Uganda: Kampala Tenants Flee City Centre

Rent for office space in prime locations in Kampala city has taken an almost 30% fall as tenants flee the city's Central Business District (CBD), according tothe latest report from the property agency Knight Frank.

Rents have dropped to as to as low as $12, from highs of $15-16.5 per square metres in some properties over the period.

The decline in property rents in Kampala over the last six months is likely to persist in the mid-term but innovative property investors could reap when demand inevitably picks up, according to Knight Frank.

Judy Rugasira, the managing director at Knight Frank Uganda, told journalists on July 08 that majority of the tenants in Kampala are now choosing rental office spaces out of theCBD which has become synonymous with congestion.

"We foresee this trend continuing as the key demand drivers of commercial office space continue to look for office space out of the congested central business district," Rugasira says.

"According to our research, many retail tenants generally registered low sales during the first quarter of 2016 compared with the same period last year; and this is partly attributed to the slowdown in the economy given that the country witnessed an election period during the first quarter of the year and investors withholding their investments," she said.

She said the average daily traffic in the retail segment reduced by 2.1% compared with the first and second quarters of the year, with retailers putting pressure on property owners to charge them rent in shillings instead of foreign currencies to easily manage their monthly rental bills.

However, this request, if granted, would be detrimental to the landlords as their financial obligations are pegged on the dollars.

Presently, it is only the top property mogul Sudhir Ruparelia who has announced a shift to charging rent in shillings on some of his properties in the country. This is in response to members of the business community crying out over surging rent costs as the shilling weakens.

The business community, especially those operating in shopping malls, have - through their Kampala City Traders Association (KACITA) - protested against paying rent in dollars. They say they get hit particularly when the shilling depreciates.

More gloom before boom

Looking at the outlook for the second half of the year, Knight Frank says the property market will remain weak on the back of revelations by Bank of Uganda that the economy may slow down further in the next 12 months as emerging market economies see slowdowns and reduced demand leads to a tumble in the prices of the country's exports.

The firm also projects high demand and supply disequilibrium for middle income and affordable housing as supply in the prime residential segment runs the risk of becoming saturated amidst limited demand in the mid-term. This could result in fall in prices and reduced occupancy.

Rugasira says the property market is expected to pick-up, but with caution since interest rates are likely to remain high, the shilling weak, and the demand for both prime office and residential accommodation lagging behind.

However, it is not all gloom. Marc Du Toit, the head of retail at Knight Frank says whereas the demand for retail tenancy reduced during the first half of the year, it will continue to grow as more businesses are looking at further expansions alongside the emergence of start-ups especially in the fashion industry.

"East Africa's leading retailer Nakumatt has expansion plans to penetrate Ntinda Market, with the opening of a branch at Ntinda Complex targeting the catchment area of Ntinda, and the secondary catchment area," Toit says , adding that Sportswear company, Adidas, is also planning to expand its footprint on the Ugandan market soon.

He adds that property owners especially in the central business district will need to refurbish their properties to meet the standards of the upcoming malls such as Arena Mall in Nsambya and Imperial Mall in Entebbe, to retain clients, who are now more adventurous and looking for unique products and services.

The firm is also optimistic that the passing of the amended financial bill that allows banks to engage in agency banking, Islamic banking, and bank assurance will be a catalyst for increased economic activity over the next half of the year through increased access to financing for trade and investments, stirring growth of the property market.

Warehousing, industrial properties hit

While commenting on the Knight Frank report, KACITA Executive Director Everest Kayondo said low occupancy and 'To Let" signs have become commonplace in Kampala as the majority of potential tenants people choose spaces out of the CBD.

He said those remaining within the city prefer to rent only the first and second floors, leaving the rest of the building with a lot of empty spaces.

"Poor construction of some buildings without lifts or with the lifts but unreliable power supply has contributed to the reduction in their demand," he said.

According to Knight Frank, property rent in prime industrial areas has stagnated during the same period under review.

The average rent is $5-$7 per square metre for properties in the traditional industrial areas and $5-$6.5 for newer, more modern warehousing premises in secondary industrial locations of Nakawa, Ntinda, Luzira, Namanve, and Seeta.

Similarly, the demand for industrial rental property in the traditional industrial areas within and around the CBD and secondary industrial locations like Banda, Ntinda, Nakawa, and Kyambogo experienced low occupancy rates and take-up over the past six months as supply of warehousing outstripped demand.

It comes at a time when trade in imported goods and commodities that would require storage space for distribution to the neighbouring states is slowing down.

"It is without a doubt, to a certain extent, that the regional peace and stability affects how well the Ugandan economy will do," Rugasira says, "The political unrest in South Sudan and Burundi has impacted on trading volumes which has had a knock on effect on demand for warehouse space."

South Sudan accounts for 15% of Uganda's total exports and the persistent civil conflict there, which first erupted in 2013, has resulted in a decline of exports from $518.7million in 2012 to $400million in 2014, according to the Bank of Uganda.

Rugasira adds that the high commercial interest rates on the market, currently averaging 24.5%, are a deterrent to prospective homeowners and have led to loan defaults in the mortgage market. There has recently been a flurry of foreclosures on mortgaged properties by financial institutions.

Barclays Bank has announced plans to auction J&M Airport Road Hotel Apartments and Leisure Centre Ltd and the associated properties to recover approximately Shs4.7billion ($1.4million) advanced for completion of the facility in 2005.

In May Centenary Bank announced plans to auction various properties including estates in Mbarara and Mukono, among others, to recover loans worth Sh2.4billion ($707,965).

The residential segment witnessed an increase in the number of properties for sale mainly in the Kampala metropolitan areas of Kira, Kireka, Naalya, and Najjera that are becoming popular for middle income earners.

The Private Mailo tenure system, considered to be safe for home owners as opposed to leasehold title, contributed to a surge in demand for commercial and residential property investments for both local and foreign expatriates in these areas.

Rugasira says there are also various middle income housing development schemes and satellite towns in the offing that could address and alleviate the housing deficit if the right product is built and priced correctly.

Property developers have previously shunned investing in low cost housing arguing that investment in that segment is only commercially viable if they build many semi-detached units and the government offers incentives towards setting up other infrastructure including roads, water and electricity in the estates.

Uganda's housing deficit currently stands at 1.2 million units, according to National Housing and Construction Company, with Kampala alone estimated at 750,000.

Source: The Independent