How Weak shilling is pushing landlords to demand payment in dollars

Martin Opolot has been renting in the upscale Ntinda suburb for the past three years. In this period, he has enjoyed a cordial relationship with his landlord.
However, as the ripple effects of a weak Shilling continued to slip through into various sectors of the economy, the landlord sent him a communication, saying he should pay in dollars, or the equivalent of it. His explanation? He needed to balance the costs since the dollar had appreciated heavily against the Shilling.
Martin says the landlord had recently brought for him documents to sign in the presence of a lawyer. On top of increasing the rent, she wanted him to pay three months in aance.

His concerns were equally shared by realtors who raised concerns about the Shilling’s performance in this financial year.
The Kampala property market outlook report for the first and second quarters of 2015, released by Knight Frank Uganda, revealed a slowdown in market activity as a result of the depreciating Shilling.
“Trading in suburban malls has been robust in all leisure categories. However, the depreciation of the shilling over the last two-quarters, continue to impact on general retail by pushing the price of imported products higher and eroding profit margins considerably,” the report reads.

Relators views on dollar payments

Real estate developers in big malls around Kampala receive most credit facilities that are pegged to the dollar.
Rental fees are also charged in dollars in order to avoid any foreign exchange related losses when paying back their loans.
The report highlights that the resulting depreciating Shilling will cause investors to hold back.

Moses Lutalo, the head of commercial and residential Property Management at Knight Frank, says landlords are charging in dollars mainly because they borrow money in dollars to finance the construction of their buildings.
“This means they have to charge in dollars to be able to make their loan repayments in dollars as well,” he explains.
The report by Knight Franks says the currency depreciation will cause impediments to economic growth due to negative sentiments and uncertainty holding back investment activity.
It will take a combination of fiscal and monetary policies to bolster the resilience and vibrancy of the economy.

However, Sonia Reese, the CEO from Tateru properties, says landlords usually charge their rates in dollars to hedge against any losses arising out of currency exchanges.
She also says charging clients in dollars is not something that started recently but has been on going, especially for commercial properties.
For those who rent in upscale suburbs, rent arrears are usually charged in dollars. This move has been spreading across from the commercial structures to the residential establishments.

The land lords say some of them built these houses using loans and as such the depreciating economy has forced them to charge in dollars to hedge against these loses.
Jonathan Maraka, an insurance expert, prefers to think otherwise, saying real estate, which most people prefer to invest in these days, ties up a lot of money.
The sector, which takes long to realise returns forces landlords to keep on increasing rent every other time in a bid to break even and realise profit from their investment.

What this means for traders
For the trader, it is a tale of rising costs of business, considering that most of them earn in shillings but transact (rent and import) in dollars. It has become common in Uganda for some businesses, especially in the hospitality, entrainment and rent industries to peg their charges to the dollar as they hedge against the risks of the unstable shilling.

Inflation
Currently, inflation is at 9.1 per cent, interest rates are rising, economic growth rate is expected to slow down to 5 per cent instead of the projected 5.8 per cent and the Uganda Shilling remains in a weak position against the US dollar.

Uncertainty over 2016 election
According to the Kampala property market report, the sector is also concerned about the 2016 general elections.
“Uganda has not fully recovered from the 20112012 property depression, and this has met with an investment market which is being cautious in the run-up to the 2016 general elections.
A number of investors have deferred borrowing for development or house purchases until after the elections,” the report reads.
The forthcoming election in 2016 is causing anxiety mostly in the mid to upper niche of the residential property market hence holding off decision making to invest until after the elections.

Impact on real estate
This has no direct impact on real estate business since both the tenant and landlord are well aware of their rental obligations.
It only becomes a problem when the Shilling depreciates like what is happening now and tenants who earn in Uganda Shillings have to pay rent in dollars.
Some business who did not hedge against currency depreciation will find it difficult to meet their rent obligations.

Rights of tenants and landlords
Such rights, according to Lutalo, are usually predetermined and governed by a tenancy agreement way before a commitment is made by either party.
This is the document that will then determine the tenant-landlord relationship going forward until the agreement is determined.

Property outlook
Residential property market. According to Knight Frank’s report about Kampala’s property outlook (2015),The residential sales also experienced less activity compared to this time last year, as a result of increased mortgage interest rates that have risen to 21% to 23% per annum.
The forthcoming election in 2016 is also causing anxiety and uncertainty within the mid to upper niche of the residential property market hence holding off decision making to invest until after the elections. This is a typical behavioural pattern of African property markets which take on a particularly cautious attitude towards elections.

Commercial property market.
The first half of the year 2015 looked promising for the commercial property sector, with few projects being completed while others are breaking ground. The firm believe this is mainly attributed to the investment appetite in office space developments by developers who believe the property market will have recovered within the next 24 months, and entry of private equity investors with long-term funding as well as access to financing from commercial and development banks.

Office space. Over supply of office space in Kampala has negatively affected this sector of the commercial real estate market as businesses strive to reduce costs by downsizing, relinquishing office space and others winding up altogether, also as future accommodation take up soften. Passing rentals in the commercial property sector are on a down ward trend with prime office rental yields stabilising between 8% to 10% and net headline rents between $9 and $14.

SOURCE: DAILY MONTIOR

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