Housing Finance in Uganda

Introduction

The strong and sustainable economic growth, enjoyed by Uganda, over the last two decades, has laid a firm foundation for the country to further broaden its development agenda. The country has since moved from a significant focus on the prudential management of the macroeconomic environment (including stabilising key economic indicators like inflation) to transforming into prosperous middle income nation.

The 2nd National Development Plan (NDP II 2015/16 – 2019/120), launched in June 2015, delineates a transformative development agenda in pursuit of inclusive, equitable and sustainable socio-economic growth.  One that will fast-track the country into middle income status, in line with the aspirations of Uganda’s Vision 2040. The country’s average per capita income is currently US$770,increasing from US$ 706 in 2015, and US$ 504 in 2014. The goal of the NDP II is to steadily transform the country into lower-middle income status, with a per capita US$1 033, by 2020.

However, this transformation strongly hinges on measures that will stimulate increased economic growth. Economic growth that does not exceed an average of 7 percent, in the next five years, will not enable Uganda to achieve its ambitious goal of becoming a lower middle-income nation, by 2020.

American credit rating agency, Standard and Poor (S&P), in their 2016 Report on Uganda, suggested that the per capita income is expected to remain below US$ 1 000 from 2016 to 2019. Suggesting that it is highly unlikely for the country to achieve its desired economic growth.  Government’s projection for the next three years (2016/17 to 2018/19) is an average of 6.3 percent, down from 4.6 percent in 2015/16. In 2016/17, the economy is projected to grow at 5.5 percent[ii], largely due to Government’s commitment to fast-tracked implementation of key public investments in infrastructure.

It is envisaged that the huge public investments in hydroelectricity power projects, an oil pipeline and a standard gauge railway, planned over a five year period (2015 to 2020), will generate substantial revenues, which will be pumped into the economy, to support the benchmark target of 7 percent.

The efficient management of infrastructure projects, is crucial for the Government realize higher returns, and to increase and sustain the requisite rates of economic growth. Over the past five years, about half of resources allocated to Uganda’s priority infrastructure sectors were not spent, resulting in under expenditure of the budget. This was largely attributed to inadequate preparation of the projects, which led to delays in implementation, cost escalation, time over runs, contract disputes and rapid depreciation of capital stock.

Access to Finance

Uganda’s financial sector is sound, and its efficiency has greatly improved over the last two decades.  The sector is well-capitalized (44 percent of GDP in 2016, compared to 37 percent in 2014), liquid and profitable.

Recent developments in the financial sector include the passing of the Financial Institutions (Amendment) Act, 2015. The Act espouses for financial institutions to offer new, better and more convenient services to clients, as part of efforts to enhance financial inclusion, The Act provides for; the introduction of Islamic Banking, Bancassurance, Agent Banking, and reforming the Deposit Protection Fund.

Commercial banking accounts for the largest share of the financial sector. There are25 licensed banks. The total number of bank branches is currently 570, compared to 561, in 2015. There are currently 834 ATMs throughout the country, compared to 803 in 2015. And, bank account holders are estimated at 5.5 million.

Deposit funding accounted for 80.2 percent of the banks’ core funding, in the past year (June 2015 to June 2016). Though high, annual deposit growth receded from 19.5 percent in 2015, to 16.5 percent in 2016. By sector, households made the largest contribution to banks’ deposit funding, with a share of 44.9 percent, as at June 2016.

The ratio of total loans and advances to total deposits increased from 70.8 percent to 72.8 percent, between June 2015 and June 2016. Total lending grew by 19.7 percent by June 2016, from 14.4 percent in June 2015. The growth in lending was attributed to an increase in foreign currency loans, which grew by 36 percent from USh3.7 trillion (US$ 1.1 billion) to USh4.9 trillion (US$ 1.5 billion), in that period.

Of the key business sectors, banks’ lending to manufacturing registered the highest annual growth rate, between 2015 and 2016, at 40.6 percent. However, loans to the household sector receded from 44.3 percent as at June 2015, to 7.6 percent, as at June 2016. This was attributed to the high interest rates (between 21 and 25 percent) and commercial bank’s reluctance to provide unsecured loans for private sector investment, given the limited access to titled land. The high interest rates were mainly attributed to a high CBR (15 percent in June 2016, compared to 12 percent in June 2015) and the high risk portfolio of borrowers. In addition, increased issuance of Government bonds were preferred as a risk free investment for banks, thus crowding out private sector credit.

In the period June 2015 to June 2016, the building and construction sector maintained the highest share of bank lending, at 23.2 percent. Increase in credit to the construction sector was mainly driven by borrowing for land purchases.

The annual change in mortgage lending, however, reduced from 26.3 percent in June 2014 to 9 percent in June 2015. This significant reduction was attributed to commercial banks’ shift/change in investment choices, to short-term risk-free treasury bills and bonds, which guarantee a fixed rate on return, and less investment in mortgages, which are risker. As a result, the total stock of Government domestic debt (through the issuance of treasury bills and bonds) increased by 11 percent to USh10.4 trillion (US$3.1 billion) between June 2015 and March 2016. Commercial banks’ preference for short-term risk-free treasury bills and bonds was also attributed to an increase in interest rates at which the bills and bonds were offered. Between June 2014 and June 2015, interest rates on 91-day treasury bills increased by 3.8 percentage points.

Five banks dominate mortgage finance, namely (i) Housing Finance Bank, (ii) DFCU Bank, (iii) Stanbic Bank, (iv) Barclays Bank, and (v) Standard Chartered Bank. Housing Finance Bank is the market leader, and for the last decade, it has held between 50 and 53 percent of the total mortgage finance book. The total mortgage portfolio is estimated at USh261 billion, compared to USh267 billion in 2015. This represented a decline of 2.3 percent, borne from the high interest rates that dampened the demand for mortgage financing,

Stiff competition among commercial banks has led to the development of more innovative housing finance products. Notably, the mini-mortgages offered by Housing Finance Bank and Stanbic Bank. Mini-mortgages are collateralised 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.

However, uptake of mini mortgages was slow in 2015 and the first half of 2016. The high interest rates, attributed to the rise in the CBR, as part of efforts to curb the inflation rate and exchange rate volatility, are one of the main reasons for the low uptake. According to industry experts, the drop in demand for residential mortgage products, is expected to ease around the third quarter of 2016, on the assumption that the Uganda Shilling stabilises. So far, the Shilling has appreciated against the US Dollar, from USh3 384 per US$ in December 2015, to from USh3 298 per US$ in June 2016.

Defaults (NPLs) in the real estate sector are still high, estimated at about 4 percent. And, are largely attributed to the lack of group lending culture (cooperatives) which could secure/rescue any member defaulting a loan repayment when they are faced with unpredictable circumstances. The other causes of defaults are (i) the lack of comprehensive securing of loans through insurance companies, (ii) a high rate of job insecurity, among borrowers, and (ii) banks not taking advantage and informing the borrower of the condominium Property Act 2001, when lending out. This would enable the property to be converted into condominium units that could be disposed of, to clear the outstanding loans, while the borrower retains the rest of the property.

The absence of long-term funding schemes within the domestic banking system continues to constrain the growth of the housing finance sector. NSSF (National Social Security Fund) is the only suitable long term funder, in the Uganda, which invests its long-term assets in short-term equity or real estate.

However, 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.

Another notable development was the establishment of the Uganda Retirements Benefits Authority (URBRA), in 2012, whose overall goal is to regulate, supervise and promote the development of a stable and effective retirement benefits sector. In June 2016, URBRA licensed Uganda’s first informal sector based pension schemes; (i) Mazima Voluntary Individual Retirement Benefits Scheme (MVIRBS) and (ii) Kampala City Traders Association (KACITA). These schemes will extend social protection coverage to informal sector workers, who are generally faced with inadequate social welfare coverage, it will also help them to draw from their savings to meet their housing needs, as espoused by the Retirement Benefits Sector Liberalization Bill.

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.

With funding from The MasterCard Foundation, Habitat for Humanity is supporting Centenary Bank, OBUL and Pride to develop housing microfinance loans and explore improvements in the housing value chain for low income families.  The project, which concludes at the end of 2018, emphasizes a sector-building approach to advance sustainable solutions that enable the poor to save, borrow, invest, and build assets towards improving their lives.

Housing 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, and are better able to afford housing. Income poverty declined from 24.5 percent in 2009/10 to 19.7 percent in 2012/13. Income inequality has also decreased by 7.3 percent over the same period. The middle income class (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 currently (2016) estimated at US$770. However, this income is still too 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 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 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. These high LTV ratios are still applicable. Other terms at which commercial banks offer mortgages include an interest rate of between 19 and 25 percent, a tenor ranging between 5 and 20 years, and loan repayments that do not exceed 40 percent of an individual’s salaried income.

To date, there are no affordable housing projects that have been embarked upon on scale, specifically targeting middle and lower middle income earners, i.e. those earning between USh0.5 million and USh0.9 million. Houses for sale start at USh52 million (US$17 000) for a one-bedroom apartment, and go as high as USh1.575 billion (US$450 000) for a four-bedroom house. One bedroom apartments (measuring 50m2), are on high demand, and are seemingly attractive to young employed Ugandans, without a family— or those that are still single. Two bedroom apartments (priced between US$30,000 and US$45,000), measuring about 90m2, are becoming increasingly popular on the outskirts of Kampala City, and predominately target young couples maintaining a nucleus/nuclear family structure. The output/delivery of such flats is however still low.

Houses/apartments targeting high income earners are readily available, however, in Q1 and Q2 of 2016, there was a noticeable decline in sales activity in the high end residential markets. In that period, marketing periods for prime property took much longer to gain interest from potential buyers. Additionally, there were few buyers with the capacity to close deals at asking prices. This led to a downward correction in the market prices of about 10 to 15 percent.

A key factor contributing towards the high cost of housing is the infrastructure component.  Increasingly, given capacity constraints within local authorities, developers are developing local and bulk infrastructure as part of the actual development. These costs are then included in the price of the housing rather than spreading it over the life span 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. 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 is imported, the price of 50kg bag of cement increased by 11.1 percent, between 2013 and 2016, from USh27 000 to USh30 000 (US$10).

From Q3 of 2016, onwards, the cost of a bag of cement is expected to increase, following a proposal in the 2016/17 Budget, to double excise duty on cement. Excise duty on a 50kg bag of cement will increase to US$0.29 from US$0.15. This will correspondingly raise market prices, consequently weakening consumer demand and the pace of private property development.

Housing Supply

Over 70 percent of housing is delivered by individuals, using their own savings to undertake construction incrementally. Owner occupancy is estimated at 72.8 percent. Housing units built using permanent materials are currently (2016) estimated at about 50 percent, compared to 26 percent in 2002.

Based on the number of Residential Plans approved by the relevant institutions (Ministry of Lands and District Land Boards), in 2013, individual households constructed 3 729 houses, compared to 1 444 in 2012 and 861 in 2009.

Notwithstanding the above, the country is currently (2016) estimated to have 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 its increasing urban population’s housing needs. Out of the total deficit, 1.29 million is in rural areas and 211 000 in urban centres.

Presently, the supply of middle and high income residential properties outstrips demand. During the last five years, six modestly sized property developers have led efforts in the supply of residential properties, targeting 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 residential properties, particularly in 2011 and 2012,the units delivered annually, per developer, are estimated at between 500 and 1 000.

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. For example, in Najjera, a Kampala suburb, individual developers are able to construct as few as 12 units of 2 bedrooms each (96.4 m2), however, some sell out before final completion. 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.

One of the more recent housing developments is the Nakawa-Naguru housing project. After nearly five years of stalling, it is expected to deliver the first 100 of 1,000 housing units by the end of 2016. The housing project is owned/funded by Opecprime Properties Uganda Limited (OPUL), a UK subsidiary firm of Comer Group and the Government of Uganda. The initial plan by the Government is to provide low-cost housing for tenants. However, the price for the units is yet to be established after conclusively estimating the actual cost of delivering each unit. The project will cost USh4 trillion (about US$ 100 million).

With support from Shelter Afrique, the Government (through the Ministry of Lands, Housing and Urban Development), has embarked on the Nationwide Housing project, implemented under a PPP or Equity Model. The project will target middle and low income earners. And, will be implemented in the six Districts of Arua, Jinja, Lira, Mbarara, Mukono and Wakiso. The Government plans to start with 100 units, developed on Government land in Jinja, and another 400 units, on private land, in the greater Kampala area. A mix of four house types is proposed; (i) a 1-bedroom house of 36m2, valued at USh84 million, (ii) a 2-bedroom house of 56m2, valued at USh131 million, (iii) a 2-bedroom house of 70m2, valued at USh164 million and (iv) 3-bedroom house of 85m2, valued at USh200 million.

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 seven years (2009 to 2016), prices of residential property increased by 214.8 percent, mainly as a result of the high demand from the middle income class. However, for the last five years, there has been a slump in demand for residential properties. This was attributed to the high interest rates on residential mortgages (between 20 and 26 percent), general slowdown in economic activity (4.6 percent growth against a projected 5.8 percent) and commercial banks preference to invest in short-term risk free financial instruments (treasury bills and bonds), rather than accumulate high proportions of NPLs, through mortgages.

Notwithstanding the above, 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, targeting modest, middle and high income earners.

Housing Policy and Regulations

On May 4th 2016, cabinet approved the new National Housing Policy, following a wait of approximately two years. In the new policy, the government will be charged with instituting a conducive policy, legislative and regulatory environment to enable stakeholders (private and public) to promote and develop the housing sector. Under a public-private partnership framework, government will provide key inputs such as the installation of utilities like electricity, water and sewerage on identified real estate development plots of land as well as leverage access to affordable financing for housing development.

Implementation of the urban housing and settlement policy also needs to be strengthened to ensure that home development plans in urban areas are informed by key considerations such as, the fast growing demand for rental housing units, the declining average household size, and the need to promote orderly development of real estate in urban areas.

Currently, the MLHUD has registered about 112 condominium plans, guided by the Condominium Law (2001). The Condominium Law has helped, although in a small way, to increase 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.

Housing Sector Opportunities

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, which generally require loan term of up to 20 years. The Government, with support from the World Bank, has indicated commissioning a study to assess the feasibility of 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. There is also 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. Additionally, higher densities should be promoted to optimize land use and reduce infrastructure costs.