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Rocky times for Uganda’s real estate business

National Housing and Construction Company (NHCC) estates. A tough economic environment has led to stagnation in the real estate market. Photo by Ismail Kezaala.
What you need to know:
The sector grew by 5.8 per cent in 2011/12, compared to the 5.7 per cent annual rate that had been recorded since the financial year 2008/09 to 2010/11. Despite Uganda’s fast growing population and housing shortage, the real estate business slowed in 2011 and continues to suffer from dropping sales and investment.
By 2010, the real estate business was booming and fast growing, with a lot of untapped potential. It was this boom that convinced many real estate developers to inject huge financial resources into the sector.
But, the growth has been avoided. 2011 alone left the real estate business wounded with very little growth registered.
Statistics from Uganda National Bureau of Statistics (UBOS) show that the sector grew by 5.8 per cent in 2011/12, compared to the 5.7 per cent annual rate that had been recorded since the financial year 2008/09 to 2010/11.
The marginal growth is accounted for by a huge drop in construction sector performance, poor economic performance and the Eurozone crisis.
Statistics from UBOS show that “the construction sector grew by a mere 1.7 per cent in financial year 2011/2012, a very small growth compared to a growth of 7.8 per cent estimated in 2010/11.” During the same time (2011/12), Uganda witnessed the highest inflation in the last decade of up to 30.5 per cent at the end of October 2011.
Similar trends have already characterised the first half of 2012.
In an interview with Prosper magazine, Eng. John Paul Mukoza, the managing director of Akright Projects, said the last 18 months had been turbulent with the economic instability hurting house sales, rent and new constructions.
“Real estate business has not performed well. People are discouraged to get bank loans due to the high interests yet many buyers depend on bank money. This has reduced sales and overall sector performance,” Eng. Mukoza said.
He further explained that the real estate sector was hit by increased prices of land and construction materials coupled with slowing demand.
“There is generally little money flow in the whole sector. The situation is not only affecting our sales but even new construction.”
Additionally, Mr Edward Mubiru, the general manager Sema properties said that the whole sector is currently faced with a sales drop of about 25 per cent as the willingness of people to buy is not being supported by their financial ability.
“There is demand but it is not supported by ability to pay. Sales are below expectations by about 25 per cent across the sector. Some of the main buyers are usually people from the diaspora. But because of the Euro zone crisis, they also don’t have money,” Mr Mubiru said.
He added: “The trend today is that those that have some money are going for cheaper land far away from town. People do not mind living far (away from the city) so long as they can own something.”
Mr Nicholas Okwir, the managing director of Housing Finance Bank, one of the main providers of mortgages said there has been a reasonable drop in mortgages issued with the borrowing ability constrained by high rates.
“There is no liquidity in the market. The lending is minimal. Potential borrowers are shying away from mortgages as they cannot afford the high rates. This has led to a reasonable reduction,” he said.
He added: “The good news though is that the situation is improving as the inflation continues to go down. ”
Meanwhile, while the sector had a slight growth, its revenue contribution to national GDP increased by more than Shs200 billion from Shs1609 billion in 2010 to Shs1814 billion in 2011, representing a 5.3 per cent share to total GDP in the 2011/12 fiscal year.
According to Mr Joseph Kamulegeya, a partner at PriceWaterhouse Coopers, the sector’s contribution to GDP can increase even further as there are several untapped potentials.
“If we are to widen our revenue collections, taxes on Real Estates should be increased because the sector has so much potential.”
Housing deficit
According to the housing ministry, Uganda has a national housing backlog of about 1.4 million units out of which 211,000 units are in urban centres and 1.29 million in rural areas. In Kampala alone, about 60 per cent of the houses are located in slum areas and are highly occupied while a few are located in uptown areas, showing an immediate demand for better housing facilities.
The deficit is set to widen as Uganda’s population continues to grow at over 3 per cent per year yet a similar growth is not duplicated in housing development.
Mr Daudi Migereko, the minister of housing said a joint government and private sector partnership can address the current housing shortages.
“Part of this problem is supposed to be addressed by real estate companies. We look at promoting an optimal level of public-private financing to housing.”
However, the Real Estate sector seems unready to find solutions to this problem. While new estates and apartments are coming up, they only cater for the high and middle class, neglecting the lowest income earners yet they are equally short of housing facilities.
A simple survey among different real estate companies prices shows that only land sellers are catering for the needs of the low income earners with well surveyed plots of land going for as low as Shs2 million.
This is however different among house developers as they charge inflated prices. The cheapest house for rent (double rooms) goes for at least Shs200,000 while, the cheapest house on sale (a two-bed roomed house) goes for about Shs50 million.
Mr Simon Mayanja, a real estate’s broker said: “I can admit that these houses are only for rich people. I am a broker for these houses but cannot afford any of them.”
He added: “Few people buy. Many of the people just rent but again, they keep shifting. This is partly because; the houses are expensive with stringent terms. Someone is expected to pay rent for three months in advance.”
Additionally, one Henry Lukwago, a broker in Nansana said that the business model for real estate developers only favours the rich.
“They build these houses for foreigners and Ugandans from the Diaspora. When foreigners mainly from South Sudan come to Uganda, they just pay without negotiations. But very few locals can do this.”
However, Eng. Mukoza said that with the current state of the economy, the current prices will remain as they actually spend more throughout the construction process.
“It is wrong to say that these houses are expensive. When we are pricing the houses we consider a lot of factors that many under look. These include cost of actual construction, cost of buying the land and compensation of squatters if any, plot survey, extending electricity, water and road systems.”
Recently, Mr Vicent Agaba, the President of Association of Real Estate Agents Uganda (AREA), said that the rising costs in the sector are constraining the supply of affordable housing units.
“Developers are putting fewer houses on the market because of rising costs,” he said.
But this trend may further increase the housing shortages in the country. With a housing backlog of up to 1.4 million, a huge percentage of it in Kampala, the transformation of more residential areas into office areas is set to worsen the situation the current situation.
With the ongoing Euro zone crisis and Uganda’s economy yet to stabilise, the growth of the real estate business will depend on its ability to develop new real estate products.
As they focus on the rich class, real estate players should also look for ways of delivering products that average Ugandans can afford. This will not only increase the sector’s profitability but also avert the housing crisis.