Housing Finance in Uganda

Introduction

Uganda is the third largest country in East Africa, situated in the heart of the Great Lakes Region. Uganda’s capital, Kampala, is the central node within a sprawling urbanised belt encompassing many smaller towns. This makes up the Greater Metropolitan Kampala Area (GKMA). The GKMA has a population of approximately four million,^[1] which is more than 50 percent of the country’s total urban population.

Although the country has progressed towards addressing poverty over the past three decades, housing provision remains one of the most pervasive challenges faced by over two-thirds^[2] of Uganda’s population. The country is largely informed by private-sector led housing development, which is unable to meet the growing demand for affordable housing. Thus there is a widening deficit of housing, estimated at 2.4 million units, growing by 200 000 units a year.^[3] Some of the issues that the sector has to deal with are supply-side bottlenecks, unaffordable credit, insecure land tenure, burgeoning informal settlements, as well as insufficient political will. Though it is estimated to contribute 7.5 percent of Uganda’s overall GDP, budget allocation for this sector stands at less than 0.3 percent, a reduction from USh1.613 billion (US$432 653) in the  fiscal year (FY) 2017/18 to USh1.405 billion (US$376 861) for FY 2020/21.^[4]

According to the World Bank, Uganda’s economy is the third largest in the East African region, but has been severely affected by the COVID-19 global pandemic, locust invasions and rainfall-induced flooding in 2020. The country’s projected gross domestic product (GDP) for 2020 is significantly lower than that of 2019.^[5] Shrinking foreign direct investments, remittances, exports and income from tourism, coupled with high inflation levels, have created an uncertain economic outlook, especially for crucial sectors such as real estate and housing.

Inflation was 4.7 percent at the end of July 2020, up from 4.1 percent for June 2020,^[6] representing a three-and-a-half year high since 2017.^[7] To ensure stability, maintain confidence and support sectors such as real estate and housing, the central bank cut lending rates to an unprecedented low of seven percent^[8], though on average interest rates on mortgage loans by major financial institutions remain above 15 percent, on par with pre-COVID 19 rates.

In this year’s budget, the government has targeted improving access to investment finance for Savings and Credit Cooperative Societies (SACCOs) and microfinance institutions to USh94 billion (US$25 213 501). It has also capitalised the Uganda Development Bank with USh1.045 billion (US$376 861) to offer cheaper financing for the private sector.^[9] These interventions present significant opportunities for the housing sector to access affordable financing in order to narrow the housing deficit. The government has also employed a mixture of fiscal and monetary measures during 2020 to increase expenditure on health infrastructure, reducing the central bank rate and providing credit relief. During the COVID-19 lockdown, the government advised landlords not to evict tenants who default on rent.^[10]

Residents in informal settlements are especially vulnerable to the COVID-19 pandemic, given high density and limited social infrastructure.^[11] Subsequently, municipal governments in major towns including Jinja, Wakiso, Mbarara, Kira and Kampala have partnered with civil society organisations, such as the Slum Dwellers International (SDI)-affiliated Uganda Alliance and Cities Alliance, to address inequalities in informal settlements.^[12]

^[1] Haas, A. and Slack, E. (2018). Why metropolitan governance structures matter: Kampala. International Growth Centre. https://www.theigc.org/blog/metropolitan-governance-structures-matter-kampala/ (Accessed 5 August 2020).

^[2] Habitat for Humanity. (2020). The housing need in Uganda. https://www.habitatforhumanity.org.uk/country/uganda/ (Accessed 09 August 2020).

^[3] Urban areas and rural areas account for approximately 210 000 units and 1.4 million units respectively (Habitat for Humanity, 2020).

^[4] CS-BAG, (2020). CSO Position Paper on the Lands, Housing, and Urban Development Sector Budget FY 2020/21. Pg. 5.

^[5] Uganda’s GDP growth rate for FY 2019/20is projected to oscillate between 0.4 percent and 1.7 percent which is below the 2019 rate of 5.6 percent (World Bank, 2020). https://www.worldbank.org/en/country/uganda/overview#:~:text=Uganda’s%20economy%20has%20experienced%20a,compared%20to%205.6%25%20in%202019. (Accessed 3 August 2020).

^[6] UBOS. (2020). Uganda Consumer Price Index 2009/10=100. Uganda Bureau of Statistics. https://www.ubos.org/wp-content/uploads/publications/07_2020CPI_Publication_for_June_2020.pdf (Accessed 26 August 2020).

^[7] Trading Economics. Uganda Inflation Rate. 1998-2020 Data.

https://tradingeconomics.com/uganda/inflation-cpi (Accessed 8 August 2020).

^[8] Oketch, M.L. (2020). Banks meet over high interest rates on loans. 10 July 2020. Daily Monitor; Busuulwa, B. (2020). Bank of Uganda cuts key lending rate. 17 June 2020. The East African.

^[9] Rupiny, D. (2020). Uganda National Budget 2020/2021: Key Investment Takeaways. 12 June 2020. Uganda Investment Authority.

^[10]Nabejja, R. (2020). Museveni bans landlords from evicting tenants during COVID-19 lockdown. 9 April 2020. Kampala International University.

^[11] World Bank. (2020). Feature Story: COVID-19 Turns Spotlight on Slums. 10 June 2020; UN-Habitat. (2020). Key messages on COVID-19 and informal settlements. https://unhabitat.org/key-messages-on-covid-19-and-informal-settlements (Accessed 5 August 2020).

^[12] Cities Alliance. (2020). Uganda: Helping Communities Fight COVID19. 13 May 2020; Slum Dwellers International. (2020). Mitigating the Impact of Covid-19 on Informal Settlements: An update. 19 June 2020.

Access to Finance

The COVID-19 pandemic has created unprecedented uncertainty across the globe. In Uganda, the pandemic has threatened the country’s financial stability. At the start of the lockdown in March 2020, financial institutions were ordered to limit their operational hours, while some closed completely.^[1] Banks and most businesses have only recently resumed full operation, but where the spread of COVID-19 is now accelerating it is unlikely that they will return to full capacity soon. In emerging markets like Uganda these restrictions will significantly affect the country’s previously stable financial system.

Among the challenges identified by Uganda’s central bank, the Bank of Uganda, is the impact of the lockdown on borrower finances due to loss of income. Moreover, rising liquidity pressures are anticipated for those institutions dependent on foreign capital investors, some of which have chosen to retreat to safer off-shore investment havens.

Prior to 2020, the banking sector witnessed tremendous growth.^[2] Currently, Uganda has a total value of USh1.6 billion (US$429 166) in residential mortgage loans collectively held by formal banking and non-banking financial institutions. Commercial banks and other non-banking financial institutions account for more than 50 percent of this total.^[3] Although the Bank of Uganda has reduced the interest rate, interest on mortgage loans remains relatively high at approximately 17 percent among those commercial banks offering mortgage loans.

It is likely that, with prevailing conditions, the terms of current mortgage loans will need to be restructured. For future clients, dwindling incomes will certainly discourage housing finance at current interest rates. On average, mortgage terms are structured for payment over 10-20 years depending on a client’s credit risk profile (i.e. income stability and age), the mortgage instalment representing no more than 50 percent of a client’s monthly income. With effect from 1 June 2020, the central bank capped the loan-to-value ratio at 85 percent for mortgage loans and land purchases as a “risk mitigation measure.”^[4]

In Uganda there has been an upsurge in smaller, non-banking organisations in the past decade. In 2019, Uganda Microfinance Regulatory Authority issued more than 500 licences to different microfinance institutions offering finance for housing. Non-banking organisations that offer housing finance have a variety of packages, ranging from home-improvement loans to actual mortgages. These housing finance products are accessible to low-income households, which may not have bankable collateral to access formal housing finance from commercial banks. Non-banking organisations have more flexible conditions, including acceptance of social collateral, negotiable repayment terms and lower loan amounts.

For all mortgage holders it is anticipated that demand for credit relaxation measures will increase after September 2020. Banks are still expected to tighten conditions for credit, however, to minimise risk, and more than 80 percent of banking institutions anticipate an increase in loan default rates.^[5] These limitations will certainly have an adverse impact on the availability of finance for the building, mortgage, construction and real estate sectors in the short term.

^[1]Oketch, M.L. (2020). COVID-19: Bank of Uganda reduces working hours for banks. 27 March 2020. Daily Monitor.

^[2] Uganda Bankers Association (2020). Statement on the banking sector. https://ugandabankers.org/statement-on-the-banking-sector/ (Accessed 27 August 2020).

^[3] Bank of Uganda (2020). Financial Stability Review. Quarter ended 31 March 2020; Bank of Uganda, (2020). Credit to the private sector statistics.

^[4] Oketch, M.L. (2020). BOU asks banks to limit lending on mortgages. 5 June 2020, Daily Monitor.

^[5] Bank of Uganda (2020). Bank Lending Survey Report Fourth Quarter – FY 2019/20. Pgs. 1-3.

Affordability

Housing availability and affordability is more pronounced in Uganda’s urban areas, which have expanded rapidly to accommodate migration from rural areas. Most households in rural areas have access to secure tenure through customary systems and low-cost building techniques. In urban areas, however, the growth of informal settlements shows the scale and magnitude of the housing challenge for both owners and tenants. The country produces an estimated 60 000 housing units against a demand of 200 000 housing units a year. Of this, 31 percent are categorised as temporary, 52 percent as semi-permanent and 16 percent as permanent in the rural areas. The greater proportion of this is self-provided housing. In the urban areas, 6.9 percent are temporary, 27 percent are semi-permanent and more than 66 percent permanent.^[1] In the GKMA, housing is generally self-provided by households and individual entrepreneurs.

For low income households, which account for more than 60 percent of urban households in Uganda, the formal housing economy is too expensive as they have limited means to access decent housing. For these households, frugality and survival dictate their occupation of low-quality units such as tenements (single-room dwellings) of less than 10m², at average monthly rents of USh150 000 (US$40) and below. These households have a combined average of less than USh500 000 (US$134) in gross monthly income, of which 30 percent is taken up by rent alone.

A small proportion of households in the GKMA with formal incomes above USh5 million (US$1 341) can access housing finance from more than 10 commercial banks. Housing Finance Bank, the market leader, offers up to 100 percent financing at a 17.3 percent interest rate. Others such as Centenary and Stanbic Bank offer rates of approximately 19 percent and 16 percent respectively with mortgage funding capped at 80 percent. These relatively high interest rates, as well as a need for bankable collateral pose serious hurdles for low income households to access formal mortgage loans. This underscores the urgency for widening and deepening the range of housing finance products in Uganda. In this respect, microfinance institutions have filled this gap by providing more flexible and customised home improvement loans for as low as USh500 000 (US$134), which are obtained by leveraging small business assets and social collateral and used for incremental housing construction. Some commercial banks have responded by introducing home-improvement loans in line with market realities.

The provision of affordable housing in Uganda has been significantly affected by land governance challenges which have complicated land acquisition. This is exacerbated by an unregulated urban land market driven by speculation, resulting in inflated land prices. In addition, the high costs of turnkey and rental housing well as mortgage finance have affected access to affordable housing for those who may afford it. This is exacerbated by high inflation levels which have resulted in rising residential property prices.^[2]

Government assistance for addressing housing affordability has focused on developing crucial housing-related infrastructure. This includes power supply, piped water supply, sanitation and solid waste management. In the rural areas, power has been extended to households through a subsidised last-mile connection programme by the Rural Electrification Agency. During the CORVID-19 lockdown enforced by government at the end of March 2020, the programme was temporarily suspended due to financial constraints.^[3] By the end of 2019, the state-owned National Water and Sewerage Corporation had increased piped water supply coverage, reaching approximately eight million people in 280 urban areas, close to 100 percent coverage of the country’s urban population.

^[1] Uganda Bureau of Statistics. (2019). Housing and Household Conditions. Decent Housing for Improved Household Welfare. Pgs. 5-14.

^[2] The RPPI has risen significantly to an average of 6.9 percent from 2.5 percent for the previous financial year, according to the Uganda Bureau of Statistics (UBOS) (2020). Residential Property Price Index (RPPI), Fourth Quarter 2019/2020, Press Release. Pg. 4.

^[3] Twaha, A. (2020). COVID-19: UMEME suspends free power connections. 29 July 2020. New Vision.

Housing Supply

For the financial year 2014/15, Uganda’s total housing stock – comprised of both public and privately supplied new and turnkey stand-alone units, high rise apartments, old and informal housing – stood at 6.8 million units.  With less than a four percent annual increase in the country’s total housing stock since then, Uganda’s current housing stock is estimated at 8.5 million units. Along with a growing yearly deficit of approximately 200 000 units and backlog of more than a million units the country continues to fall behind on meeting its housing needs.

Housing developers in Uganda are typically made up of a combination of informal and formal role players: individual entrepreneurs, local micro, small-scale and medium enterprises as well as large firms, including the National Housing and Construction Corporation (NHCC) and National Social Security Fund (NSSF). There is also growing competition from foreign-owned real estate developers.

Several factors have been key in facilitating the improvement of private sector housing provision in Uganda. These include enhanced urban infrastructure,^[1] increased options for financing, improvements in banking with low inflation rates (less than six percent per annum),^[2] stable governance, oil and gas development, and an increased flow of remittances from Ugandans working abroad.^[3]

At the same time, housing supply has been undermined by growing competition within the sector for high-end housing. This is approaching saturation point with low occupancy rates, thus affecting return on investments. The cost of formal financing remains high, reflected by an average interest rate during June 2020 of 19.3 percent. Urban land parcels and building materials are expensive, which makes new residential housing units costly. In spite of these high prices, modular building technologies are not popular in Uganda due to consumer preferences for mainstream concrete, brick and mortar structures.

In Uganda, self-built housing, often constructed incrementally, dominates the building market. Two-bedroom and three-bedroom units are the most popular in urban areas such as the GKMA, with the average floor space 90m² and 110m². Single bedroom/studio apartments averaging 50m² are also becoming popular. Aside from plans by the NHCC, NSSF and other established private real estate developers to increase the housing supply capacity, Buganda Kingdom (a cultural institution in Central Uganda), has collaborated with foreign investors to implement a low-cost 400 housing unit project with units priced at USh52 million (US$13 948).

The project will be built on the periphery of the GKMA. Apart from these formal housing plans, the central government is also providing emergency housing for vulnerable communities, particularly those displaced by natural disasters and unplanned development.^[4]

^[1] These include the US$476 Exim Bank/Chinese funded Kampala-Entebbe Expressway, the USh566 billion (US$151 817 465) EU-Government of Uganda (GOU) co-funded Northern By-pass and the US$184 million World Bank-GOU co-funded road upgrading for the GKMA in addition to the World Bank-GOU co-funded Uganda Support to Municipal Infrastructure Development programme covering secondary cities.

^[2] Headlined by the United Nations Entebbe regional hub, which provides the basis for the multi-organisational Great Lakes region humanitarian programme.

^[3] Prominent areas where workers in the diaspora operate include the Middle-East, Europe and the United States.

^[4] The government has assisted communities displaced by landslides on the slopes of Mount Elgon, Eastern Uganda and another displaced by a proposed oil refinery in Buseruka sub-county, Kabale parish, Hoima.

Property Markets

Uganda has a vibrant unregulated land market, particularly in the GKMA and other urban areas. Within this hybridised formal-informal market, more than 80 percent of transactions bypass the centralised registry, given that more than 75 percent of the land in the country is under customary tenure.^[1]

Residential property prices within the GKMA have been rising since 2016. However, there was a marked decline of 2.9 percent in the Residential Property Price Index for the fourth quarter of the FY 2019/20 contrasting with the 5.8 increase recorded in the third quarter of the same financial year.^[2] This can be attributed to the negative effects of the COVID-19 pandemic on the residential property market.

More than 70 percent of the country’s population lives in owner-occupier housing. In the GKMA, over 50 percent^[3] of households live in rented housing, of which 22 percent live in rented apartments. Until recently, rental values were steadily rising but, according to Knight Frank^[4], the multi-scalar disruptions triggered by the pandemic have forced landlords to lower rentals to remain competitive.

The GKMA has more than 30 formal real estate firms competing in the urban residential and commercial real estate property business with an even larger number of informal small businesses and individuals. The larger formal firms dominate the market for commercial and high-end residential properties with the smaller firms and informal players concentrating on residential properties in the middle and lower end of the market.

^[1] FAO. (2020). BOU asks banks to limit lending on mortgages. 5 June 2020, Daily Monitor.

^[2] Uganda Bureau of Statistics. (2020). Residential Property Price Index (RPPI), Fourth Quarter 2019/2020, Press Release.

^[3] Uganda Bureau of Statistics. (2016). Uganda National Housing Survey 2016/17. Pgs. 122-123.

^[4] Knight Frank (2020). Kampala Market Update H1 2020. https://www.knightfrank.ug/research/kampala-market-update–h1-2020-7257.aspx (Accessed 1 September 2020).

Policy and Regulation

The Ugandan government has generally created an enabling environment by developing and implementing policy and institutional frameworks for housing provision and regulation. This is evident through various housing-related programmes it has undertaken, particularly those directed towards low-cost housing.^[1] Key policy developments that will impact the housing sector in 2020 include the enactment of the Building Control Regulations 2020 and the Income Tax (Rental Rates) Regulations 2020. The former was passed to enforce the Building Control Act No. 10 of 2013 to promote secure and safe building structures in accordance with acceptable standards. The latter facilitates the collection of public revenue from previously overlooked sectors such as rental estates. Under this law, rental tax values for those earning rental income increases from 20 percent to 30 percent while allowable expenses for rental income for individuals has risen to 50 percent of gross rent. In addition, property owners will be required to separately account for rental tax of their different properties.

^[1] Within this programme, the government has helped to disseminate prototype building plans for affordable and environmentally sound housing to the poor and PWDs, guidelines for earthquake resistant construction for earthquake-prone areas, creating awareness about appropriate housing materials for vulnerable groups (Ministerial Policy Statement for the Lands, Housing and Urban Development Sector FY 2020/21).

Opportunities

Uganda’s affordable housing market segment holds substantial potential for investment, particularly as the country has a relatively stable economy. The housing backlog presents many possibilities for investing in rental and built-for-sale housing. Growing competition among material suppliers, along with an emphasis on value-addition on local materials, will certainly benefit the many private and informal actors which provide housing by lowering costs.

Moreover, the entry of large formal firms into the sector has opened opportunities for policymakers to expand state support, for example in areas such as critical infrastructure (such as water supply, electricity, sewerage and waste management), towards reaching the ultimate goal of affordable housing delivery. Incremental building of housing by private players also offers possibilities as the growth of home-improvement loans and associated products shows. Non-traditional microfinance offers competitive products for households to meet their needs incrementally.

The realisation of plans by the government to recapitalise the Housing Finance Bank with USh30 billion (US$8 046 862) along with funds provided by Uganda Development Bank of USh103 billion (US$27 627 560), reinforce the two crucial outcomes of motivating households to apply for housing finance while also incentivising private firms to invest in the housing sector.

Financially, although the Bank of Uganda has lowered the interest rate significantly, lending rates by financial institutions remain high, given risks for loan recovery. With upcoming general elections set for February 2021, maintenance of political stability is a serious challenge. Lending and borrowing can slow down significantly during this season. A common feature of Ugandan elections is mass voter bribery due to poor regulation and enforcement of campaign financing laws. This also presents significant challenges in relation to inflation and it could affect investment decisions in the housing sector.

Availability of data on housing finance

For prospective investors, key public institutions including the Bank of Uganda and Uganda Bureau of Statistics usually disseminate data on the housing finance sector, and these are the most reliable sources of information. Bank of Uganda provides economic data and reports on the performance of financial and non-financial institutions and private sector credit. These can be sourced from its website at www.bou.or.ug. Uganda Bureau of Statistics publishes quarterly and annual reports with data and information on household incomes, poverty rates, housing conditions and residential prices, which are accessible on its website at www.ubos.or.ug. Information about mortgage lending and related market and population dynamics are published on a quarterly and yearly basis by these institutions, augmented by other government ministries, departments and agencies and non-state special-interest organisations.

Accessing hard data on mortgage rates, numbers, housing stock, costs of construction and housing prices for research purposes from financial institutions and other actors such as the NHCC, NSSF, real estate developers and civil society organisations is by way of formal requests through bureaucratic systems.

COVID-19 response

The government imposed a 12-week lockdown from the end of March 2020 as part of its strategy to minimise the incidence of COVID-19.  During the same period, the central bank reduced the interest rate to seven percent from 8 percent, the lowest in the last 30 years. A ban was placed on the eviction of rent defaulters and the collection of water bills in informal settlements to ease the impact of the pandemic on poorer households.

Websites

Bank of Uganda https://www.bou.or.ug/

Uganda Bureau of Statistics https://www.ubos.org/

Uganda Bankers Association https://ugandabankers.org/

Rural Electrification Agency https://www.rea.or.ug/

National Water and Sewerage Corporation https://www.nwsc.co.ug/

National Housing and Construction Corporation https://www.nhcc.co.ug/

National Social Security Fund https://www.nssfug.org/