Uganda real estate products may not be meeting the market’s needs

The real estate market is driven by demand and supply. When demand is greater than supply, the prices skyrocket. The reverse is also true. To best understand the current dynamics of real estate market in Uganda, one ought to know the factors that affect both demand and supply of real estate.

An analysis of Uganda’s real estate industry shows that there is a disconnect between the demand and supply of real estate products, both for sale and to let.

Market players are running the risk of sending the industry into limbo, because they are delivering products that consumers do not want. This risk is characterised by such aspects as having an over-supply of certain real estate products, which do not meet the purchasing power of most people in Uganda’s labour force, or, do not meet the current needs of Ugandan consumers.

Chief among these is the properties that are developed for commercial office spacing, commercial retail and residential buildings. The CEO of the Association of the Real Estate Association of Uganda, Vincent Agaba, says many real estate companies and developers are delivering products without doing feasibility studies to establish what their target market actually wants, and, what the target market can pay for.
The result has been a great number of office space and many floors on plazas in the towns that are empty and yearning for clients, but to no avail. It is a scenario that evidently does not do many good for industry players who expect to make returns on the investments they put up.

Commercial office space
When it comes to buildings, especially in the centre of town, Mr Agaba says there has been progress in terms of the city’s development. “We are seeing the central business district becoming a metropolitan city with high sky buildings,” he says. “That is huge progress. You have buildings like Mapeera House coming in. You have all these buildings coming up on Nakasero hill with 13 floors, even 15 floors. Those are Class A buildings, with air conditioning and all. That is very good for the business community to have a good environment in which to operate,” he adds.

However, he notes, the trouble comes in when you start to consider whether Uganda’s economy has the wherewithal to afford such facilities.
“The other question, however, is are we having oversupply or not?” he asks. “Our current school of thought is that we may be heading into oversupply. If you look at most of these buildings, they are very vacant. At the moment, the demand for commercial office space is less than the supply.

“It requires real estate investors to go back and think and do feasibility studies before setting up buildings. Do we have the capacity to occupy that space? If you look at our small and medium enterprises in Uganda, how many corporations do we have that need to hire for example, four floors?

Whether that is that right investment portfolio or not, we have to look at whether the demand fits the supply.

Residential
It is safe to bet all your chips on the fact that everybody out there wants to possess a home. Or at least, they need to. It’s for that reason that houses, either to let or for sale, should be in prime demand, at any given time.

What we have in Uganda at the moment however, is that the demand is, technically speaking, not demand per se because the market desires to have houses for rent and sale, but the houses and apartments offered on the market, fall way over the market’s purchasing power. In other incidences, some of the products are just simply not suited for buyers.

“There has been a lot that has been put on the market (for residential),” Mr Agaba says. “But again, demand is higher than supply, for both to let and to buy. The only problem we have is that there is the wrong product on the market. It does not match the capacity of the market. People really want houses, but their incomes do not match what is being built on the market.

“Bank interest rates on mortgages are very high. For most of our middle income people, willing to pay Shs300,000 to Shs600,000 for a two bedroom apartment, the houses are not enough. If you look at people from sales executives to managers, they fall in that category.”
When it comes to houses for sale, Mr Agaba says, “People are looking for houses between Shs50m to Shs100m. But how many houses are on that market? No one is building houses like this.”

He advises that to fix the current problem, developers need to look more at construction affordable apartments, especially one and two bedroom apartments, because this is what most of the market is targeting now. “The people from university do not need a bungalow or a house where they have to slash grass. They just need a bedroom, a kitchen and sitting room to watch TV with their friends. Then later, as they make more money, they end up in a bungalow,” he says. Developers can cut constructions costs by constructing apartments on storeyed buildings instead of bungalows.
He discourages developers from constructing property for the expatriate market because this is small, less than two per cent of the labour force.

Commercial retail
Commercial retail space, in the form of plazas and shopping malls, just may offer the alternative to office space. “The SMEs can have smaller space in a shopping mall, which they can afford, and on a good class A or B building,” he says. “You are likely to fill it up faster than office space. Look at Forest Mall and Garden City for instance. Our economy is full of SMEs. Many want to shift from Katwe to a good environment but affordable. That is what retail buildings offer. They cannot afford to hire a whole floor on say Crested Towers.”

However, even here, there are challenges. Kampala’s city centre, at nearly any given time, is having a plaza coming up at a certain point. Downtown Kampala is itself stuck together with plazas as if they are in an assembly. But yes, walk past the fourth floor and what follows if empty floors.

“The solution,” Mr Agaba says, “is mixed use. “A critical real estate developer does not only build one thing. You have seen people have shops at the bottom of the building and apartments at the top. That is mixed use. Like in our market, have retail in the first four floors and then, in the higher floors, put a hotel.”

Of course, this is subject to the location of the building. (Ask yourself,) what do you put up there that does not need first contact. Hotels and apartments do not need first contact, available on say the first flour floors, like shops do. Many people would want to stay in the city because it cuts transport costs.

Warehousing
This sector of the real estate industry is tied to the agriculture, mineral or trade sectors. They offer a huge opportunity because if there are available warehousing facilities for trade, traders would hire these and not only use them as stores but even as sales rooms. They are not very expensive; needing just a rectangular block, a roof, ventilation and good location. Demand for warehousing is steadily rising. One would however, still have to carry out feasibility studies to gauge whether the warehouse would fit the market it’s placed in. One could, for instance use Hoima Road and set up a warehouse in anticipation of oil production by providing storage for petroleum products.

Why the disconnect
The current discrepancy between demand and supply is caused by a lack of professionalism in real estate management. “Most real estate developers are not real estate people fulltime. They do incidental real estate investment. One for instance, made money from another business like selling clothes, then they join real estate,” he says.
The result is that a Ugandan who has finally got some money, ends up replicating a building here that they saw in Dubai, but which no one can afford.

The solution would be for real estate players to “do their homework well, find cheap financing, use cheaper technology, and be a committed real estate player.”

The Monitor Newspaper
By John K. Abimanyi
03-Apr-2013