Housing Finance in Uganda

Introduction

Uganda’s economy has over the past two decades attained a commendable growth rate on account of rapid infrastructural developments supported by a period of relative stability in the political space. Average annual growth has been at 4.5 percent in the past five years. However, since early 2012, the economy has grown at a slower pace thereby reducing its ability to drive poverty reduction. The slowdown in growth is largely attributed to adverse weather affecting this largely agricultural nation, contraction in private sector credit, civil unrest in South Sudan – Uganda’s key trading partner, and external economic uncertainties. This has resulted in a 0.2 percent drop in Uganda’s growth rate as of December 2016; the country’s lowest in over 2 decades. Several key sectors of the economy, including housing and agriculture have been affected by the economic slump with a noted contraction in the number of new housing estates constructed between 2016 and 2017.

There has been an 8.4 percent drop in GDP from US$ 27.86 billion (Ush 100.296 trillion) in 2014 to US$25.53 billion (Ush 91.908 trillion) in June 2017. This translated into suppressed consumer demand across several sectors including the housing sector. The uptake rates of several development estates, available for sale, have stagnated at between 50 to 60 percent and rental establishments have a 40 to 50 percent occupancy rate.  The decline in consumer demand has also affected trade and commerce resulting in the closure of a number of supermarket outlets including Nakumatt (a regional supermarket chain) and several home-based shops.[1] Such developments have further depressed the occupancy rates for commercial rental space from an average of 60 percent to an average of 56.2 percent and negatively impacted employment rates with the of dismissals over 1 200 employees.[2]

Despite the economic challenges of the last few years, 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 as well as improved infrastructure[3]. In addition, the Central Bank has pursued a monetary easing strategy leading to improvements in access to private sector credit which is likely to increase and stimulate economic activity. The Bank of Uganda reduced its Central Bank Rate (CBR) from 15 percent in June 2016 to 10 percent in June 2017.

For the fiscal year 2017/18, the Government of Uganda, has announced a number of medium-term measures that further demonstrate its commitment to building the productive capacity of the nation and lift the country up to middle income status. The government has placed an emphasis on infrastructural development to achieve this and there are several ongoing infrastructural projects linked to the oil sector.

Commercial oil production is expected to start in 2020, and not in 2018, as earlier envisaged. This is largely due to delays in establishing strategic partnerships with prominent oil companies including Total E&P, Tullow Oil and CNOOC. An export pipeline is being developed and work is at the early stages of field development. Several road projects are also under construction to support the oil sector. Oil revenues – which are likely to range from about half a percent GDP initially to about 4 percent annually at peak production – are expected to uplift the economy through linkages with the services, agriculture and housing sectors over the medium term. Specific impact on the housing sector has long been anticipated with the establishment of several housing estates around the city of Kampala, largely targeting expatriates working in the oil sector.

Moody’s credit rating for Uganda in July 2017 was at ‘B2 Stable’ on account of persistent low per capita GDP and large, albeit falling, fiscal deficits. Additionally, the per capita income is expected to remain low at less than US$1,000. The credit rating has implications for fundraising initiatives by commercial lenders in Uganda seeking to borrow funds for on-lending from the international market, specifically from Development Finance Institutions (DFIs). Funds are likely to be accessed at high interest rates, translating into highly unaffordable borrowing costs for final borrowers. In determining the lending rate to financial institutions in Uganda, DFIs consider the overall country risk – through country ratings. A less favourable rating increases the cost of credit by up to 150 basis points.

Access to Finance

Uganda’s financial sector remains sound despite the regulatory take-over and eventual sale of the third largest bank in the country during the third quarter of 2016. On the 20 October 2016, Bank of Uganda took over management of Crane Bank Limited due to its insufficient capitalization. The bank was subsequently sold to DFCU Bank, another local market player, without loss of customer deposits.  Within the sector, supervised and regulated financial institutions include 24 commercial banks, 4 Tier-II Credit Institutions and 5 Micro Deposit-taking Institutions.

Following the 2015 amendment of the Financial Institutions Act 2004 that incorporated regulations on Bancassurance, Islamic Banking and Agency Banking, commercial banks are keenly exploring opportunities in extending financial services to previously unbanked segments through the establishment of agents. Agents will operate as private commercial entities contracted by licensed commercial banks to provide specific services on behalf of these commercial banks. Such services will include cash deposit and withdrawal, payment of bills, balance enquiry and document collection for account opening. Agency banking will provide the unlock barriers to accessing financial products and services by bringing various outlets closest to the customers.

These financial institutions have been instrumental in providing access to finance for the private sector. 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 – 0.1percent in mid-2016.  However, compared to December 2015, there has been a notable decline in PSC growth to an average of 6.5 per cent in February 2017, down from 15.6 per cent in December 2015. This downward trend is largely attributed to a slowdown in the issuing of new loans as a result of relative losses suffered due to client defaults. Credit to the real estate sector has contracted by 8 percent or Ush 241 billion (US$ 66.94 million) from Ush 2.74 trillion (US$ 761.1 million) in December 2016 to Ush2.493 trillion (US$ 692.5 million) by April 2017.

Private Sector Credit (PSC), a leading indicator of the financial sector’s contribution to economic activity, improved to 5.3 percent in early 2017 from – 0.1 percent in mid-2016.  However, compared to December 2015, there has been a notable decline in PSC growth to an average of 6.5 percent in February 2017, down from 15.6 per cent in December 2015. This downward trend is largely attributed to a slowdown in the issuing of new loans by as a result of the relative losses suffered due to client defaults.

Overall, PSC demand (as proxied by the number and value of loan applications) has remained relatively robust in 2017 whereas PSC supply (proxied by the number and value of loan approvals) has remained subdued. This is an indication that the relatively subdued growth in PSC could be driven by tightening credit standards in financial institutions

Building, Mortgage, Construction and Real estate credit approvals rank highest in PSC and account for 23 percent of overall growth. This is followed by Trade Credit (20 percent), Personal loans (16 percent), Manufacturing (13 percent), Agriculture (10 percent), Services (7 percent) and others (11 percent).

In terms of borrowing costs, the weighted average lending rates (WALR) on Shilling-denominated loans continued to decline to 22.4 percent in January 2017, from 24 percent in mid-2016. Commercial banks have been consistently reducing their rates on loans to an average of 21.2 percent, in line with the Central Bank’s reduction of its central Bank Rate policy to 10 percent as of June 2017.  Loans to residential housing sector developments have been priced even lower at 18 percent, compared to business loans priced at 22.4 percent on average. The lower mortgage pricing is attributed to the comfort in collateral which significantly reduces the credit risk. Collateral of high quality and value would ensure that the bank can recover an outstanding debt amount, in case of default.

The ratio of total loans and advances to total deposits increased marginally from 72.8 to 73.1 percent, between June 2016 and June 2017. Deposits are largely raised from household sector savings, accounting for 45.4 percent of total deposits[1].

The Housing Finance Bank still leads the mortgage market in Uganda with about 55 percent of the total mortgage portfolio in the country. The mortgage lender has been in existence since 1967. 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 Ush1.122 trillion in June 2016 to USh1.112 trillion in June 2017.The decline is attributed to a reduction in total loan approvals by financial institutions to the private sector[2].Residential mortgages account for 55 percent of the total mortgage portfolio.

Due to the high level of defaults, Ugandan Banks are more concerned about variations in a borrowers’ income that could potentially affect their ability to repay loans. Some of these variations include the impact of changing exchange rates on business profitability for borrowers whose businesses are heavily reliant on imported goods.  The weakening of the Ugandan shilling against the US dollar, from Ush3 298 per US$ in June 2016 to USh3595 per US$ in June 2017 highlights the potential impact on businesses who rely on imported goods. This normally reduces the net cash-flows available to cater for loan repayments and in most cases, leads to defaults.

The rate of Non-Performing Loans (NPLs) as a ratio of total loans 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 Ush142.3 billion (US$40 million) write-offs suffered by the lender, particular in its commercial mortgage loan book.

Several other lenders have experienced significant losses on account of the regulatory ‘huge loan loss’ provisions. Being a market characterized by suppressed demand for housing units and therefore declining property values, lenders have been affected by lower values in foreclosures compared to the outstanding loan amounts. Whereas lenders usually consider a loan to value ratio of up to 80 percent, leaving a 20 percent cushion for value drops especially at foreclosures, forced sale values (FSVs) for properties are much lower and could even reach 50 percent of the open market value (OMV) of mortgaged properties. Banks are therefore exposed to the difference between the outstanding loan amount at foreclosure and the realizable value of the property. The result has been a deliberate application of stringent underwriting procedures by the lenders, specifically for large ticket deals and development projects where loss in the event of default can be enormous.

The market is still lacking in long-term local currency sources of funding, largely relying on retail and wholesale deposits to support up to 80.4 percent of bank lending. However, such savings and current account deposits support very short-term operations with less than 15 percent usable for long term credit creation. Gaging from commercial banks average deposits, estimated at about Ush8.5 trillion (US$ 2.36 billion) at the end of 2016, a 15 percent ratio that is safe for long-term lending would translate to about Ush1 275 billion (US$ 354.2 million). However, against a funding need ofUsh7 200billion (US$2 billion)[3].The 15 percent bank deposits therefore cover 17.7% of the total funding gap.

In addition to a marginal portion of retail deposits that are stretched to create long-term assets, banks continue to rely heavily on pension funds available on a one-year recurrent basis. Existing Pension Sector regulations detailed in the Uganda Retirement Benefits Regulatory Act 2011 do not provide for investment of long-term pension assets directly into commercial banks without issuance of listed stocks or bonds.

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 is perceived to be modest, because of the low levels of verifiable income. Financial institutions normally consider only documented income sources in computation of their Payment to Income (PTI) ratio.

The country’s average per capita income was estimated at US$770 in 2016. This income is still too low to meet the mortgage requirements for buying a house on the formal market. A case in point is private health workers, the majority (about 90 percent) earn too little to finance their housing needs, at approximately USh700 000 (US$230). In addition to the low monthly salary, a greater portion (over 60 percent) of the salary is spent on food, rent, transport and school fees. The income and savings of the private health workers falls below a level where one could secure mortgage financing in the formal market (USh1 million (US$ 278) and above). For most financial institutions, this level of income is quite low to support the clients’ mortgage eligibility. 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 an increase in down payments on both purchase and construction mortgages. Since early 2017, some banks have established partnerships with insurance companies to offer Collateral Replacement Indemnity (CRI). Under the CRI arrangement, banks will be in a position to offer mortgages without demanding a down payment from clients. This would help low and middle income earners access mortgages without necessarily saving a lump sum for the initial deposit.

Over the past couple of years, commercial banks have reduced the average loan to value ratio for residential mortgages. In 2014 a survey was conducted by Bank of Uganda to assess 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. In 2016 and early 2017, high NPLs have resulted in a reduction in the LTVs to an average of 60 percent among financial institutions. 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. Other terms at which commercial banks offer mortgages include an interest rate of between 19 and 23 percent, a tenor ranging between 5 and 25 years, and loan repayments that do not exceed 40 percent of an individual’s salaried income.

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 awakened from 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 Supply

Compared to the supply, demand for housing units continues to grow at 300 000 units per annum, leaving an unmet demand backlog of 1.72 million units. This widening gap is exacerbated by the 5.4 percentage growth in urbanization. With the growth in population and increasing demand for housing, a number of initiatives have emerged to boost the country’s housing supply. Over 60 percent of single-family residential units constructed are delivered by individual households using household savings and income. 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 Ush810.6 billion per month in 2017 compared to Ush794 billion in 2016suggests that individuals and developers are increasingly relying on borrowed funds for construction of both owner occupied and rental residential units.

In terms of house structure, there is a budding demand for condominium multilevel buildings. These have been seen to save on land space for expansion. A number of developers, including Comfort Homes, Universal Homes and National Housing and Construction Corporation have delivered several multilevel units estates for sale to the purchasing public.

Supply of residential housing units continues to increase with emergence of new developer firms. In addition to National Housing and Construction Company (NHCC), 2017 has seen other firms delivering housing units for the middle and high income groups (from US$ 20,000 and above). New companies including Universal Homes, Comfort Homes, Mirembe Villas, Dreamland Homes, and others have delivered about 520housing units to the market for the very first time. Timely uptake of these units will encourage these firms to deliver additional units for the target markets.

However, with the exception of NHCC, these companies are delivering too few units to cover the market demand, and at very high prices. None of the firms has the capacity to deliver over 2000 units in the single year and over 1,000 units in a single project. The focus for most developers has been on delivery of housing units for high income households, yet the demand is highest among middle income and low income households. Over the next 5 years, 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 extent to other parts of the country including the eastern, northern and south western regions.

Property Markets

Uganda’s property markets are gradually developing, supported by the growth of the middle class and, the expected economic boom from exploration of oil and gas. From 2009 to 2016, prices of residential property increased by 214.8 percent, mainly as a result of the high demand from middle income households. However, since 2014, there has been a slump in demand for residential properties, particularly housing units priced out of even middle income households.

Despite the country’s economic challenges, property markets are fast developing in towns adjacent to Kampala City. This is largely because of the construction of large infrastructure projects, to catalyse industrial development and economic growth. Most notable, 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[i], targeting low, middle and high income earners.

Housing Policy and Regulations

In 2015, the government of Uganda, through the Ministry of Lands, Housing and Urban Development (MLHUD) approved the National Housing Policy. the National Housing Policy therefore seeks to promote progressive realization of adequate housing for all through partnership, between the Government and the Private Sector (civil society, Community Based Organizations, land owners, financial institutions and the government. 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.

In addition, 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. Whereas the objectives of the amendments are fairly conceived in light of significant delays experienced in implementing several infrastructural projects, sections of the population feel that the changes are likely to disempower the population at large and grant the government excessive power over individual citizens’ land. The results of the legislature’s deliberations are yet to be seen in light of the a-foregoing discussions.

Housing Sector Opportunities

For 2017, the housing sector has seen a general decline in interest rates on mortgages from an average of over 22 percent to about 18 percent, indicating, in part, availability of mortgage finance for eligible borrowers. The majority of borrowers with bank and microfinance housing loans are individuals and companies with regular verifiable income. On the whole, these borrowers constitute less than 38 percent of the working population. There is therefore a need to avail inclusive finance for mortgages to prospective borrowers in the informal sector. This would boost their ability to undertake housing development projects and increase the supply of housing units in the country.

Additionally, developers are constrained by the inadequacy of appropriately structured project finance for the sector. Lenders in the sector structure developer loans in such a way that repayments for the facilities must be made on a monthly basis. This is well aligned to the financial institutions’ own funding obligations which may be monthly, quarterly or bi-annually. However, owing to the fact that developers derive their repayment funds from the sale of funded housing units which may not be very regular, defaults begin to emerge, not as a result of market failures but rather structuring deficiencies. It is therefore important to have developer finance appropriately structured and tagged to the sale of the funded units rather than tagged to the expiry of the time period.

The commencement of oil production, scheduled for 2020 provides additional opportunities for the housing sector through expansion of the middle class. It is envisaged that the supply value chain for the oil and gas sector will have linkages to the service industry, including hotel, tourism, banking, insurance and transport. Growth in these sectors will have multiplier effects on other sectors including housing and construction.