The International Monetary Fund (IMF) reading from an
analysis of Ugandan’s investing habits since 2008 point out that we are investing
more and more money in the least productive assets in the economy, namely real
estate.
The IMF says investment in real estate has grown 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 Nansana.
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 fueled 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. There are better returns in trade or industry. The attraction of real estate is the myth that you will just build 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.
