12 July 2016

Knight Frank Uganda has released a new report on Kampala’s real estate market performance over the first half of 2016. The report states that Uganda’s economy continued to grow in the current financial year 2015/16 albeit at a slower pace of 4.6 percent compared to a 5 percent growth that was recorded in the financial year 2014/15. The decline in real GDP growth is attributed to volatilities experienced by the economy such as the dollar rate, which in turn affected various economic activities leading to low foreign direct investments in the country. 


1.0  Commercial

According to Knight Frank’s report, the office sector has been the hardest hit of all the property sectors over the past 24 months and saw prime rents falling to as low as $12.00 per sq.m in some properties. The Kampala outer CBD locations of Kololo and Nakasero, and other prime suburban office locations of Naguru, Bugolobi, Nakawa and Bukoto have been the focal points of office development over the past two years. “We foresee this trend continuing as the key demand drivers of commercial office space continue to look for office space out of the congested central business district”, said Judy Rugasira Kyanda, Managing Director Knight Frank Uganda. During the first half of 2016, yields for office space remained stable ranging between 9 percent and 10 percent for prime offices (grade A) and 8% percent for grade B Offices.


2.0  Retail

Knight Frank Uganda witnessed a number of retail tenants particularly in secondary locations, requesting to have their rents paid in local currency in order to curb the dollar fluctuations. “According to our research, many retail tenants generally registered slow sales during the first quarter of 2016 compared to the same period last year; this is partly attributed to the slowdown in the economy given the fact that Uganda witnessed an election period during the first quarter of the year”, continued Judy Rugasira Kyanda. The Knight Frank report further stated that retailers were putting pressure on property owners to give them capped rentals to enable them forecast actual sales with a degree of certainty. However this request, if allowed, would be detrimental to the landlords as their financial obligations are in foreign currency (US$).


3.0  Industrial

The Knight Frank report stated that industrial rental property in the traditional industrial areas within and around the central business district and secondary industrial locations like Banda, Ntinda, Nakawa and Kyambogo experienced low occupancy rates and take up over the past six months. Knight Frank stated that this was partly attributed to the fact that the supply of warehousing space outstripped demand as well as a slowdown in the trading of imported goods and commodities which would require storage space for distribution to neighbouring countries. “It is without a doubt, to a certain extent, that regional peace and stability affects how well the Ugandan economy will do. The political unrest in South Sudan and Burundi have impacted on trading volumes which has had a knock on effect on demand for warehousing space” noted Judy Rugasira Kyanda, Managing Director of Knight Frank Uganda. Despite this, Knight Frank noticed an increase in demand for relatively large warehousing space of late from the logistics, transportation, and pharmaceuticals sectors during the first half of 2016.


4.0  Residential

During the reporting period Knight Frank witnessed an increase in the number of properties for sale mainly in the greater Kampala Metropolitan areas of Kira, Naalya, and Najjera which are becoming increasingly popular for middle income home owners. Land tenure in these suburbs also tends to be “Private Mailo” which is considered an advantage for many home buyers who believe mailo tenure is in perpetuity, and is generally considered a “safer” tenure to have, as opposed to a leasehold title. According to the report, inquiries for commercial and residential investment properties to buy / rent have increased, from both the local and expatriate community. This is a sign of recovering investor confidence as the perceived immediate threats or aftermaths of the 2016 general election are considered to have passed. In addition, the period of March-May 2016 saw an increase in demand for short stay accommodation as opposed to the long leases. Over 80 percent of the inquiries received during this period were from clients who were looking to stay for a period of 2 – 4 months. 


5.0  Valuations

Overall, bank lending rates remained stable during the first half of 2016 though still high at an average rate of 24.5%. Knight Frank registered a noticeable increase in valuation instructions and bank lending activity over the past 2 months, albeit for evaluation, as opposed to new loans. Judy Rugasira Kyanda noted that there was a correlation between house purchase activity, and the volume of valuation instructions and bank lending activity, since most buyers in the market are mortgage purchasers. “Sadly one of the biggest deterrents of home ownership for mortgage buyers, who are the majority of purchasers in Uganda, is the unaffordable bank lending rates (22% - 25%). This is also partly the reason why loan repayments are not being met and property repossessions are increasing” noted Judy Rugasira Kyanda.


6.0  Outlook for The Second Half Of 2016

·         Knight Frank strongly believes that the passing of the amended financial bill that allows banks to engage in agency banking, Islamic banking and bank assurance will be a catalyst for increased economic activity over the next half of the year through increased access to financing for trade and investment. “We believe that some of the capital will be absorbed into the construction sector and therefore we foresee increased activity in the second half of the year”, said Judy Rugasira Kyanda.


·         The supply / demand disequilibrium for middle income and affordable housing remains high, as supply in the prime residential segment runs the risk of becoming saturated with limited demand to match in the short to mid - term. Likewise, this will have downward pressure on prime residential rentals and increased voids.


·         However, the property market sentiment remains bearish, with Bank of Uganda revealing that the economy may deteriorate over the next 12 months due to slowdown in emerging market economies especially due to China’s sharp slowdown, which has hurt commodity-exporting countries by driving down demand for exports.  Consequently, Uganda's balance of payments in the short to medium-term will remain vulnerable to the turbulences in the global economic environment.


·         The property market is expected to pick up, but with caution since interest rates remain high, the shilling remains weak, and demand for both prime office and residential accommodation is still lagging behind supply. “There are various middle income housing development schemes and satellite towns in the offing, and we belie-ve this will address and alleviate the housing deficit if the right product is built and priced correctly” continued Judy Rugasira Kyanda.


·         Finally Knight Frank envisaged a decline in new investments in the construction sector during the second half of 2016 as a result of the proposed higher taxes on cement. With an aim to boost revenue in FY 2016/17, Government of Uganda proposed excise duty charged on a 50 kg bag of cement  be raised from Ush500 ($0.15) to Ush1,000 ($0.29), which could raise market prices, depress consumer demand and discourage new investments.