There was a huge shake up that disturbed the economy of Uganda last year. The property market was one of the most affected areas in the country’s economy. “A turbulent year” was Knight Frank’s statement regarding the property market. The real estate consultancy made the remark in Uganda Market Update for the second half of 2016.
Prime residential lettings faced a “relatively slow year”, with things only picking up in the last three months, according to the update. And although demand for the highest quality office space rose, there were many vacant offices leaving property managers no choice but to give discounted offers. Industrial rental property also registered “low occupancy rates and take up”; meanwhile investors in real estate put their plans on hold, deciding to wait out the economy.
But the best indicator of how bad things were was the prices of prime properties. Knight Frank says they fell 10-15% – the first time they were doing so in ten years – to their “realistic level”. Even though the adjustment was in tandem with the performance of the wider economy, Knight Frank says that for some time now “the Kampala property market has been due for a correction.”
The decline in the prices of prime properties “is allowing the latent value and potential of redevelopment plots to be unlocked, since affordable land prices are a critical determining factor in the viability of property development,” the update adds.
There was also a rise in the sales of residential properties. But this was mainly due to the purchase of properties put on the market by banks seeking to recover defaulting loans.
The increase in nonperforming loans – from 4% of total loans in June 2015 to 8.3% in June 2016, the highest recorded NPL ratio in 15 years – played a role in the sector’s slowdown, with banks reducing their lending in the year as a safeguard measure. Plus, the construction sector was “the largest single contributor to the rise in NPLs during 2015/16 of all sectors of the economy.”
The high number of nonperforming loans, the central bank’s tight monetary stance, and “structural rigidities in the financial sector” led to more expensive credit in the year, says the update. The result was a slowdown in private sector borrowing. Outstanding credit to the private sector for July-October 2016 was Shs152 billion less compared to the same period in 2015, according to the update.
In the office space segment, most of the demand in the second half of the year was for higher quality offerings. “Occupancy rates for Grade A/AB buildings in Kampala have increased from 80% during Q1&Q2 to 86% for Q3&Q4 of 2016,” Knight Frank says. The demand mainly came from multinationals and government institutions.
The sector is also anticipating a rise in the demand for prime office space from oil and gas companies, which the update says have increased their operations following the issuance of production licences in August. The companies also reconsidered plans to reduce their office space, according to the update. Demand for office space from oil firms had fallen in the second half of 2015 and first half of 2016.
Although the retail sector limped through the year, Knight Frank still registered a year-on-year increase of 11.7% in foot traffic to the malls it manages in the second half of 2016. The growth was driven by “international branded stores that trade into the middle to upper income segments” and “home grown / organic stores who have bedded down their trade and acquired a better understanding of their target market trends and shopping habits.”
The report says the lower demand for industrial rental property in the central business district and Banda, Ntinda, Nakawa and Kyambogo was partly caused by supply of warehousing space rising faster than demand, and “a slowdown in the trading of imported goods and commodities which would require storage space for distribution to neighbouring countries.”
In 2017, Knight Frank is banking on increased activity from the oil and gas sector to drive demand in both the office and residential segments. An upward turn in the economic activity would also help, although projections do not see it changing much from last years’.