The low-cost housing myth in Uganda

Last week, there were two housing projects unveiled to the public and investors in different sections of the town. National Housing and Construction Company (NHCC) was the first to unveil 131 housing units in Namungoona, north of Kampala. Each unit of the two-bedroomed apartments goes for Shs300m. Then at the end of last week, 12 housing units belonging to Admas Construction Company were unveiled along Lake Drive in Luzira, near Lake Victoria. The pricing for the three-bedroomed apartments is about $190,000 (Shs630m). By definition, these houses are not placed in the low-cost housing category because of the average monthly cost to the buyer.

According to the World Bank, the average Gross National Income in Uganda is estimated at $650 (Shs2.2m). On a monthly basis, that is an average income of Shs189,000. Going by that calculation, it means that the two housing projects are not within the range of the average Ugandan.

What is low-cost?
The Ministry of Lands, Housing and Urban Development (MHULD) does not have specific rates on what a low-cost house is in terms of money. It does, however, estimate that on a monthly basis, at least 30 per cent of one’s income should cater for the acquisition of a house.
“At the ministry, we can’t define a low-cost housing for Uganda because the income levels areas differ. Kampala low-cost rates cannot be compared to those of Mbale, Jinja, and Mbarara. What we have done is to define low-cost housing as that which takes 30 per cent of your monthly income,” says Mr Dave Khayangayanga, the acting assistant commissioner Housing Operations in MHULD.

The trouble with a definition of 30 per cent is that people have different income levels, so that does not clearly indicate a low-cost housing feature. The government has tried out low-cost housing projects on its own in Tororo. The initial projection was to spend about Shs20m per unit in order to construct 250 units. That would have brought the total cost up to Shs5b.

The costs are estimated to have gone up, with the unit prices going for about Shs35m. This project, according to Khayangayanga, is considered low-cost because each unit is being sold at Shs40m. The buyers have a period of 10 to 15 years to clear the outstanding amount. For instance, in 15 years, one would have to put aside Shs222,000 to fully acquire the house.

These low-cost houses do not in any way, address the housing gap in the country, especially in urban areas where there is a population growth rate of 5.1 per cent. According to the National Housing Policy drafted in May 2016, urban areas in Uganda need at least 65,000 units. Estimates on construction in Uganda indicate that in urban areas, there are about 20,000 units. That leaves a deficit of 45,000 units in urban areas.

However, low-cost housing differs from affordability. Mr Arthur Mukembo, the regional director Remax Uganda, says: “Low-cost speaks to the cost of a particular product being lower relative to others on the market whereas ‘affordability’ speaks to one’s capacity to pay for what is on offer. It is more prudent for Government, perhaps through the Lands ministry, to act as ‘custodian’ for the definition of Low-cost housing and therefore create policies that encourage that segment to thrive.”

That said, the projections from the government are that the housing backlog will still be around for a while.

Mr Mukembo continues to say: “Government has a large pool of civil servants. Consider a scenario where it could give a developer an off-take guarantee along the lines of ‘if you build at a certain cost to a good standard, we undertake to buy some or all of the units when completed so our people can pay us back over time at their pace.”
This is a market that developers can tap especially for entry level homeowners who have decent jobs but spend their income paying rent.

Trouble, according to developers and realtors is in part, due to limited demand for the currently available projects.

Low purchasing power
“When we invite people to take a look at the houses, they like them. They, however, complain about the cost of the houses because they can’t seem to see the low-cost house they can acquire,” says Mr Deglel Mehari, the managing director Admas General Trading Company, the real estate company that recently unveiled 12 housing units in Luzira.
Asked why the company did not take low-cost housing for the emerging middle-class in Uganda, Mr Mehari revealed that the challenge for real estate developers is that even with the demand, the actual acquisition is limited.
“The high-end market is one that makes business sense for an investor right now because there is a higher rate of return,” he adds.

Ms Judy Rugasira, the managing director Knight Frank Uganda points out that the high-end segment of the market like the Admas Lake Villa’s in Luzira, have demand supported with actual acquisition of the houses.
“They’re very well priced at the moment. The market in the next 12 months will recover. The returns on the investment in higher value properties are high,” she says.

She does, however, emphasise there is 20 per cent need for affordable housing to cater for those with income levels of $200 (Shs672,000) and $2000 (Shs6.7 million). Knight Frank manages properties on behalf of developers and one of the noticeable trends is the lack of lack of large investors that can build more units at low-cost rates.
“A lot of the developers are private. There are less institutional developers with the capacity to deliver affordable housing units. Until institutions like NSSF and NHCC get entirely involved, we’ll continue to see this disequilibrium in the market,” she adds.

NHCC is partly owned by the government to a tune of 49 percent, with the rest owned by the Libyan Government. The company places the cheapest house in its portfolio at between Shs80m and Shs100m. NHCC has set a target of delivering 5,000 units in the next five years. At the launch of the Namungoona Impala Estate, Mr Parity Twinomujuni, the managing director NHCC, noted there is a myriad of problems facing the sector, hence restricting low-cost housing.

“We have of recent continued to nag about the challenges we face as a government company that is supposed to deliver a profitable model in a free economy, yet with our hands and legs tied with legislation and policies that restrict use of pension funds, procurement laws, high interest rates and a high cost of infrastructure that includes roads, electricity and water. This is an addition to the sale of a house being tax exempt that introduces 18 per cent to our cost of construction. Like any other business that needs long-term finances but borrows at short term high rates, our business model provides that the bigger population can’t afford,” he said.
NSSF recently launched a project where it gave developers that can bring on board 1,000 housing units with each at Shs100m to Shs120m. This is because, in the current market, houses within that range are scarce in the Ugandan market.

Government intervention
According to Vision 2040, the government expects that by 2030, it shall: “Ensure access for all to adequate, safe and affordable housing and basic services, and upgrade slums.” In the same document, the government acknowledges the task at hand.

“A total shortage of 1.6 million housing units still exists due to overcrowding, sub-standard structures; rapid population growth; high cost of building materials; high interest rates and stringent terms that do not support long-term mortgage financing,” the National Development Plan II reads.

In order to address the current challenge, that is why the government drafted another policy on housing. One of the proposals from the government in National Housing Policy 2016 is to provide some sort of guarantee to investors.
“Government shall mobilise partners to avail cheap sources of finance and where possible provide guarantees to financial institutions to be able to access cheaper offshore short-term borrowing finance for housing and related infrastructure development,” the policy reads. The government is currently talking to the World Bank to provide a mortgage fund facility for bankers to access.

One of those long-term proposals has been to allow pension savings to be used as collateral for a mortgage. This is proposed in the Retirement Benefits Liberalisation Bill, 2011 that says an NSSF member can use up to 30 per cent of savings as collateral for a mortgage. “Amend the Pension, NSSF, Insurance and other Acts relating to retirement to recognise benefits of workers as a suitable security against a mortgage,” the policy reads.

High mortgage rates

NSSF and NHCC are also shareholders in the mortgage inclined bank, Housing Finance Bank. The government of Uganda also holds shares in the bank. The bank offers mortgages at rates of about 18 per cent – the lowest in the market – but that interest charge is still considered to be high. That explains where there are only 15,000 mortgages in the country.

“The cost of an average home mortgage in Uganda is about $30,000 [Shs100 million] yet the Gross National Income of Uganda is $800 (Shs2.7 million),” says Mr Mathias Katamba, the managing director Housing Finance Bank Uganda, at the recently concluded 7th annual CEO Summit in Kampala.

To him, demand for housing has to be driven by the price of the product. His emphasis is that 30 per cent of the costs of putting up housing units for sale is due to putting electricity lines and bringing in water to an estate. He also reveals that the current banking structure in Uganda does not support long-term financing that is required for people who want to borrow to own a house.
“It is a myth that the number of mortgages in Uganda will rise. How many banks have access to long-term financing? What we need is a mortgage liquidity facility to raise long-term funding that banks can use to build houses,” he adds.
At the current financing rates, the risk premiums for the working population is still considered high and that is why options are being proposed.

“The banker is looking at the capacity of the borrower to payback. What is needed is a system that takes away that risk. If it is to be the private sector that unlocks housing for the working population, then the costs to the private sector have to drop. One of these is to ensure that the method of financing changes,” says Mr Arthur Mukembo, the regional director, Remax, a real estate marketing company.

NUMBERS

30

Percentage of one’s monthly income that should go to the acquisition of a house in Uganda

45,000

Deficit of housing units in urban areas according to the National Housing Policy of May 2016

Shs2.2m

Average Gross National Income in Uganda according to World Bank.

Shs300m

Cost of a two-bedroomed apartment in Namungona by nhCC.