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Tuesday, September 26, 2017


The International Monetary Fund (IMF) reading from an analysis of Ugandan’s investing habits since 2008 point out that we investing more and more money in the least productive assets in the economy, namely real estate.

The IMF say investment in real estate has been growing by about 70 percent last year from over 50 percent nine years prior.

The boom in real estate development has been one of the main drivers of economic growth over the last two decades or so.

This explosion has brought Mukono and Entebbe closer to Kampala and has also swallowed up the previously outlying areas of Luzira, Namugongo and Nasana.

In the city center it has turned the streets beyond Kampala road into a warren of high rise buildings that have changed the daylight hours.

"The sad thing though, is it seems that bubble has done its course. A lot of space goes begging – in the city and in the residential areas and the rise in land prices has slowed or reversed altogether. In its wake it has left a trail of tears within households and among lenders....

How do you know you are in the middle of a boom? When anyone and everyone can make money, when everyone looks like a financial genius, you know you are slap bang in the middle of a boom. You also know it when no one believes it will ever end, that the good times will keep on rolling on.

But what has made our real estate boom particularly nasty is that a lot, if not most of it, was fuelled by hot money, money got from less than legitimate means. The signs are everywhere you look.

How do you have a five story building on prime land in the city unoccupied for going on three years now and it has not been attached by the banks? How do you build apartments in the middle of the slam and still quote top dollar? How do you buy a house at multiples of the going rate for comparable property not only in a Kampala but even in the region?

In an environment of high mortgage rates, high cost of amenities and low purchasing power the genuine real estate developers have found themselves on the sidelines having to sing for their supper. 

It would be funny if it wasn’t sad.

However the market has a way of correcting itself. When there is little supply it creates an incentive to invest. The trick really is to be at the beginning of the trend before it catches on and everybody piles in, then you can sell for a handsome profit and then either move on or wait for the inevitable burst of the bubble and buy at the bottom of the cycle.

Easier said than done.

 A cursory look at the mathematics shows that even at the best of times the returns are not as dramatic as they are hyped to be.

If you built a two-bedroomed apartment for sh100m and depending on location, you may get up to a million shillings monthly or sh12m a year. But this is the top line or gross revenue, this before you have removed costs you have incurred over the period. And god forbid you have taken out a loan to finance the build.

Of course others have decided to build and sell, a higher level of complexity and risk than the rental market. A friend once who was in the build to sell business learnt that it doesn’t make sense to sell finished houses because the buyers will talk you down on any number of things – they don’t like the burglar proofing, they don’t like the tiles, the kitchen is too small, the ceiling is too low and on and on. And each complaint means you might have to climb down from your earlier price.

There is money to be made as a property developer but it helps if you have access to cheap money and can manage scale.

But real estate has a place to play in our portfolios. Real estate can be a store of value, preserver of capital to the extent that if you had the money hanging around you might blow it and have nothing to show for it afterwards.

It can be the end of your wealth accumulation cycle. That you make your money in trade and commerce and finally lock it down in real estate.

"And that was what the IMF was getting at. The are better returns in trade or industry. The attraction of real estate is the myth that you will just building your units rent them out and see the money rolling in with little effort. While with setting up an enterprise of the other kinds will need day to day supervision and planning that sounds like too much work...

Clearly the sustainable solution is for all of us learn how to do business and not get seduced by the possibility of the quick and easy return.


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