Uganda’s mortgage industry is growing at 58%. This is a good sign that our economy is growing. For long, what has retarded Uganda’s economy is the poor mindset of some people with tendency to tie a lot of money in owner occupied properties by making an outright purchase of expensive land instead of using the money in the trade and commerce.
Take the case of someone who buys a plot of land at Ugx. 200m, constructs a house to live in at a cost of Ugx. 500m. That is a total Ugx. 700m tied up capital, against a saving of Ugx. 1.5 million rent that would have been spent renting under a mortgage arrangement, for ultimate occupier ownership after the mortgage period! In Europe and America, people acquire properties they would otherwise not due to mortgage financing – they make small repayments from their small salaries over their productive life, and invest a big percentage of their salaries or incomes in other businesses instead of tying up money in a single property that only saves just Ugx. 1.5 m in rent!
The bad thing is that such money in real estate cannot easily be liquidated – i.e. if you want money, it is difficult to find a buyer instantly at your stated value. Properties, if not business assets or not held as stock in trade (read real estate dealing), tie up cash flow and therefore derail the market. Such money would have been put in a business to create a multiplier effect.
That is why the news of 58% increase in the mortgage sector is great.
I recall the time I applied for a mortgage then as a 25 year old ambitious young man aiming to profit from the real estate industry. Armed with a fool proof plan, I duly presented my papers to the bank for approval. The banker only asked me one question; can you raise a monthly instalment of Ugx 5million? That was the end of my mortgage dream, as I was convinced that its only the rich who can access such facilities. I also wondered whether this industry would grow with such high restrictions. How I was to be proved wrong.
Ten years ago, the industry was very bad at 0.3% of the GDP. Not anymore. The size of the mortgage market is currently estimated at 1.7 percent of the country’s GDP, up from 1.6 per cent in 2010 and from 0.3% in 2002.
Back then, the industry did not only have one player, Housing Finance Bank, clients were also few. Despite this, the 58% growth is attributed to the liberalization of the economy, increased competition that has seen more players with innovative products come on board. The numbers on both demand and supply sides have increased.
Presently, five banks dominate the market. These include Housing Finance Bank, DFCU Bank, Stanbic Bank, Standard Chartered Bank, and Barclays Bank. A section of real estate players recently started a SACCO which is said to be currently worth Ugx. 10bn and still growing. The champions of this Sacco plan to extend loans to members at low interest to enable low cost housing for the low market segment.
Data from Bank of Uganda (BoU) reveal mortgage loans have been rising over the years. In last quarter of 2014, the total mortgages outstanding from commercial banks rose to 46 percent from the same period last year to Ugx.1.16 trillion (US$414.6 million). Total outstanding residential mortgages jumped from 36 percent to Ugx. 673.2 billion (US$239.7 million) over the same period.
In 2010, the whole portfolio including residential and commercial mortgage was around Ugx. 1.8 billion moving to Ugx. 2.2 billion. The residential market is a unique one; it has grown from around Ugx. 500bn in 2010 to around Ugx. 698 billion as of December 2014. As much as this industry is in its formative years, the prospect looks bright but only for prepared.
One needs to understand these are absolute figures in terms of quantum and value. Sometimes the quantitative does not tell the full story. For examples, sources say, majority of houses/ apartments are bought by foreigners particularly businessmen from Rwanda, Kenya, South Sudan and Canada.
Five years ago, there was only one mortgage player-Housing Finance Bank. Today, there are more players and more are coming, as the industry matures and the market becomes attractive. That is good news for customers — they have more choices to pick from.
Why the slow growth?
On the supply side, the more players coming means there is capacity building at all levels and that’s good for the future of the industry. Part of the reason why Uganda’s insurance and banking industry are not growing as fast as those of region is lack of capacity building. Banks are said to be poaching from each other while the country’s insurance boasts of less than 1,000 local experts.
New developers are also coming up with innovative product offerings. Back then you had to go to Housing Finance bank and you had to fall within a certain income bracket to access mortgage services.
Today, the players are making products that satisfy different customer needs. For example, there has been a strategic partnership with real estate developers and banks which is making it easier for players and customers as well. Interest rates remain biggest problem. At some point interest rates reached a high 33 percent in 2011 to now at 18 percent. Though this is still on the high side, things are moving in the right direction and may fully stabilize after the 2016 elections.
Not yet Uhuru
The Ugx. 800bn mark is good move, but when you look at potential of the market, the figure is still low. With rising middle class (now estimated at 11m of the 37 million people in Uganda) and the influx of foreigners speculating on the oil boom, the future is bright. Available statistics reveal there is an accumulated nationwide shortage of affordable housing of 500,000 houses in Kampala alone.
A recent survey indicates the average price for a house in city suburbs is Ugx. 80m. There are few Ugandans who can afford this price. However, majority can afford to take a mortgage of a completed house and be able to service it on monthly instalments, especially salaried earners.
According to industry sources, the majority of Ugandans who build their houses/homes do not do so through mortgages, but through personal savings. And that is where the opportunity to unlock the economy through innovative mortgage solutions lies – encourage people to invest their savings in small businesses while paying on their mortgages monthly.
Information obtained by this magazine indicates that there are less than 25 mortgage financing applications daily in Uganda. This is a very low figure compared to the region’s super economy, Kenya. Despite a 58% growth, there exists huge untapped market. In Kenya, at least each bank processes three mortgage applications daily. That is over 300 mortgage loan applications per day. As country’s middle class grows, so is the need for increase in the supply of affordable housing to the lower and middle class who do not have to invest their hard earned savings in owner occupied property as they risk starving in it in the old age!
What next?
For the sector to realize its potential, a number of things must come into play; macroeconomic stability, free information flow, more reliable data to make the right decisions and need for all stakeholders including manufactures of building materials, ministry of lands to come together to grow the sector.
The key issue that must be fixed is the demand side – especially pricing of the houses. If the cost of construction is till high and the mortgage rates are high as well, the cost to the customer will be high as well. Beyond macroeconomic stability, stakeholders need to ensure right building materials, an efficient organized ministry of land and perhaps organized real estate sector which is fraud free.
Collaboration among stakeholders is key. Town councils and other local governments need to play their role to do things like sewerage connections, access roads and proper planning. These costs are said to be in range of 25 per cent of the total cost of a house. If these issues were fixed, the cost of house ownership would reduce significantly. This would directly imply low mortgage rates and would stimulate demand.
Customer education
The Ugx. 800bn for residential sector is worth celebrating but for industry to move forward, the stakeholder need to do more. One such move is customer education to reduce loan default. Customers need guidance about the risks and benefits of taking mortgage. Like life insurance, mortgage puts a lot of pressure on the customer to sustain the monthly repayments, else they risk losing their property after many years of suffering. For example, if the customer has been renting and paying say Ugx. 10 million per month, they might have to relocate to say five million house and balance goes to mortgage repayment, which could be owner occupied or rented to reduce on the repayments. Simply put, customers need to be educated to prioritize for new way of life and personal finance planning.
That way, more Ugandans and the nearly 300,000 civil servants have potential to own a house, with low financial stress, using their small salaries. This translates in to high employee productivity. With just 10,000 mortgages, there is huge market potential. It requires massive awareness, something banks and other institutions responsible for financial literacy and deepening have not done. Instead banks and mortgage players have been exploiting the customer ignorance which has caused a bad name to the industry. It is common to hear horror stories of how banks have taken over a proper from a mortgage repayment defaulting customer. In most cases, these people were not informed of the implications of the terms, specifically to plan their cash flows such that they are able to complete the repayments. Any small glitch in their business, might lead to default. Most of the time, banks are happy to take over ownership of the property in question from such a client. This gives the industry bad reputation.
There is need for more education about banking, insurance and mortgage financing