, which is now a bit quiet. In anticipation of oil, developers were in rush to have office and prime residential space.

“Demand for prime residential accommodation has reduced in 2014. A lot of this slowed demand has been due to the oil and gas sector. Demand derived from the oil and gas and telecoms sectors continued to decline as many of the expatriate staff relocated from Uganda,” Ms Rugasira said at the report launch media briefing on Wednesday.

In 2014, oil companies completed appraisal and exploration work in Uganda. Some of the companies such as Baker Hughes and Schlumberger that were sub-contracted during the exploration had some expatriate staff leaving. Additionally, suppliers to the sector were reduced in number and contracts due to the lull.

The anticipation for oil, according to the Knight Frank report had led to a spike in what they termed as “speculative” tendencies in the commercial office sector. Commercial buildings began to pop up around Kampala leading to oversupply in the market.

Occupancy in some of the buildings is at below 50 per cent.
“Commercial properties were hit hard by the supply in sector yet there is less demand. However, the excitement of the oil sector appears to have reduced, which has lowered rental prices,” said Mr Moses Lutalo, the head property management and residential at Knight Frank Uganda.

Mr Lutalo added that this has translated into tenants having better bargaining power in terms of rent due to the available supply. He warned that landlords should not offer “unrealistic leasing terms in desperate attempt to attract tenants and fill up the space.” He said they have engaged landlords to slow-down on speculative tendencies.

The returns for any investor in the commercial office segment have fallen from between 12 per cent and 14 per cent in 2010, 2011 and 2012 to between 8 per cent and 10 per cent in 2014.

The shilling effect
The recent depreciation of the Uganda Shilling has also had both positive and negative implications on the real estate sector.

According to the Knight Frank report for the third and fourth quarters of 2014, increased demand middle income house purchase enquiries by the Diaspora community “seems to be driven by the strengthening dollar against the shilling, which they seem to be taking advantage of.”

On the negative side, Mr Marc Du Toit, the head property management retail Knight Frank Uganda, said the Shilling depreciation will have longer term effects on rental leases.