Tuesday, November 8, 2016

LET IT: THE RENTAL MARKET WILL REGULATE ITSELF

A new law that will regulate landlord-tenant relationships is coming to parliament with some clauses which will have a negative impact on efforts to bridge our housing deficit.

The Landlord & Tenant Bill 2016 has some laudable clauses that regulate certain aspects of the relationship like house repairs, security deposits, liability for utility bills and eviction circumstances. These have been handled by the members in the relationship by ear but a more formal prescription will be useful.

However it has some clauses that, while clearly pandering to populist sentiment will do irreparable damage to the development of the sector.

There are four particular clauses that caught my eye. 

The first one was the provision that all rent shall be charged in shillings. Tenants have complained that charging in dollars makes it difficult to plan their expenditure or keep up with the fluctuating shilling. And that in circumstances like last year when the shilling shed as much as 40 percent of its value against the dollar rents will become unmanageable. It’s hard to ignore the pain of the tenant.

But the other side of the coin is the landlord’s side. For lack of long term affordable capital in this market it’s possible the landlord would have borrowed in hard currency where lending rates are in single digits unlike locally where mortgage rates are in double digits, and in order to hedge against those same fluctuations he passes on the exchange risk to the client.

"In a situation where landlords are restricted to charging in shillings you may very well see a slowdown in development, a subsequent shortage of rentable space and the dreaded rental increases we are hoping to prevent...

Secondly the law proposes that landlords should not demand for more than three months in advance. 

Currently landlords can ask for unlimited rent in advance but the figure has come down over the years to anything between six and three years. To legislate this period is wrong because like the first case we do not know how the land lord financed the project and his demands are in line with his repayment schedules.

And then what has got to be the craziest proposal is the one that seeks to cap rental increases annually to six percent. How they came up with six percent is not explained. In a year when inflation shoots to 30 percent and the shilling depreciates 40 percent – all recent events that have happened in this country, how does a landlord manage? A landlord should be allowed to respond to market forces promptly in order to make his investment viable. This amounts to a price cap and can only lead to bad things down the line.

And finally the provision that a rental increase should not be effected within 12 months of the last one. Once again what happens when the market or economy dictates otherwise?

It has been reported that Uganda has a deficit of quality housing of about eight million units with 2.3 million of these needed houses in the urban areas. The last thing you need is for non-market laws to come into play which would stifle current private sector efforts to bridge the deficit.

If landlords are charging in dollars, asking for six month or more in advance and raising rates at unfair intervals it speaks to the fact that it is still a sellers’ market. That the stock of housing is less than demand and therefore the owners of the properties can do what they want.

"One of the most visionary things the NRM did as regards the housing sector is to resist calls in the 1980s to control rent on property. By letting the market determine what is fair rent, the boom in construction was spawned that has led to thousands of rental units being built...

The housing situation was so bad that renting someone’s garage as living space was not uncommon. 
Imagine paying sh300,000 a month for nothing more than four walls – ventilation maybe optional!

The construction industry is one of those sectors with really multiplier effect through the economy, with the masons, materials and transporters locally sourced many people are happy when there is a construction boom. We want to keep those happy times going.

We need to let the industry grow largely unfettered, especially since government has shown a lack of capacity to build houses itself.  The natural progression is that house supply will match demand and all these practices of charging in dollars, asking for advances and unnecessary rent hikes will become a thing of the past.

What government needs to address is why the increase in the stock of housing is not matching the rising demand and to try and address this.

"To bring the cost of housing down government should consider underwriting the infrastructure into the residential areas – the roads, electricity lines, water and sewerage network. By some estimates these account for half the cost of development...

We also need to lower mortgage rates. The high rates again are a function of low supply of long term funding. Maybe it’s time government increased the mandatory rate of borrowing of workers towards their pensions and gratuity. The current five percent has been in pace for 30 years! With more long term money in their coffers banks maybe forced to lower lending rates. And not only prospective home owners but developers will benefit from the decrease.

In a nutshell what government should be doing is encouraging credible investors into the sector by improving the environment for real estate development and prices will take care of themselves not try to legislate into law things that are determined by the market.


This does not take much intelligence but the repercussions will set us back.

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