In Summary

A lot of alternative space is cropping up in the suburbs, sending many tenants out of the Central Business District to other suburbs where rents are slightly lower, Joan Salmon writes.

A few months back, there was an advert of Course View Towers on the verge of getting auctioned.
While Knight Frank Kampala market update 2018 says the economic environment in Uganda is slowly getting better, the cry in the real estate industry rages on because it has been punctured for so long.
In 2016, the real estate giant said, “The headwinds that hit Uganda’s economy in 2016 did not spare the property sector. It was “a turbulent year for the property market.”

Collins Oduka, a real estate professional tells of the pains therein.
“The real estate market is still somewhat depressed. This was at one point further worsened by the increase in commercial interest lending rates which saw many developers shunning and/or defaulting on their loans despite banks trying their best to market the loans. That led to banks being selective in who they gave loans in a bid to avoid bad debt.”

Mr Christopher Akugizibwe, Credit Analyst - home loans at dfcu Bank, says, “Around November 2018, there was a general spike in interest rates. Since most of the bank lending is based on the base rate, this slightly increased the effective interest rate and consequently the instalments for the customers. This spike in interest rate was based on the Central Bank Rate that has been maintained at 10 per cent since December 2018, rising from 9.5 per cent.”

Increased interest rates also led to increase in rental rates yet most commercial rental agreements have a clause that rent would increase annually. For those paying in dollars, the increment is anywhere between 3 and 5 per cent per annum while shilling denominated loans could experience about 10 per cent increment annually.

The woes of the industry rage on as many tenants of whom the Government takes the biggest percentage vied for rent to be paid in shillings.
“That makes real estate investment less lucrative owing to the shilling instability,” Akugizibwe said.
Furthermore, the changes in the exchange rate cause rental rates to rise.

“Besides the annual rental increase, the currency exchange rate further causes an increment in rent hence making it even harder for tenants to stay in business”, he explains.
Besides, big takers of space such as Uganda Revenue Authority (URA) have built their own real estate leaving vacant spaces in the market.
“Currently, it’s not easy getting a single let for this amount of space”, he adds.

There is also a lot of alternative space coming up in the suburbs hence many are moving out of the Central Business District (CBD).
“Previously, many developers in the real estate business had invested in the traditional areas of Nakasero, Naguru, Kololo and the CBD where rent is usually charged in USD and per square metre. With the emergence of alternative commercial nodes, tenants are able to drive hard bargains and realise more value. These places also work well for offices that prefer standalone structures compared to multi tenanted spaces. Therefore, newer nodes are seeing increased tenancies for residential, commercial and mixed use buildings than before,” Oduka suggests.

The Knight Frank Kampala market update 2018 notes, “Knight Frank Uganda registered a 5 per cent year on year decline from 86 per cent to 81 per cent in occupancy rates for the prime residential suburbs of Kololo, Nakasero, and Naguru. Key among the drivers for this decline is the fact that tenants opted for accommodation in other suburbs where rents are slightly lower, yet the quality of stock available is newer and of similar if not better quality than is available in the prime suburbs.”
Rehema Nakuya had a stall in Gaza land but opted out to start a boutique in Najeera.

“Apart from having to get up very early to beat traffic jam, the issue of sharing space was one that I bore until I got wind of a commercial building opening in a location not far from my home. Here, I have space enough to accommodate my clients without being weary of bothering a shop mate.”
Additionally, older investments were targeted for the high income earners while the biggest percentage of Uganda’s population is comprised of the medium and low income persons most of whom are not ready to part with so much.

Another excerpt from the report says, “Despite a 12 per cent increase in the supply of residential housing stock, the greater Kampala suburbs of Naalya, Kira, Najjera, Namugongo, Buwaate and Kitende that are dominated by mid-income residential properties registered a two per cent year-on-year increase in occupancy rates from 80 per cent recorded in 2017 to 82 per cent in 2018. This is in correction with justifying the steady demand and requirement for affordable housing given that demand has been outstripping supply for the past five years.”

Peter Kakembo no longer has to deal with rent. “At first, I thought of moving to Ntinda where my clientele was concentrated compared to Kololo where I operated until late 2017. However, when a friend in IT shared about doing business online, I left the whole idea of renting aside. Today, I sell men’s shoes and suits online in the comfort of my home.”
However, there is hope for the tide to change for the better and that would start with attraction of sophisticated investors. But that can only happen when the legal framework is improved to boost investment.

Assessing opportunities
Moses Dennis Lutalo, the country director of Broll Property Group, hopes that things will get better.
“The market can change for the better if the sector attracts more sophisticated developers who have a full appreciation of the real estate investment value chain. Developers should do more research to determine which projects to create and whether they are aligned with the market expectations.”
He points out that the real estate industry follows economic cycles. As such, as long as the macroeconomic environment improves, the real estate business should improve.
“Real estate investors usually look out for GDP, GDP per Capita, Purchasing Power Parity, Population Growth Rate and demographic structure. This enables them assess the extent of the opportunity.”