30th October 2017
Over the last five years, Uganda has experienced a slowdown in economic growth due to the adverse weather conditions affecting its agriculture sector, an increased public debt burden and political pressures from the South Sudanese crises. Despite these challenges, the economy has shown signs of recovery with a 2017 growth rate of 5.8 percent. This can be attributed to improved weather conditions that are likely to boost agricultural production and cross-sectoral involvement in major infrastructure investment projects. A 35 percent increase in road and energy infrastructure investment contributed significantly to the country’s economic growth in the first quarter of 2017.
However, the poor implementation and management of these investment projects has been identified as a key risk to economic growth in the country. In an attempt to stimulate economic growth through an increase in private sector credit, the Bank of Uganda reduced its Central Bank Rate (CBR) from 15 percent in June 2016 to 9.5 percent in October 2017. Private Sector Credit (PSC), a leading indicator of the financial sector’s contribution to economic activity, has improved to 5.3 percent in early 2017 from - 0.1 percent in mid-2016. This has had positive effects on the construction, real estate and mortgage sector as it continues to hold the lions share of PSC.
A Country Overview of Housing Finance Markets in Uganda
A Country Overview of Housing Finance Markets in Uganda
2017 has seen a general decline in interest rates on mortgages, from 22 to 18 percent. This suggests an increase in the availability of mortgage finance in the country.
On the demand side, the issuance of mortgage finance in Uganda continues to depend on verifiable income in the underwriting process. However, borrowers with formal ,verifiable income constitutes less than 38 percent of the working population.
On the supply side, developers are constrained by poorly structured project finance for the sector. Lenders in the sector structure the amortization of residential development loans on a monthly basis which is often inconsistent with their cashflow structures, derived primarily from the off-take of units . This has resulted in high levels of NPLs amongst developers.
Ugandan banks have begun to develop financial products that are more responsive to the needs of the country’s population. Following the 2015 amendment of the Financial Institutions Act 2004, commercial banks have explored new ways of extending financial products to previously unbanked segments of the population, through the use of banking agents. These agents will operate as private, commercial entities contracted by licensed commercial banks to provide specific services on behalf of these banks. Such services will include cash deposit and withdrawal, payment of bills, balance enquiry and document collection for account opening. Agency banking will unlock barriers to accessing financial products and services by bringing financial infrastructure closer to customers.
On the demand side, the issuance of mortgage finance in Uganda continues to depend on verifiable income in the underwriting process. However, borrowers with formal ,verifiable income constitutes less than 38 percent of the working population.
On the supply side, developers are constrained by poorly structured project finance for the sector. Lenders in the sector structure the amortization of residential development loans on a monthly basis which is often inconsistent with their cashflow structures, derived primarily from the off-take of units . This has resulted in high levels of NPLs amongst developers.
Ugandan banks have begun to develop financial products that are more responsive to the needs of the country’s population. Following the 2015 amendment of the Financial Institutions Act 2004, commercial banks have explored new ways of extending financial products to previously unbanked segments of the population, through the use of banking agents. These agents will operate as private, commercial entities contracted by licensed commercial banks to provide specific services on behalf of these banks. Such services will include cash deposit and withdrawal, payment of bills, balance enquiry and document collection for account opening. Agency banking will unlock barriers to accessing financial products and services by bringing financial infrastructure closer to customers.
The Housing Finance Bank continues to lead the mortgage market in Uganda, holding around 55 percent of the total mortgage portfolio in the country. Until 2008, the bank only offered housing loans, but has since been licensed as a commercial bank and offers a full suite of commercial banking services. Other banks involved in housing related finance include Stanbic Bank, Standard Chartered Bank, DFCU Bank, KCB Bank and Centenary Bank.
The total mortgage portfolio comprising of both residential and commercial mortgages has declined from Ush 1.122 trillion in June 2016 to Ush 1.112 trillion in June 2017.This decline is attributed to a reduction in total loan approvals by financial institutions in response to the high levels of non-performing loans (NPLs). The NPL rate has continued to increase, rising from 7.7 percent in June 2016 to 10.5 percent in April 2017.
Commercial lenders have suffered huge write-offs attributed to the slowdown in general economic conditions and subdued consumer demand. The impact on mortgage business has been enormous. Indeed, the collapse of the third largest bank (Crane Bank Ltd) in October 2016 is attributed to the weight of Ush 142.3 billion (US$40 million) write-offs suffered by the lender, particularly in its commercial mortgage loan book.
Over the next 5 years, the National Housing and Construction Company (NHCC) plans to deliver close to 500 housing units in several municipalities outside Kampala. Having delivered several housing units in Kampala and its suburbs, (Namungoona, Naalya, Luzira, Kyambogo and others), the NHCC now aims to deliver projects in various regions of the country. The company’s pilot project was launched in Mbarara (2016), about 250 kilometres to the west of Kampala, with 160 apartments. These includes 126 square meters 2 and 3 bedroom apartments at a starting price of Ush 199 million (US$55 500). The project is expected to extend to other parts of the country including the eastern, northern and south western regions.
Construction costs remain a challenge to affordability. However, new manufacturers and innovations are lowering this cost. The cost of a bag of cement is expected to remain stable at US$8.5 or decrease, even in the face of mild inflation rate of 5.7 percent in July 2017. This is mainly due to a weakening of the building and construction sector, against planned factory expansion of productive capacity by both Tororo Cement Industry and Hima Cement Limited.
Additionally, a new manufacturer (Kampala Cement Company Ltd) joined the market in 2015 and is steadily gaining a sizeable client base and building competitive pressure on pricing.
The new company has installed a plant with the capacity to produce one million metric tons of cement per year. Unlike Tororo and Hima Cement factories, Kampala Cement produces multiple grades of cement under the brand names of Nyati (32.5 grade), Kifaru (42.5 grade), Ndovu (42.5 grade) and Supercrete (52.5 grade).
Housing Affordability
Although the demand for housing is high among Uganda’s middle class, with aggregate monthly household incomes ranging between US$400 to US$1 000, effective demand in terms of affordability is modest. This is due to the structure of livelihood strategies in Uganda which usually consists of both declarable and non-declarable income generating activities. Financial institutions continue to rely on declarable income records when calculating Payment to Income (PTI) ratios. Based on declarable income alone, only 3.3 percent of Ugandans can afford a PPP$ 65,418 house and 0.1 percent of the urban population can afford the cheapest newly built house, at a cost of US$52,737 in the capital using mortgage finance.
Mortgage conditions in Uganda range from 19 to 23 percent interest rates and 5 to 25 year tenors. Monthly repayments cannot exceed 40 percent of a household’s incomes.
In 2014 a survey was conducted by Bank of Uganda to assess loan to value (LTV) practices amongst selected banks. It found that the LTV ratio for mortgages had risen from 58 percent in March 2013 to 64 percent in March 2014, representing a substantial decrease in affordability levels across all income brackets. In 2016 and early 2017, high NPL levels have resulted in a reduction in the LTV rate to an average of 60 percent. LTVs for real estate developments within Kampala have been reduced to about 80 percent compared to 90 percent in 2014. Residential developments for establishments in other urban centres are further depressed to a maximum of 50 percent.
Housing Typology
Over the next 5 years, the National Housing and Construction Company (NHCC) plans to deliver close to 500 housing units in several municipalities outside Kampala. Having delivered several housing units in Kampala and its suburbs, (Namungoona, Naalya, Luzira, Kyambogo and others), the NHCC now aims to deliver projects in various regions of the country. The company’s pilot project was launched in Mbarara (2016), about 250 kilometres to the west of Kampala, with 160 apartments. These includes 126 square meters 2 and 3 bedroom apartments at a starting price of Ush 199 million (US$55 500). The project is expected to extend to other parts of the country including the eastern, northern and south western regions.
Construction costs remain a challenge to affordability. However, new manufacturers and innovations are lowering this cost. The cost of a bag of cement is expected to remain stable at US$8.5 or decrease, even in the face of mild inflation rate of 5.7 percent in July 2017. This is mainly due to a weakening of the building and construction sector, against planned factory expansion of productive capacity by both Tororo Cement Industry and Hima Cement Limited.
Additionally, a new manufacturer (Kampala Cement Company Ltd) joined the market in 2015 and is steadily gaining a sizeable client base and building competitive pressure on pricing.
The new company has installed a plant with the capacity to produce one million metric tons of cement per year. Unlike Tororo and Hima Cement factories, Kampala Cement produces multiple grades of cement under the brand names of Nyati (32.5 grade), Kifaru (42.5 grade), Ndovu (42.5 grade) and Supercrete (52.5 grade).
Housing Affordability
Although the demand for housing is high among Uganda’s middle class, with aggregate monthly household incomes ranging between US$400 to US$1 000, effective demand in terms of affordability is modest. This is due to the structure of livelihood strategies in Uganda which usually consists of both declarable and non-declarable income generating activities. Financial institutions continue to rely on declarable income records when calculating Payment to Income (PTI) ratios. Based on declarable income alone, only 3.3 percent of Ugandans can afford a PPP$ 65,418 house and 0.1 percent of the urban population can afford the cheapest newly built house, at a cost of US$52,737 in the capital using mortgage finance.
Mortgage conditions in Uganda range from 19 to 23 percent interest rates and 5 to 25 year tenors. Monthly repayments cannot exceed 40 percent of a household’s incomes.
In 2014 a survey was conducted by Bank of Uganda to assess loan to value (LTV) practices amongst selected banks. It found that the LTV ratio for mortgages had risen from 58 percent in March 2013 to 64 percent in March 2014, representing a substantial decrease in affordability levels across all income brackets. In 2016 and early 2017, high NPL levels have resulted in a reduction in the LTV rate to an average of 60 percent. LTVs for real estate developments within Kampala have been reduced to about 80 percent compared to 90 percent in 2014. Residential developments for establishments in other urban centres are further depressed to a maximum of 50 percent.
Housing Typology
Over 60 percent of single- family residential units are constructed incrementally by individual households using their own savings. About 70 percent of these households are constructed for owner occupation. Most rental units are constructed as multi- family units, usually with the support of mortgage financiers. The growing number of loan approvals, averaging Ush 810.6 billion per month in 2017 compared to Ush 794 billion in 2016 suggests that individuals and developers are increasingly relying on borrowed funds for the construction of both owner occupied and rental residential units.
The existing housing stock in and around larger cities consists primarily of run-down multi-family buildings, formally and informally constructed bungalows and flats. 46 percent of households in Kampala rent from private landlords. 71 percent of the housing stock is constructed with temporary materials. However, permanent, semi-permanent and temporary materials are often used on the same site or to retrofit existing structures.
There is a budding demand for condominium multilevel buildings. A number of developers, including Comfort Homes, Universal Homes and the National Housing and Construction Corporation (NHCC) have delivered several multilevel housing estates targeting upper and middle-class households. However, the uptake rates for newly built, for sale units have stagnated at around 50 to 60 percent while rental establishments have a 40 to 50 percent occupancy rate.
Housing Policy
Land Act 1998: The country is in the process of reviewing the Land Act 1998, which gives land ownership rights to the registered land owner. Proposals have been tabled before parliament to amend the citizen vested powers to government vested powers. The primary objective driving these proposals is to ease the execution of government projects and avoid undue resistance and delays caused by protracted negotiations over land. While this presents an opportunity to unblock barriers to housing and infrastructure delivery, it will have significant impacts on housing markets and risk calculations when issuing mortgages as land tenure can be contested during default and repossession.
URBA Act 2011: The establishment of the Uganda Retirement Benefits Regulatory Authority Act (URBRA) 2011, access to this local pool of long-term funds has been restricted. The Act established URBRA as the regulatory authority to govern activities of Pension Sector players including determining the classes of investments for pension funds. URBA excludes direct loans to commercial banks and other institutions. Before this period, NSSF had invested heavily in loans to commercial banks (Table 10) and the new restrictions present a serious threat to the long-term funding required by commercial banks in the issuance of mortgages. Under the Act, pension funds cannot make direct loans to commercial banks, unless the banks issue marketable instruments such as corporate bonds
National Housing Policy 2016: The policy provides a framework under which the government shall offer a conducive regulatory environment and other key housing sector inputs such as serviced land with access roads, electricity, water and sewerage, as well as ensuring collective access to affordable financing for housing development. Implementing the objectives of this policy is likely to ease the affordability challenge for the sector.
The existing housing stock in and around larger cities consists primarily of run-down multi-family buildings, formally and informally constructed bungalows and flats. 46 percent of households in Kampala rent from private landlords. 71 percent of the housing stock is constructed with temporary materials. However, permanent, semi-permanent and temporary materials are often used on the same site or to retrofit existing structures.
There is a budding demand for condominium multilevel buildings. A number of developers, including Comfort Homes, Universal Homes and the National Housing and Construction Corporation (NHCC) have delivered several multilevel housing estates targeting upper and middle-class households. However, the uptake rates for newly built, for sale units have stagnated at around 50 to 60 percent while rental establishments have a 40 to 50 percent occupancy rate.
Housing Policy
Land Act 1998: The country is in the process of reviewing the Land Act 1998, which gives land ownership rights to the registered land owner. Proposals have been tabled before parliament to amend the citizen vested powers to government vested powers. The primary objective driving these proposals is to ease the execution of government projects and avoid undue resistance and delays caused by protracted negotiations over land. While this presents an opportunity to unblock barriers to housing and infrastructure delivery, it will have significant impacts on housing markets and risk calculations when issuing mortgages as land tenure can be contested during default and repossession.
URBA Act 2011: The establishment of the Uganda Retirement Benefits Regulatory Authority Act (URBRA) 2011, access to this local pool of long-term funds has been restricted. The Act established URBRA as the regulatory authority to govern activities of Pension Sector players including determining the classes of investments for pension funds. URBA excludes direct loans to commercial banks and other institutions. Before this period, NSSF had invested heavily in loans to commercial banks (Table 10) and the new restrictions present a serious threat to the long-term funding required by commercial banks in the issuance of mortgages. Under the Act, pension funds cannot make direct loans to commercial banks, unless the banks issue marketable instruments such as corporate bonds
National Housing Policy 2016: The policy provides a framework under which the government shall offer a conducive regulatory environment and other key housing sector inputs such as serviced land with access roads, electricity, water and sewerage, as well as ensuring collective access to affordable financing for housing development. Implementing the objectives of this policy is likely to ease the affordability challenge for the sector.
No comments:
Post a Comment