High prices behind the Uganda housing deficit

Thursday, 1st September, 2011

Between July and September every year, Tom Odaak, the director of Excel Estates, has a reason to smile.

That period of the year always has hot land and property deals. But this year is different. The deals are there alright, but they are way beyond many buyers’ means.

Odaak says these months were high demand seasons because produce dealers and businesses were reaping from high crop harvests and sales.

Also with children back for holidays, parents had less on their plate and have some money to invest in either building or acquiring property.

“This year, people are more concerned about day-to-day living than making payments for land and housing,” says Odaak.

Rising bank interest rates, expensive construction materials, inflated land and property prices are all set to stall further investments in real estate and are likely to escalate the already acute housing shortage, experts have warned.

Bank of Uganda’s tight monetary policy, which has seen interbank rates rise to 14%, has pushed commercial banks to revise their lending rates, meaning the cost of borrowing from commercial banks for investment in housing has steadily risen.

Also figures from the Uganda Bureau of Statistics indicate that the prices for the whole construction sector (covering material prices, wage rates and equipment hire rates) rose by about 14% in February 2011 compared to February 2010.

This was due to a 15% increase in inputs for both civil works and residential buildings and a 13% increase in inputs for non-residential buildings.

The Bank of Uganda December 2010 annual supervision report points that building and construction experienced the most significant rate of growth in loans to an astronomical 166% in 2010 to 7.7% during the same period in 2009.

Commercial mortgages were also on the rise. Todate, Stanbic Bank has lent out over sh1,000b in mortgage projects, of which about 20% goes to direct borrowing for construction, according to Philip Odera, the managing director.

The spiralling cost of building materials is not helping the acute shortage of housing units in the country.

The cost of cement has risen from an average sh22,000 to sh28,000 a bag in just seven months, making it one of the highest input costs. Also high fuel costs have made transporting building materials more expensive.

The input for residential and non-residential buildings both rose by 2% in April 2011, mainly due to increased prices of inputs such as roofing sheets, concrete products and timber.

"What one could do with last year, now they can do only half the job with the same money," says Odaak.

Inflated prices
There is also a high discrepancy in the pricing of land and property that professional realtors say are out of step with the core principles of supply and demand.

Odaak says there is likelihood that there would be a property bubble.

He blames the whole scenario mainly on speculation and the yet-to-be-professionalised real estate industry. He says Entebbe Road is one of the most inflated areas and there is likely to be an oversupply of housing in the area in the future.

"The problem is we don’t have a regulator, we may end up with what happened in the US when prices dropped below their previous mortgage value," Odaak says.

He advises people to deal directly with real estate firms whose prices reflect the true market value and avoid brokers who inflate prices.

"Some of them are real quacks, if you are not keen enough, you pay a lot for nothing," warns Odaak.

Housing shortage

Kampala alone has a shortage of over 100,000 units. The country sits on a shortage of about 700,000 units.

Rental housing is big opportunity
Rent has traditionally consumed a huge chunk of household incomes because only a small number of people own houses and therefore resort to renting.

But low real investments in rental housing have not helped the already low supply of housing units in the country.

Experts say future investments in rentals are a big investment opportunity.

With the rising urbanisation, the demand for rental housing is expected to increase if overall investments in the sector slacken.

This is also due to the large income disparity that does not favour home ownership, meaning less people can afford to fund the construction of their own houses.

Low cost rental housing is also seen as a bridge to home ownership and discourages the emergence of informal settlements because young adults are more inspired to live on their own if they can find cheap housing.

To increase the availability of rental housing, Housing Finance managing director Nicholas Okwir is advising that real estate players undertake larger projects of 100 to 1,000 units which are easier and cheaper to fund because of their scale and in the long-term will address the housing shortage.

"This helps us to get funding, there are people ready to fund. You and me can come up with 4-5 units but this will not satisfy the market," says Okwir.

Philip Odera, Stanbic Bank managing director even says most people prefer to borrow money and build houses instead of direct mortgages which could be an indication in the low interest in low cost rentals .

"Some people are saying they would rather construct other than wait for finished products," he said recently.

Odera says of all the banks’ product portfolios, a defaulting client prefers not to suffocate their mortgage plan.

"Somebody can default elsewhere but in the long-term, we have seen that the things people push to maintain is their house," said Odera.

Experts say rental housing will remain an attractive investment segment for real estate developers going forward.

By David Mugabe: The New Vision Newspaper