Should you build rentals to sell or rent them out?

Tuesday March 12 2019

Apartments with accommodation in Kampala. A

Apartments with accommodation in Kampala. A research by Housing Investment Chronicles shows that real estate developers and other sector players are better off investing in lower middle income segment housing needs because that is where the real demand is. PHOTO BY RACHEL MABALA 

By Ismail Musa Ladu & Christine Kasemiire

Uganda’s housing deficit is growing by 300,000 units per year, according to available statistics.

As a result, it is estimated that the national deficit is hovering at between 2.1 to 2.4 million housing units and it is expected to reach three million by 2030.
Although policy makers are aware of this problem, it is not clear yet how they are going about dealing with it.

Housing Finance data estimates housing stock at about 8,021,000 housing units with an average household size of about five persons for the 37.7 million residents.
Data from the industry player shows that rental markets remains dominant, particularly in urban areas.

In Kampala, for example, seven out of 10 households rent their dwellings. Also, access to services is still a challenge, even in the case of formal housing.
Despite all that, the country’s property markets are fast developing, particularly in towns adjacent to the main capital city, Kampala.

The conventional property market has, however, slowed in the financial year 2017/2018 period, despite declining interest rates.
With relative success in the lower-middle income segments, developers could be looking to providing smaller units in coming years, although this in itself, according to industry players Prosper Magazine spoke to, is not only a tricky affair but also a gamble.

Research findings
Key findings of Housing Investment Chronicles research in the Greater Kampala Metropolitan Area (GKMA) show that real estate developers and other sector players are better off investing in lower middle income segment housing needs because that is where the real demand is.

Ms Dorothy Baziwe’s research presented a more detailed picture of low and middle-income households, their housing needs and expectations, the processes and costs incurred while investing in housing.
Ms Baziwe, a researcher with Uganda Human Settlements Network, in her study titled: Shelter and Settlements Alternatives, found out that majority (up to 61 per cent) of households in Kampala are renting.

The 2018 research shows that six out of 10 apartments are one-room houses (Muzigo). Furthermore, only four per cent of household owners used mortgages.
Ms Baziwe also disclosed that the most affordable price range for most households is in the range of Sh50,000 to Shs90,000 and rental values tend to change mostly after a year or so.

This partly explains why the duration of stay for households in specific localities is about three years maximum. Those constructing their own houses it will take them between five and 10 years average to construct and complete a house. The cost normally of a three bedroom house over time will add up to about Shs47 million.

Industry players’ views
In an interview last week with the managing director of Avarts Housing Ltd, Mr Vincent Agaba whose company majors in property management services, it emerged that renting is almost unavoidable because it tends to be the first ladder to climb before owning or building a house.

The better option, according to Mr Agaba, to building your own house would have been through securing a mortgage but this is not feasible because of the cost of interest charged on mortgage, making it unaffordable to the biggest majority of the population.
As a result Ugandans tend to progressively build their own houses with their savings over time, which is also another expensive and time consuming venture. For that, Mr Agaba suggest that industry players such as developers be supported to establish modern and affordable rentals to cater for the huge demands.

But for this to happen, the cost of borrowing will have to drastically go down for at this rate—20-25 per cent interest, it’s difficult to provide affordable housing alternatives.
According to Mr Agaba, also a former president of the Association of Real Estate Agents, an umbrella organisation of real estate agents, managers, organisations and other real estate professionals in Uganda, most dominant rentals go for between Shs100,000 to Shs250,000 and those at the high end are being rented out at between Shs350,000 to Shs450,000.

Anything beyond that is unaffordable. Actually those who can afford this range tend to instead build their own house rather than renting.
This has been worsen by the low purchasing power of the population, with majority of the workforce accruing their livelihood on monthly average stipends of less than Shs500,000.
Mr Godfrey Kirumira, Chairman Landlords Association, is certain that construction with the ultimate goal to rent is profitable.

He says with property, you only make money but cannot lose it.
“Property will stay for long wherever you invest it, it is good to invest in real estate because Uganda has good climate and security,” he says.

However, the real estate business at the moment is not doing well, he acknowledges. The correlation between the business environment and real estate is direct.
This is to say, if businesses are making profits, landlords will be paid on time and the reverse is true.
“Currently, real estate is not doing well. But in the long term, it will definitely change,” he says basing his optimism on the much anticipated oil and gas.

Money makers
Popular belief is that single rooms are the money makers in the residential real estate business. But Ms Catherine Nanteza, chief executive officer Association of Real Estate Agents (AREA) begs to disagree.

She says all houses can earn you money depending on where they are located.
“It all comes down to research. It is important to understand who your target market is and location of your houses,” she says.

For instance, single self-contained rooms and studio apartments are profitable when constructed around a university targeting the young population.
It is essential to understand the earnings of your target market as well. University students or young working population earning between Shs500,000 and Shs1.5m can afford a house between Shs250,000 and Shs700,000 for double rooms.
While double and single rooms are lucrative in Kampala, three bedroom houses are more popular in the outskirts of town.

The phenomena, she says is because those are family homes, with parents who want a playground for their children.
“You find three bedroom houses in outskirts because the parents want about two bedrooms for their children, girls and boys as well as a playground,” she said emphasising that you find those houses in areas such as Naalya, Namugongo and Entebbe, among others.

Defaulting tenant woes
Renting comes with its own challenges especially in Uganda where there is no law regulating the sector.

Tenants abandoning their responsibility to pay rent is a major challenge in this industry.
According to Ms Nanteza, the upcoming Landlord and Tenant Bill ought to address such issues. While the Bill dictates that grievances in terms of payment should be discussed in court, players are inquiring about the accommodation status of the defaulting tenant.
“What we are saying is with the prolonged court processes in Uganda, while the landlord and tenant argue payment in court, where is the tenant staying? Is it in my house?” Nanteza ponders.

The Landlord and Tenant Bill, she says, should determine how long a landlord should tolerate a defaulting tenant before they are evicted.
In the face of all challenges associated with renting, she believes renting out a residential is more lucrative than selling because of the nature of the Ugandan community.

“Only 1 per cent of Ugandans have access to mortgages, implying that it could be a long term before a developer earns money from that property,” she says.

Condominium aspect and return on investment
Mr Agaba believes that return on investment in rentals is not as profitable. In fact, those who can have some return on investment are those who invest their own money and not developers and related investors who rely on loans to do real estate business.
As a way he proposed that condominium ownership is the way to go. A condominium is one of a group of housing units where the homeowners own their individual unit space, and all the dwellings share ownership of common use areas.

The condominium owner holds sole title to the unit, but owns land and common property (elevators, halls, roof, stairs,) jointly with other unit owners.
He shares the upkeep expenses on the common-property with them.
The unit owner pays property taxes only on his or her unit, and may mortgage, rent, or sell it just like any other personal property.
He said: “We have to embrace this because the land does not expand and the alternative is embracing condominiums.”

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