Uganda

Excerpt from Africa Housing Finance Yearbook 2015

Overview

Uganda has a long and solid track record of prudent macro-economic policies, and positive development prospects, with significant fiscal investment, supporting economic growth. Uganda’s fiscal dynamics have improved, supported by higher revenue collection capacity. The country is now less dependent on donor aid – the ratio of budget support to total donor aid has reduced from 49 percent in 2005/6 to 29 percent in 2015/16.

Presently, GDP is USh75 trillion (US$25 billion), compared to USh40 trillion (US$16 billion), in 2010. Provisional results from the census (2014) indicate that Uganda has a population of 34.9 million people – this is three percent points lower than the figure of 37 million that had been previously calculated. The country’s average per capita income has increased to US$706 from US$504 in 2014, bringing the country closer to a middle income status, an objective the Government intends to achieve by 2020, as espoused by the 2nd National Development Plan (2015/16 – 2019/20).

The structure of the economy still comprises a sizeable informal sector, accounting for 49 percent of economic output.

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Excerpt from Africa Housing Finance Yearbook 2015

Overview

Uganda has a long and solid track record of prudent macro-economic policies, and positive development prospects, with significant fiscal investment, supporting economic growth. Uganda’s fiscal dynamics have improved, supported by higher revenue collection capacity. The country is now less dependent on donor aid – the ratio of budget support to total donor aid has reduced from 49 percent in 2005/6 to 29 percent in 2015/16.

Presently, GDP is USh75 trillion (US$25 billion), compared to USh40 trillion (US$16 billion), in 2010. Provisional results from the census (2014) indicate that Uganda has a population of 34.9 million people – this is three percent points lower than the figure of 37 million that had been previously calculated. The country’s average per capita income has increased to US$706 from US$504 in 2014, bringing the country closer to a middle income status, an objective the Government intends to achieve by 2020, as espoused by the 2nd National Development Plan (2015/16 – 2019/20).

The structure of the economy still comprises a sizeable informal sector, accounting for 49 percent of economic output. The agricultural and industrial sectors – the main productive base of the economy – require substantial investment to spur continued growth and competitiveness. The competitiveness of the private sector remains constrained by infrastructural gaps – unreliable electricity and inadequate rail and roads network.

The economy is projected to grow at 5.8 percent, in 2015/16, largely on account of the recovery of private sector consumption, supported by stronger credit growth, as well as huge public investment in infrastructure. The medium outlook is promising, with real GDP expected to grow at a rate of 6.5 percent in the next five years, boosted by the development of the oil sector, value addition in the mineral sector, and enhancing institutional efficiency in mainstreaming, coordinating and following up implementation of EAC programs and projects. Uganda ranks second in trading with partner states in the EAC Regional Bloc; with a market share of 25 percent.

Access to Finance

Uganda’s financial sector is stable, relatively well-capitalized (37 percent of GDP) and has grown at an average rate of 17 percent per annum since 2006 . Commercial banking accounts for the largest share of the financial sector, with 25 licensed banks. Total assets of the commercial banks have increased by US$1.8 million since 2011. The increase in bank assets was mainly driven by more investment in government securities, which grew by 29.6 percent in 2014 to USh4 trillion (US$1.3 million) at the end of June 2015.

During the last four years, however, overall asset quality has been on decline, due to a persistent increase in NPLs. The ratio of NPLs to total loans increased from 1.6 percent by June 2012; to 3.9 percent by June 2013 and 5.8 percent by June 2014. This increase was attributed to (i) higher interest rates on new loans, (ii) re-pricing of existing loans at higher interest rates, and (iii) a slowdown in economic growth .
Between 2013 and 2014, there was a gradual shift in bank lending by sector, with a higher preference to extend loans to households. Loans to households and personal loans grew by 44.3 percent at the end of December 2014, and 39.8 percent at the end of December 2013, though they performed poorly the previous year (December 2012), receding in growth by 13.7 percent.

The building, construction and real estate sector comprises the largest share of banks’ total lending. Bank credit to this sector as a share of total loans has dominated during the last seven years, growing exponentially, from 5.1 percent in June 2008 to 23.2 percent in June 2014. Between 2010 and 2014, loans to this sector comprised commercial mortgages, land purchases, road construction, loans to general and specialized construction contractors and property developers and estate agents. A closer look at the activities to which credit was extended revealed that over 50 percent of the credit was extended to both residential and commercial mortgages. Credit extended to property developers and estate agents, as a share of credit extended to the building construction and real estate sector increased from 23.7 percent in June 2010 to 25 percent in June 2014.

Five banks dominate in mortgage finance. Housing Finance Bank is the market leader, and for the last decade, it has held between 50 and 53 percent of total mortgage finance book. By March 2015, the total mortgage portfolio was estimated at USh1.7 trillion, and with the potential to grow in excess of 6 trillion (US$2 million) at the end of the year. This would represent a 15.4 percent increase compared to 2014, which registered a total mortgage portfolio of USh5.2 trillion (US$1.7 million).

In the last two years, stiff competition among commercial banks has led to the development of more innovative housing finance products. Notably, are the mini-mortgages offered by Housing Finance Bank and Stanbic Bank. Mini-mortgages are collateralized but differ from conventional mortgages in that their tenor is shorter (between 5 and 7 years), at interest rates of about 22 percent, and involve underwriting of informal income.

Credit Guarantee Schemes have also been introduced to relax the terms against which prospective home owners’ access mortgages. The Credit Guarantee Scheme that was launched by the USAID/Uganda Private Health Support Program at Centenary Bank, three years ago, not only guarantees against the non-performance of the loans (at a ratio of 60:40), but it has also been used to help customers scale up the value of their collateral, such that they can access loans for which an additional fee for utilizing the guarantee is charged.

However, the absence of long-term funding schemes within the domestic banking system continues to constrain the growth of the housing finance sector. NSSF is the only suitable long term funder in the Ugandan market which invests its long-term assets in short-term equity or real estate.

Current efforts to reform the pension sector are expected to end NSSF’s monopoly. The passing of the Retirement Benefits Sector Liberalization Bill, will introduce competition and improved governance within the pension sector. Also, recent efforts that have been embarked upon to create Real Estate Investment Trusts (REITS) will encourage and minimize the risk several private sector occupational schemes could face, when directly investing in real estate.
Centenary Bank, Opportunity Bank, Finance Trust Bank and Pride Microfinance have all developed/are developing housing microfinance products, as a way of retaining their clientele, and also broadening their product lines.

Centenary Bank offers three unique housing finance and housing microfinance products; (i) Cente-Mortgage : a medium-to-long term housing finance product targeting salary earners as well as rural and urban low, middle and high regular income earners engaged in self-employment; (ii) Cente-Home: a short to medium term loan for home owners with regular income earnings for the purpose of financing home improvement; and (iii) Cente-Land: a short-to-medium term loan designed for the purpose of financing land purchase, survey and registration to formalize ownership.

Finance Trust Bank offers the personal development loan ; an affordable loan facility to ease cash flow for personal development needs, including home improvement. Pride Microfinance offers the mortgage and asset finance loan.

Equity Bank offers the Development Loan ; a fund-based credit facility where a customer has advanced money to set up a long-term development project, including building a house. Opportunity Bank is being supported by Habitat for Humanity Uganda (HFHU), under the Mastercard Project, to develop and later roll out a commercially viable housing microfinance product.

Through the Mastercard Project, HFHU supported Ugafode Microfinance, an MDI, design, test and roll out housing microfinance products that are affordable and flexible. Today, Ugafode has a range of products targeting low and moderate income earners. Three products are explicitly for housing: asset acquisition loans, micro-mortgage loans and flexible housing loans. With 12 949 active borrowers in 2015, Ugafode has a gross loan portfolio of US$8.42million. Ugafode’s deposit base is strong, with 58 754 depositors saving almost US$4.24 million.

Since 2008, HFHU has been piloting a low income housing finance programme in its two microfinance institutions (Luweero and Lugazi). Through the programme, households, access loans for home improvement, and also build sanitation facilities. The average monthly income of households targeted is USh500 000 (US$217). The average loan size is USh2 million, for a tenor of two years. The loans are issued at a monthly interest of two percent.

Affordability 

Although the demand for housing is high, effective demand is actually very low because only a portion of employees’ income is documented. It is common for individuals to complement their salaried income with other sources of revenues, from micro and small sized investments. Statistics from the Ministry of Finance, Planning and Economic Development, on documented income show that more Ugandans have crossed the poverty line, and, indeed, they are in a better position, than before to afford housing. Income poverty declined from 24.5 percent in 2009/10 to 19.7 percent in 2012/13. Income inequality has also reduced by 7.3 percent over the same period. The middle income class (Middle class is defined as a group of people who earn between US$4 a day and a maximum of US$20 a day ) has grown seven-folds during the last two decades, increasing from 1.8 million individuals in 1992/93 to 12.6 million in 2012/13. Notably, between 2009/10 and 2012/13, 2.6 million Ugandans acquired middle class status.

The country’s average per capita income is estimated at US$706, compared to US$504 in 2014. This income is however, still low to meet mortgage terms for buying a house on the formal market. A case in point is private health workers – the majority (about 90 percent) earn too low to finance their housing needs – approximately USh700 000 (US$230). In addition to the low monthly salary, a greater portion (over 60 percent) of the salary is spent on food, rent, transport and school fees. The income and savings of the private health workers falls below a level where they would secure mortgage financing in the formal market (USh1 million and above).

Mortgage lenders generally require a high down payment (between 20 and 30 percent), to reduce credit risk and keep monthly payments affordable. However, since 2013, the high risk of lending to the real estate sector led to high LTV ratios. A survey by Bank of Uganda (May to June 2014), among selected banks, to assess LTV practices, established that the LTV ratio for mortgages had risen from 58 percent in March 2013 to 64 percent in March 2014. Other terms at which commercial banks offer mortgages include an interest rate of between 19 and 25 percent; and loan repayments should not exceed 40 percent of an individual’s salaried income. The tenor ranges between 5 and 20 years.

To date, there are no affordable housing projects that have been embarked upon on scale. Houses for sale start at USh105 million (US$30 000) for a basic two-bedroom house, and go as high as USh1.575 billion (US$450 000) for a four-bedroom house. The cheapest house built by a private developer in 2015 is US$13 500 for a one bedroom 80m² house. At current rates, this would cost an estimated US$308 a month (at 22 percent over a seven-year term). This translates into a monthly salary of US$771 (USh2.7 million), which is earned by less than two percent of the population.

A key factor contributing towards the cost of housing is the infrastructure component. Increasingly, given capacity constraints within local authorities, developers are developing local and bulk infrastructure as part of actual development, and covering this investment in the price of the housing rather than spreading it over the long life of the services delivered, as a municipality might be able to do. This contributes as much as 15 percent – 25 percent to the purchase price. Another factor is the cost of building materials. For example, in 2015, Tororo Cement Limited invested US$25 – 30 million towards the expansion of its cement plant, increasing its capacity from 1.8Mt/yr in 2013 to 3Mt/yr to date. However, because of the weak shilling, which led to increase in cost of inputs in cement production, most of which are imported, the price of 50kg bag of cement increased by 11.1 percent, between 2013 and 2015, from USh27 000 to USh30 000 (US$10).

Housing Supply

With a housing deficit of 1.6 million units, coupled with an annual population growth rate estimated at 3.4 percent, and a 5.6 percent urbanization rate, Uganda needs to move fast to match her population growth with decent and affordable shelter. Out of the total deficit, 1.29 million is in rural areas and 211 000 in urban centers.

Presently, the supply of middle and high level residential properties outstrips demand. To illustrate, during the last five years, the six modestly sized property developers have led efforts in the supply of residential properties, targeting the middle and high income earners. Collectively, however, these developers have not been able to supply more than 5 000 units annually. Annually, each developer had planned to develop between 1 000 and 2 000 units, however, because of the high debt exposure and the generally low demand for properties, particularly in 2011 and 2012 (See Section on Property Markets for more details), the units delivered annually, per developer, were estimated at between 500 and 1 000.

According to NHCCL’s Corporate Strategic Plan (2012 – 2016), the company’s target was to construct and sell houses equivalent to 70 percent of the housing backlog within the income bracket of USh1.8 to 9 million (US$692 to 3 461) and 50 percent of the backlog in the income bracket of USh9 to 29 million (US$ 3 461 to 11 153). This brings the total number of houses that were to be constructed and sold in five years to 8 728 housing units. However by mid-2015, about 5 000 units had been sold off. At this rate, it is plausible to argue that the company will not be able to meet its target of 8 728 units by the end of 2016.

Also, there are several small sized firms (90 percent of which are solely owned) who incrementally develop small estates, comprising flats of about 20 apartments. The apartments are priced at over US$60 000, and they can comfortably be afforded by middle and high income earners. Collectively, the contribution of the small sized developers to the housing industry has been significant – the only challenge is that there are no formal mechanisms to track their input to the industry.

INSSF is designing a project, in which it will enter into agreements with local developers, to deliver an agreed number of units with specific standards. NSSF will purchase the units and avail the same to prospective homeowners, using Housing Finance Bank, as the mortgage provider. This will help the developers dispose of all the units early enough and also capitalize them to develop and deliver more. Preliminarily, this initiative is estimated to deliver houses in the range of US$60 000, a value that can only be afforded by less than one percent of the population.

Property Markets

Uganda’s property markets are gradually developing, supported by the growth of the middle income class and, most recently (2012), the expected boom from exploration of oil and gas. In the last six years (2009 to 2014), prices of residential property increased by 115.3 percent, mainly as a result of the high demand for the properties by the middle income class. However, between 2011 and 2012, there was a slump in demand for residential properties, and consequently a drop in prices. In that period, interest rates for residential mortgages hit record levels (from an average of 20 percent in 2010, to an average of 27 percent in 2012) as Bank of Uganda tightened its monetary policy stance to control inflation that had risen to 30 percent by October 2011.

Since a huge percentage (over 90 percent) of residential houses is purchased through mortgages, the high bank lending rates, coincidently, led to a significant reduction in the demand for residential houses. Also, the introduction of more stringent lending requirements, coupled with the high interest rates, led to a marked reduction in demand for residential properties, particularly within the mid income bracket. In addition, in 2012, home owners who had failed to meet their mortgage repayments, opted to sell their houses; marginally contributing to the supply of housing on the market. The home owners accessed loans at variable interest rates which could either increase or decrease, depending on the inflation rate. Hence, the high inflationary pressures that were witnessed in late 2011 and 2012; commensurately increased interest rates on their monthly repayments, to levels that they could not comfortably afford. This situation could have been avoided, had the home owners been knowledgeable enough about the mortgage terms and also the opportunities they could seize, using their positive credit history.

The above notwithstanding, property markets are fast developing in adjacent towns to Kampala City, largely because of the construction of large infrastructure projects, to catalyse industrial development and economic growth. Notably, was the construction of several roads in Mukono (15 km from Kampala City), Wakiso (20 km from Kampala City) and Mpigi (30 km from Kampala City). The improved road network in these towns has spurred development of several housing projects, targeting modest, middle and high income earners.

The construction of the roads in the towns has also helped ease congestion in the Capital City – Kampala, where a lack of sufficient land has, in the past, forced developers to build high rise structures without any greenery. In these towns (Mukono, Wakiso and Mpigi), better planned and organized housing estates are being developed. Joint ventures in developing housing projects are also common, where land owners partner with reputable developers like NHCCL, to build modestly sized housing estates of about 2 000 units.

Policy and Regulation

The Draft Housing Policy (April 2012), delineates several measures on how to address the housing challenge in the country. The Policy notes that housing finance institutions need to work on their institutional framework to reduce operational costs, as one of the ways to bring down interest rates. The policy also calls on financial institutions to expand the range of securities for accessing mortgages to include insurance policies, pension and provident funds and employer guarantees. The Draft Housing Policy has however awaited cabinet approval for relatively long time (since mid-2014).

The recently enacted National Land Policy (2013) advances several proposals on how to improve land management, including addressing urban sprawl and dispute/conflict resolution over land. With respect to the land tenure regimes, the land policy notes that although Uganda shall maintain the multiple tenure systems, as enshrined in the constitution, the amended Land Act will be revised to allow all tenure regimes to evolve and develop appropriate incidents, in response to changes in social structures, technology of land use and market demands.

Currently the MLHUD have so far registered about 112 condominium plans, guided by the Condominium Law (2001). The Condominium Law has helped, although in a small way, in increasing the number of housing units in the country. A major challenge, however, is that the Law is not well understood by professionals who are supposed to implement it.

MLHUD is currently conducting a restructuring exercise aimed at streamlining operations at the Ministry Zonal Offices, and the National Land Information Center. The restructuring exercise is aimed at ensuring that the correct personnel with the required skills, qualifications and the appropriate number depending on the volume of work at the Ministry Zonal Office will be recruited. The exercise will also put in place an appropriate structure for smooth operation and maintenance of the National Land Information System.

Opportunities

Uganda’s housing industry is gradually improving, with few, but increasing number of innovative products; however, significant investments are needed to address the current backlog, estimated at 1.6 million units, in 2013 . Several factors still hold back the potential of the industry; including the high urbanization rate (about five percent annually); and the low levels of income, which make it difficult, if not impossible, for the vast majority to afford residential properties on the market.

The housing finance sector, though improving, still lacks the capacity and capital to: (a) expand the supply of affordable housing; and (b) provide appropriate housing finance products. In particular, there is a growing demand for mortgage lending to middle and high income groups, requiring loans of maturities of up to 20 years. The Bank of Uganda has picked interest in setting up a Mortgage Liquidity Facility (MLF). The MLF will be charged with developing the primary mortgage market by providing funds to mortgage lenders at better rates and longer tenors, thus facilitating affordability of housing finance, particularly among the lower middle and low income earners. The last five years have seen a growing need for new and innovative housing microfinance products, to serve the diverse housing needs of households at the bottom end of the pyramid. Higher densities should be promoted to optimize land use and reduce infrastructure costs.

 

Sources

Bank of Uganda (2014): Financial Stability Report
Bank of Uganda (2013): Financial Stability Report
Bank of Uganda (2012): Financial Stability Report
Bank of Uganda (2011): Financial Stability Report
Centenary Bank Annual Report (2014)
Pride Microfinance Annual Report (2014)
Ministry of Finance Planning and Economic Development (2014): Poverty Status Report
Ministry of Lands Housing and Urban Development (2014): Habitat III National Report
National Housing and Construction Limited Corporate Strategic Plan (2012 – 2016)
Uganda Bureau of Statistics (2011): Consumer Price Index
World Bank (2015): Financial Sector Policy Credit: Implementation Completion & Results Report (IDA – 489890)
World Bank (2015): The Growth Challenge: Can Ugandan Cities Get to Work?

Websites

http://www.businessdailyafrica.com/Banks-start-open-loan-pricing-July/-/539546/2322744/-/a8l3jhz/-/index.html
http://www.theeastafrican.co.ke/news/Uganda-s-real-estate-sector-set-to-thrive-in-2015/-/2558/2570616/-/1ux7w9z/-/index.html
www.financetrust.co.ug
Ug.equitybankgroup.com