Did you know that the total investment portfolio in real estate of all investment schemes in the country is only 7 per cent?
What this means, is that of all Shs12 trillion collected in pension funds such as National Social Security Fund (NSSF) and occupational schemes (savings you voluntarily set aside while at your work place during your period of employment), only 7 per cent is invested in real estate.
The influx of big beautiful houses, medium and small all indicate that Ugandans are prone to investing in real estate. Road signs reading, ‘Land Not for Sale,’ while it lies redundant should further indicate how much Ugandans treasure real estate.
By observation, the commonest form of investment in real estate by a lay man is in rentals (usually single and double rooms).
“The lady in pink, where do you think we should invest our money,” asked Mr Richard Byarugaba, managing director National Social Security Fund, at a regional employers’ meeting in Lira recently.
The lady in pink responded, “Real estate.” She and many Ugandans attribute a lot of value to property and land.
But Mr Byarugaba thinks otherwise. “You are wrong! The correct answer is fixed income,” he says.
Has the real estate sector bubble burst, leaving the surrounding without a clue?
According to the Uganda Retirements Benefits Regulatory Authority (URBRA), only 1 per cent of money from the total sector portfolio of occupational voluntary schemes is allocated to real estate.
Mr Byarugaba while presenting the fund’s performance indicated that NSSF invested only 6.5 per cent in real estate last year, compared to 7 per cent in 2016/17. The percentage is even expected to go lower to 5 per cent, he says.
Whereas the total investment in real estate is 7 per cent, the regulatory limit of funds an individual scheme can inject in immovable property is 30 per cent of its total collections meaning that no scheme is allowed to invest more than 30 per cent of its money in immovable property.
Reluctance
Even then, not even NSSF with Shs9.9 trillion assets under management has a double figure percentage allocation in real estate.
Explaining the reluctance of schemes in allocating money to real estate, Mr Byarugaba says that industry is a very speculative market whose price determinants are outside the market conditions of demand and supply.
For instance, he explains, if a rich man bought a piece of land in Bwaise at a high cost, his action could culminate into a hike in price of land in that region.
Consequently, the instability of that business is not advised for a fund made up of members’ money.
“You do not want to put your members at risk by investing in a speculative market. That is why we limit exposure in real estate,” he explains.
For URBRA, the nature of retirement benefit schemes in Uganda does not allow for long term investments such as real estate.
In her explanation, Ms Lisa Betty Oyella, the URBRA risk and investment analyst, says that schemes, precisely occupational were designed only to benefit those under employment of the organisation.
“The current scheme design is that I am a member of URBRA. The fact that I work there means if I leave the organisation, I would need to get out with my money. These schemes do not have a long term investment horizon,” she explains.
In essence, there is a high turnover in these schemes which cannot allow investment in real estate considering it is largely illiquid.
Lack of trust coupled with sentiment attached by trustees to land creates challenges for the regulator.
“They do not trust the fund managers enough to carry out the transaction because they think they will cheat them speculating they can get better deals,” she says adding that there are many flawed processes involved in real estate investments.
Maneuvering taxes
The sector, however, is struggling at the hands of the tax man, says Ms Shirley Kongai, president AREA. She revealed that more than 50 per cent of their expenses are spent on taxes.
However, Mr Jamil Ssenyonjo, manager medium taxpayers’ office, explains how real estate developers who are registered as individuals in the tax system can navigate the new income tax amendments. Shockingly, it benefits you more if you have a loan.
The tax liability of a developer who took up a loan while constructing is much less than that of a developer who never acquired a loan. The new income tax law, Mr Ssenyonjo, says accommodates interest rates on loans as allowable deductions before tax.
Income tax is levied on chargeable income which in the case of rental tax is Gross rent minus allowable deductions. Allowable deductions are the anticipated expenses incurred during the development of an investment.
Government allows a standard 20 per cent of the gross rent as allowable deductions for tax payers registered as individual.
A tax payer who does not declare having acquired a loan for constructing would be liable to pay taxes on the remaining balance of the difference of gross rent and 20 per cent as allowable deductions.
However, those with a loan would further reduce taxable income because government allows for interest rate paid to banks on a loan used for development as allowable deductions.
Companies
To increase business registration, government incentivised developers registered as businesses in the tax payers’ register. Contrary to individual tax payers who are only allowed 20 per cent of gross rent as allowable deductions before tax, government allows all capital expenses incurred during construction as allowable deductions from gross rent. This reduces the amount of taxable income a company has to pay the taxman.
Rental tax for companies, however, is a 30 per cent levy, contrary to 20 per cent paid by individuals.
Real estate still profitable
According to Ms Catherine Nanteza, chief executive officer of the Association of Real Estate Agents (AREA), real estate is still very profitable.
She attributes the low investment by retirement schemes to the fact that real estate is a long-term investment while schemes are expected to make profits for their members.
“Whereas real estate is profitable, it needs a patient person. Retirement schemes have a goal of making profits for their members. So real estate looks unattractive for them since it takes a while to make a profit,” she says.
Real estate, however, has two roles to play, all of which can create profits either through renting it out or selling it since it appreciates in value, Nanteza believes.
Informal
Real estate sector is also highly informal. While real estate contributes 10 per cent to Uganda’s Gross Domestic Product, it is unregulated.
From brokerage, mainly manned by briefcase, unethical middlemen, as well as unregistered players, regulation for the sector operations is key.
The regulations already at drafting stage, have been prioritised by the ministry of lands and housing for the next financial year 2019/202.
Financing costs in real estate
The real estate sector grapples with financing costs because it is capital intensive further diluting hopes of affordable housing. Real estate agents attribute the high cost of housing to high cost of land, taxes as well as construction raw materials.
Government, through the ministry of lands and housing, to cut the cost of construction, is discussing with the World Bank for a $150m loan for real estate developers.
The loan, state minister of lands and housing, Mr Chris Baryomunsi, says should act as an alternative to the decried high interest rates of loans in banks whose range on average stands at 21 per cent.
Developers should take up real estate investment trusts (REITS) according to Mr Keith Kalyegira, chief executive officer Capital Markets Authority, (CMA) a strong advocate of long-term financing which would be instrumental in cutting capital costs.
REIT, he says, is a collective real estate investment scheme that is listed on the stock exchange to attract funds.
HOUSING MARKET
According to Pricewaterhouse Coopers report, dubbed: ‘Real estate 2020, ‘Building the future,’ the 21st century’s great migration to the cities will be well underway. Cities will be swelling across the fast-growing countries in Asia, Africa, the Middle East and Latin America for example Pearl Marina City under construction on Entebbe road. But not all cities will prosper.
While some become great centres of wealth creation in a multipolar world, others are likely to fail. Global construction output is expected to almost double to $15 trillion by 2025, up from $8.7 trillion in 2012. Emerging markets in Asia will be the fastest growing region, and sub-Saharan Africa is expected to be the second highest.
Change in demand
Demographic shifts will affect demand for real estate fundamentally. The burgeoning middle-class urban populations in Asia, Africa and South America will need far more housing.
Meanwhile, the advanced economies’ ageing populations will demand specialist types of real estate, while their requirements for family homes will moderate.
Cities will attract the young middle classes, especially in emerging markets. As intense competition for space increases urban density, apartments are likely to shrink. Developers will need to become more innovative about how they use space.
Individual tax rates
Income tax is levied on chargeable income which in the case of rental tax is Gross rent minus allowable deductions. Allowable deductions are the anticipated expenses incurred during the development of an investment.
Government allows a standard 20 per cent of the gross rent as allowable deductions for tax payers registered as individual.
