Kampala’s landed property and the danger that awaits banks in future

It is said that the reward received for land as a factor of production is rent. To my layman’s mind, I think this is even truer in urban settings where land is nearly exclusively assigned to generating rental income in one way or another. By implication, and while there may be other considerations, prospective rental incomes are a key factor in determining prices for land and landed properties.

Again, this is specially so in urban areas. In rural settings, the prices for land often get influenced by other factors such as the land’s agricultural productivity. I know places in the countryside where people may determine the prices for land by the land’s capacity to produce bananas or grow good pastures to feed livestock. These factors may somewhat also be related to a form of rent.

For the case of Kampala, rent rates should be very critical as a determinant of property prices. A few days ago, while reading through a Metropolitan Real Estate Property Market Report published by Stanbic Properties Limited in June 2022, pondering about this relationship between rent rates and property prices, I got to ask myself a few questions that I would like to share.

In that a report, it was indicated that in Kampala’s high-end suburbs, a 2-bed apartment, 3-bed apartment and 3-5 bed stand-alone house, on average, cost US$220,000, US$270,000 and US$1,500,000 respectively. Corresponding monthly rental income from such properties was reported at an average US$2,000, US$2,500 and US$3,500 respectively. This would imply that the payback period for such properties would average 9 years, 9 years and 36 years respectively.

In the secondary suburbs of the city which include areas such as Nsambya, Muyenga, Luzira, Munyonyo and others, a 2-bed apartment, 3-bed apartment and 3-5 bed stand-alone house, on average, cost US$100,000, US$130,000 and US$150,000 respectively. Corresponding monthly rental income from such properties was reported at an average US$700, US$900 and US$1,200 respectively. This would imply that the payback period for such properties would average 12 years, 12 years and 10 years respectively.

Putting the above together, the overall average payback on residential properties in treasured parts of Kampala is about 15 years. This appears considerably long.

It would appear as if it requires difficult considerations to dedicate capital to investments in rental properties since related incomes appear significantly low, in relation to relevant property prices. Alternatively, it may be implied that the property market is driven by a diverse universe of factors that are not fully represented on the rent rates – property prices scale. As such, it would mean that capital owners put their capital on land and landed properties without strict consideration of dynamics dictated by the cashflow that is assured by rental incomes.

I do not know if the prices and rental rates for commercial properties around Kampala depict a different trend from the above residential properties, but I suspect there may be a close similarity.

On a more sensitive note however, I consider our banking sector and the potential implications of the above situation. A significant portion, if not the majority, of loans disbursed to customers around Kampala is secured against land and landed property. Additionally, building, mortgage, construction and real estate constitute a significant sector-category of the loan portfolios of Ugandan banks. Around the time of the onset of Covid-19, such loans constituted about 24 percent of the total loans disbursed by institutions supervised by Bank of Uganda.

What the above implies is that a very extensive portion of the base of our banking sector is cast in credit securitized by land and landed property. This land and landed property carries a value that is not logically linked to the conventional driver of its value, which would be the rent prospected from such assets. One may wish to argue that the value of land and property is simply driven by associated demand. However, this demand seems to be inflated by factors which are “hidden” from conventional credit analysis by lenders.

And thus, very pertinent questions arise. Could such factors give way in future and instantly distort property prices around Kampala downwards? Is this a kind of bubble waiting to explode at some time in future? Are banks able to mitigate the dangers underlying this situation? And, perhaps more important, is this danger conceivable by lenders, or is it considered too remote and irrelevant to the future of banking in Uganda?

Sometimes what we do not expect can happen. If the values and prices of properties around Kampala adjust to their business-logical values, in future, due to circumstances that may not be easy to perceive presently, answers to the above questions will be very important for banks.

Raymond Mugisha is a Chartered Risk Analyst and risk management consultant

[email protected] / [email protected]