The effects of COVID-19 on the real estate market and opportunities for investment clubs
The COVID-19 pandemic has taken quite a toll on many businesses and the real estate sector wasn’t spared either. It is with this background that dfcu Bank organized a real estate dialogue for its investment club members. This article captures some of the key takeaways.
During the discussion, Martin Muwhezi a Financial Consultant and Specialist in Investment Club Management advised clubs to consider investing in real estate as their liquidity grows. “One of the attractive areas of investment for clubs is the real estate sector and for good reasons. Real estate is a secure investment; It can be used as collateral in case the club wants to get a loan. And it is also a passive source of income.”
There are various types of real estate, each with a unique purpose and utility. The main categories are Land, Residential, Commercial and Industrial.
Situational Analysis
A real estate practitioner and Managing Director at Knight Frank Limited, Judy Rugasira, explained that the sector was rather slow during the first half of this year. “At the start of the year, we saw some slight movement within the real estate sector generally, but no sooner had it picked up than the pandemic started and we had to slow down and shut down on the back of 2019 which was quite a slow year in terms of demand.”
She also revealed that due to the pandemic, a lot of office space was let go of by those in the oil sector who were restructuring and downsizing. Government agencies opted to move into their occupied premises and there were a lot of high vacancy rates.
The residential sector also saw a tight demand side, it’s been in oversupply especially on the end of the real estate pyramid as there have been more products coming out of the pipeline onto the market than there’s the demand to soak it up.
With regards to the retail sector however, this was one that performed slightly better than all the other sectors. So the retail sector was already looking up before the pandemic disrupted things.
“The retail sector witnessed a lot of foreign retailer investments coming in such as Clark, Wahu Works and LC Waikiki, who interestingly entered Uganda before the other East African countries, which demonstrates how vibrant our retail trade is here,” she revealed.
Guidelines on what affects the value
When you are looking to invest in real estate, location is a key driver in the value of property. “From a valuation perspective, we look at proximity to the city, trading centers, transport – a lot of employees and workers rely on public transport to get home so you must put that into consideration,” Rugasira advised.
The presence of social amenities such as restaurants, gyms, supermarkets and other facilities, also affects the real estate. This applies to different sectors. If it’s industrial, then you look at infrastructures and transport.
Other factors to consider include; Security, interest rates, supply and demand, economic outlook, property market performance – the value of other properties in that area will also impact your property. Population and demographics – the more people want to live in a particular suburb, the greater the demand.
Just like any other sector of the economy, the property sector has been impacted by the pandemic. There are currently a lot of office rental waivers since as incomes take a dip. Maintenance costs are increasing as landlords are expected to raise the health and safety standards all these have an impact on the value.
Currently, the market sentiment is being dampened – buyers and users are taking the ‘wait and see’ approach to what the market is likely to look like, how their businesses are going to perform before they go out there and commit huge amounts of money into buying property or even taking debts.
Despite all these setbacks, according to Sheem Sabitti, Managing Director Bageine Limited, our economy has huge potential, it is up to us to tap into it and take advantage of it.
“Property will always be a good option for asset investment as real estate is involved in every aspect of our lives – schools, hospitals, churches, etc, so it’s here to stay. This pandemic presents an opportunity particularly on how to do things better. Get your tenants endeared both functionally and emotionally. The premises should have an intrinsic value to their business, so if you enhance your tenants, you will enhance your income,” He challenges.
Robert Wanok, Head of Personal and Business Banking at dfcu Bank, also reiterated on the benefits of real estate development and spoke about the regulator’s support to the industry. “Real estate is a good asset class, a form of wealth, an instrument of wealth to hold but at a diversified level. Generally speaking, if you had capital at this time, the prudent thing right now is to be able to preserve on your liquidity and make sure you remain afloat,” he said.
According to the Uganda Bureau of Statistics (UBOS), Uganda currently has a deficit of 2.1 million housing units and is expected to reach three million by 2030. The deficit, data shows, will further expand to 8 million units, of which 2.5 million will be in urban centers in two decades.
Part of the explanation for this is the country’s fast-growing population. At 3.3% per year, Uganda’s population will stand at 75 million in the next 20 years according to a report (2017) by the United Nations Population Fund. Additionally, more than 70% of the population is under the age of 30. According to the World Bank’s Collection of Development Indicators of 2018, Uganda’s urban population will stand at around 20 million in 2040, from just over 10 million people (24.4%) in 2018.
Over the last few years, there has been a housing shortage in the country. However, in the last two years, it has become more and more affordable, construction costs have slightly come down and the quality of constructionhas gone up.
Bank of Uganda has been very prudent in the way that they have managed this situation – lenders were offered relief which has placed banks in a better position to help their borrowers.