Sep 24, 2017

With over Kshs 82 bn of projects under mandate, across 10 real estate projects all in Kenya, (see list of projects here), we are now looking to diversify to new markets in order provide investors with a diversified portfolio of investment grade real estate products.

Before making any investment, our Real Estate Research & Deal Origination (RDO) team spends time in the target market, collecting and analyzing data to make the best investment recommendation. As such, and in line with our regional expansion strategy, we have been carrying out research on various markets in the Sub Saharan African region. We started with Kigali - Rwanda in 2016, and between June and July 2017, we carried out a real estate market research in Kampala – Uganda, and we currently have ongoing research in Accra – Ghana. We have chosen Kigali, Kampala and Accra as the near-term regional expansion targets based on our ratings of the macroeconomic evaluations of the respective countries and         on investor interest in exposure to those markets.

This week we look at our real estate findings in the commercial, residential and retail markets in Kampala. We start by a general overview of the area, then cover the key drivers and challenges for the real estate market in Kampala, followed by an analysis of the performance of the various themes including residential, commercial office, retail and give a direction on land prices, before finally concluding with our recommendations on the market and the investment opportunity therein.

Overview

Kampala is the capital and largest city in Uganda. It covers a total area of 72.8 square miles and has a total population of 1.5 mn in 2016, according to the Uganda National Bureau of Statistics. It is divided into five districts, that is:

1. Central - Consists of areas such as Kampala CBD, Nakasero, Kololo and Kisimenti. These are the high income areas in Kampala,
2. Nakawa - Includes neighbourhoods such as Nakawa, Bugolobi, Luzira and Ntinda. These are mostly the upper middle income areas,
3. Makindye District - Areas such as Muyenga, Munyunyu, Kibagalagala and Buziga. These are the middle to upper middle income areas,
4. Kawempe - Consists of Bwaise, Mulago, Kawempe and Kazo, among others. These are the middle to low income areas, and,
5. Rubaga District - Consists of Rubaga, Mengo and Kasubi and is the home to the King of Buganda Kingdom - Kabaka. It is a middle to low income area.

Generally, across Kampala, there is inadequacy in implementation of town planning regulations and it is common to find high-rise apartments coming up next to single storied buildings.

Infrastructure & Amenities

Typical of all developing country cities, Kampala has grown at a fast rate without commensurate growth in infrastructure, and hence is relatively congested with frequent and long traffic jams. It is served by several highways including (i) Entebbe Road linking Kampala to the Entebbe International Airport, (ii) Jinja Road connecting to Jinja, then Kenya, and (iii)  Bombo and Ggaba Roads, The Lugogo and The Northern Bypass, which link it to various towns in Uganda. The city is served by the Entebbe International Airport and an airstrip in the Kololo Area. Roads within the high-end estates are well tarmacked, in the middle income areas most of the roads are paved with a few tarmacked roads. Electricity is distributed by Uganda Electricity Distribution Company (UEDCL) who have subleased to Umeme, a private company. The connection is fairly strong and regular and power outages are not common. Water is distributed by Uganda National Water and Sewerage, which has a Kampala arm. Most of the areas in Kampala are connected to the main sewer network.

Factors Driving the Real Estate Market in Kampala

There are several factors boosting real estate investment in Kampala, largely connected with population growth and infrastructural development opening up the city to institutional grade development as outlined below:

1. Demographics – Uganda has a high population growth rate of 3.2% compared to the Kenyan and Sub Saharan African average of 2.6% and 2.7% p.a., respectively, according to the World Bank. The growth rate is higher in cities at 4.3% and a high urbanization rate of 5.2% against a Sub Saharan African average of 3.5% p.a. creating demand for real estate, especially in urban areas and cities such as Kampala,
2. Increased Multinational Operations – Following the discovery of oil as well as increased investments in the technology and financial services sectors, multinationals such as C Squared and Africell have set up offices in Kampala and are demanding for high end residential units for their employees and taking up office space in the city for their operations which also leads to an increase in the footfall for  retail space,
3. Increasing Disposable Income – Driven by an increase in GDP, which has on average grown by 5.1% p.a. in the last five years according to the Bank of Uganda, the population’s capacity to demand for housing and expenditure has also grown, thus boosting the residential and retail market segments,
4. Improved Infrastructure – the government has improved trunk infrastructure, especially roads in the suburbs, which have opened up the areas for development. They include the Naalya and Namugongo Area due to the Northern Bypass. Currently the Kampala Entebbe Express Way is under construction, and it is expected to open up areas along the Entebbe Road including Lubowa and Munyonyo. The success of the Lamu Port South Sudan Ethiopia( LAPSSET) Corridor project will also play to increase the opening up of Uganda
5. Government Initiatives – The Ugandan Government is boosting real estate activities in Kampala and Uganda through initiatives such as:
   1. Enacting the condominium titling system facilitating fractional sales of property hence making real estate more affordable,
   2. Government bodies such as The National Housing and Construction Company (NHCC) has also opened up areas for development by developing in remote areas hence attracting population and subsequent development, with the National Social Security Fund (NSSF) providing off taker financing for developments hence increasing development activity,
   3. For commercial office, the government bodies and parastatals take up the largest amount of office space in the city according to Knight Frank, and in retail, the government has been encouraging retailers to move from the high street to the malls thus boosting occupancy rates in the malls, and,
   4. Uganda is also experiencing a relatively stable political environment and good governance.

However, despite all the factors that have led to increased development of real estate in Kampala, there are still a number of factors, which if not properly addressed present challenges to real estate development:

1. Increased Competition - Commercial office blocks face competition from residential housing converted to office spaces, which have more parking and are not in congested areas. In retail, as a result of increased supply and development of retail space, Kampala has witnessed a mall boom with malls springing up next to each other; for instance Garden City Mall and Oasis Mall are right next to each other in Nakasero, and Forest Mall and Lugogo Mall are also next to each other. The city has a mall supply of 182,000 square meters with a pipeline of 128,000 square meters according to Knight Frank,
2. Inadequate Funding & Expensive Capital – There is very little off taker finance in the Kampala market, hence buyers have to finance using their savings. The challenge is compounded further by the fact that most sales transactions are cash payments, with clearance periods of between 1-6 months hence little time to raise capital. Mortgage activity is also subdued due to the high interest rates of between 22% - 28% to the Ugandan Shilling, with residential mortgage to GDP ratio being less than 1.0% according the Housing Finance Bank, against 4.2% in Kenya and more than 20% in South Africa,
3. Exit of Some Multinationals – Multinationals such as Tullow Oil scaled down their operations with others such as Engen and AIG exiting the Ugandan market recently. This was due to a delay by the Ugandan Government in issuing of trading licenses, as well as a tough operating environment characterized by a high interest rate environment, currency depreciation, and slower economic growth with the GDP growing by 3.9% in 2016 from 4.7% in 2015 due to a decline in commodity prices and drought. This has since reduced demand for prime residential property and commercial office blocks,
4. High Construction Costs - High costs of construction inputs as well as the high costs of transportation from ports, as Uganda is landlocked, reduce the attractiveness of the real estate market,
5. Culture – Ugandans prefer living in large palatial homes, which are unaffordable, hence affecting the uptake of apartments that are mainly bought for investment. This culture is however changing as people seek affordability and convenience,
6. Overreliance and Duplication of Foreign Retailers - The closure of Nakumatt has affected the retail sector in Uganda, as it was an anchor in a number of malls in Kampala including Acacia Mall, Oasis Mall and Village Mall Bugolobi.

Market Performance

1. Residential

Generally, the residential sector in Kampala is undergoing development, with most of the mega developments being less than 5-years old. Uganda has a housing deficit of 1.6 mn housing units largely concentrated in the low to mid income segment according to the Ministry of Lands, Housing and Urban Development. Kampala has the bulk of this deficit, with the city in need of 100,000 houses p.a. The deficit is expected to grow given the high urbanization rate of 5.2%, as majority of Kampala residents, being a total of 60%, live in informal settlements.

The residential market in Kampala can be classified broadly into high income, upper middle income, middle income and affordable housing. The high-income market consists of areas closest to the CBD. They include Nakasero, Kololo and parts of Bugolobi. Initially they were characterized by colonial style maisonettes and bungalows, but these are being replaced with high end apartments, mostly furnished, attracting rents of between USD 2,000-4,000 per month with exit prices of more than USD 200,000.  They serve the expatriate population in Kampala and the high net worth individuals.

The upper middle-income areas are the zones neighboring the high-income areas. They have grown due to improved infrastructure and expansion of the high income areas. They are characterized by standalone houses in gated compounds with a few apartments coming up. They include Mbuya, Luzira, Muyenga, Ntinda, Naguru and Nagira. They serve high net worth individuals, corporates and military personnel. House prices range from USD 160,000 - 450,000.

The middle-income areas include the Kampala suburbs of Nalya, Kira, Namugongo, Kira and Kintintale. These areas have a high demand for apartments and apartments are being developed up in large quantities. Developments have been boosted by improved infrastructure in the areas, which have opened them up for development including the Northern Bypass. For apartments, the price range from UGX 87.5mn to UGX 500 mn (USD 24,360 to 138,889).

The performance of these zones is as shown below:

High End Residential  Market Kampala Performance
Typology	Average Size SQM*	Monthly Rent USD	Price Per Unit in USD	Price Per SQM in USD	Price Per SQM in UGX	Rental Yield	Occupancy
2 Bed Apartments	130	1,900	237,500	2,083	7,498,800	10.0%	82.3%
3 Bed Apartments	192	2,522	343,000	1,786	6,429,600	8.9%	85.5%
3 Bed Villas	325	2,500	825,000	2,595	9,342,000	2.9%
Stand Alone Bungalows	650	3,250	1,400,000	1,343	4,834,800	2.8%
Average High End				1,952	7,026,300	6.1%	83.9%
High end residential areas covers Nakasero, Kololo and Bugolobi suburbs in Kampala, and these consist of:
i) Exclusive furnished and serviced apartments with average rental yields of 10.0% for two bedroom apartments and 8.9% for 3 bedroom apartments. These apartments have high occupancy rates of more than 80% in both cases and charge prime rents averaging at USD 1,900 for two bed and USD 2,522 for 3 bed. The apartments are spacious and charge the prime rents as the clients are the top end of the market seeking luxury more than just functionality.
ii) Villas and Bungalows standing on land parcels of 0.2 - 1 acre. These can be sold for values as high as 1 mn USD but are increasingly reducing in numbers as the parcels are redeveloped into either apartments or commercial office blocks. The villas attract low yields averaging at less than 3.0% indicating that investors are not willing to pay a premium for the gardens and privacy missing in apartments and are hence likely to be done away with altogether as investors seek higher returns *SQM- Square Meters

Source: Cytonn Research

Exchange rate 1 USD= 3,600 UGX, 

Upper Middle Market Kampala Residential Performance
Typology	Average Size SQM*	Monthly Rent USD	Price Per Unit in USD	Price Per SQM in USD	Price Per SQM in UGX	Rental Yield	Occupancy	Uptake
3 Bed Apartments	142	1,240	175,298	1,370	4,932,000	8.9%	91.7%	92.9%
4 Bed Apartments	188	1,444	230,714	1,209	4,352,400	7.1%	79.1%	82.2%
3 Bed Standalone	166	1,050	145,500	908	3,268,800	8.6%	80.0%
4 Bed Standalone	237	1,467	262,222	1,136	4,089,600	6.8%	82.5%	75.1%
5 Bed Standalone	297	1,983	346,667	1,166	4,197,600	5.8%	91.2%	82.4%
Average Upper middle				1,158	4,168,080	7.4%	84.9%	83.2%
The upper middle residential area covers Naguru, Mbuya, Luzira, Muyenga and Ntinda among other suburbs in Kampala. These consist of:
i.    Apartments are mostly three and four bedroom units. On average three bedroom apartments, have high yields of 8.9% and high uptake and occupancy levels of 92.9% and 91.7.7%, respectively. This is as they are in high demand from expatriates and high net worth locals seeking convenience and relative affordability as they are cheaper than housing units in the high-end areas. Four Bedroom units have lower returns with average rental yields of 7.1% and uptake and occupancy levels of 82.2% and 79.1%. This is as they mostly have similar amenities and features like the three bedrooms but are more expensive with absolute prices of on average USD 230,714 against USD 167,500 for 3 bedroom apartments
ii.       Standalone Units are mostly 3, 4 and 5 bedroom units. These have lower returns on average compared to apartments with 3 bedroom standalone having rental yields of 8.6% against 9.5% for apartments and four-bedroom standalone having average yields of 5.8% against an average of 7.6% for apartment. They have decent occupancy rates of more than 80% across all the typologies. They attract individuals seeking space and size but in a gated community to share on security, water and other amenities as well as for the community feel *SQM- Square Meters

Source: Cytonn Research                                                                                                                                           

Exchange rate 1 USD= 3600 UGX

Middle Class Residential  Market Kampala Performance
Typology	Average Size SQM*	Monthly Rent in UGX”000”	Price Per Unit in UGX”000”	Price Per SQM in UGX	Price Per SQM in USD	Rental Yield	Occupancy	Uptake
2 Bed Apartments	86	831	284,354	3,252,215	903	5.6%	83.3%	95.0%
3 Bed Apartments	103	1,667	294,750	2,877,176	799	7.2%	75.0%	95.0%
3 Bed Standalone	156	3,163	575,000	3,239,024	900	7.0%	96.7%	87.5%
4 Bed Standalone	205	2,000	732,500	3,517,698	977	3.8%	100.0%	97.5%
Average Middle Class				3,221,528	895	5.9%	88.8%	93.8%
The middle class residential area covers Bukoto, Kiwatule, Kira, Naalya, Namugongo, Buziga and Bunga suburbs in Kampala. These consist of:
i.            Apartments are mostly two and three bedrooms. There is massive construction ongoing in these markets with off plan sales driven by the high demand for the units as well as relative affordability and attractive price ranges in Ugandan Shillings. There is a huge demand for these apartments for rents by the middle class staying in Kampala hence the rush, while some buyers are owner-occupiers developers sell more to investors seeking the attractive returns. Three bedroom units are the most popular recording on average 95%  uptake  and 7.2% rental yields
ii.            Stand Alone – In these areas, stand-alone consist of three and four bedroom units. The supply for these units is declining but they still offer attractive returns with rental yields of 7.0% for 3 bedroom houses on between 0.12 and 0.30 acres of land. Four bedroom units have lower yields averaging at 3.8% as they charge similar rental rates to the three bedroom units though they have higher prices and similar amenities *SQM- Square Meters

Source: Cytonn Research                                                                                                                                                             

Exchange rate 1 USD= 3,600 UGX

Affordable Housing Market Kampala Performance
Typology	Average Size SQM*	Monthly Rent in UGX”000”	Price Per Unit in UGX”000”		Price Per SQM in UGX	Price Per SQM in USD		Rental Yield	Occupancy		Uptake
2 Bed Apartments	73	675	104,667		1,473,769	409		8.2%	92.5%		87.5%
3 Bed Apartments	80	900	146,500		1,831,250	509		7.5%			87.5%
Average Affordable Housing					1,652,510	459		7.9%			87.5%
Consists mainly of 2 and 3 bed apartments in the middle income areas. Have attractively low prices of on average UGX 104.67 mn for a two bed unit and UGX 146.5 mn for a 3 bed unit. They have attractive rental yields 8.2% for a two bed unit and 7.5% for a 3 bed unit. Due to their relative affordability, they have high uptake rates with cases of developments being 100% sold in just 10 months *SQM- Square Meters

Source: Cytonn Research

Exchange rate 1 USD= 3,600 UGX

Kampala Residential Market Performance Summary
Region	Suburbs	Price Per SQM USD	Price Per SQM UGX	Rental Yield	Occupancy	Best performing Typology
Upper Middle Income Areas	Naguru, Mbuya, Luzira, Muyenga, Lubowa and Ntinda	1,158	4,168,800	7.4%	84.9%	3 Bedroom Units
High End Areas	Kololo, Nakasero, Bugolobi	1952	7,027,200	6.1%	83.9%	2 Bed Serviced Apartments
Affordable Housing	Middle Income Areas	459	1,652,510	7.9%*	92.5%	2 Bedroom Apartments
Middle Income Areas	Bukoto, Kiwatule, Kira, Naalya, Namugongo, Buziga and Bunga suburbs	895	3,221,528	5.9%*	88.8%	3 Bedroom Units
Average		1,116	4,017,510	6.8%	87.5%
·       On Average the residential market in a Kampala has a yield of 6.8% and an average occupancy level of 87.5% ·       Upper Middle Income areas have the highest dollar yields of on average 7.4% with 3 bedroom units being the best performing typologies in these zones ·       * Uganda Shilling yields

2. Commercial Office

The commercial office sector in Kampala is fairly nascent. Kampala has a few commercial buildings, most of them located in Nakasero, Kololo and few in the outskirts in places like Bugolobi, Naguru and Ntinda. Most of the buildings are Grade B, with very few Grade A offices. The city has as shortage of parking spaces and is congested, leading to some players taking up residential blocks in the prime suburbs and converting them to offices. Prime rents can go to USD 18 dollars per square meter, compared to about USD 14 in Nairobi. There is no fractional office sales market in Kampala due to the infancy of the condominium titling Act and lack of precedence and yields are computed based on building valuations and not prices. For letting, unlike in Kenya where tenants acquire shell and core office spaces, in Kampala tenants demand fully finished and fitted out offices and hence higher construction costs compared to Kenya.

The summary of the sector’s performance is as below:

Commercial Office Performance  Kampala
Office Grade	*Market Share	Rent Per SQM** USD	Rent Per SQM UGX	Service Charge Per SQM USD	Rental Yield	Occupancy
Grade A	25.0%	16.5	59,400	3.5	11.4%	87.3%
Grade B	63.0%	15.6	56,160	2.5	10.1%	86.6%
Grade C	12.0%	13.4	48,240	2.0	10.5%	84.1%
Average		15.2	54,720	2.7	10.6%	86.0%
Grade B offices are the most common in the market with a 63% market share, they are also the most popular in the market with the highest occupancy rates at 86.6% Grade A offices have the highest rents and yields of 11.4% and occupancy rates of 87.3%. The opportunity in this theme is thus in grade A offices in the market *Market share distribution based on the samples collected **SQM- Square Meter

Source: Cytonn Research

Exchange rate 1 USD= 3,600 UGX, 103.5 Kshs, 1 Kshs = 34.64 UGX 

3. Kampala Retail Market

Kampala has a well-developed retail sector with a mall supply of 182,000 square metres according to Knight Frank, which is 46.5% of the mall supply in Nairobi. Most of the malls have come up in the last five-years and are well distributed in the city and its environs. The population has a very consumer oriented culture boosting the retail sector. The main malls are Oasis Mall and Garden City in Nakasero, Acacia Mall in Kololo, Lugogo Mall in Lugogo, which has Game and Shoprite as anchors, and Metroplex Shopping Complex in Nalya. In 2017, the sector has been destabilized by Nakumatt, which closed shop in Uganda and was the anchor to more than 90% of the malls in the cities leading to a slowdown in foot traffic.

The summary of the sector’s performance is as below:

Retail Market Performance Kampala
Mall Typology	Average Rent Per SQM* in USD	Occupancy	Yield
Destination Malls	23	80.0%	11.0%
Community Malls	18	77.0%	11.6%
Neighborhood Malls	14	56.7%	7.7%
Average	18	71.2%	10.1%
The average rent for retail space in Kampala is USD 18 per square metre per month an equivalent of Kshs 1,897 per square metre per month. The occupancy rates are on average 71.2% which are low compared to the other themes with residential at 88.6%, office at 84.5% and even lower than the average occupancy of 83% in Kenya. This can be attributed to the high supply in the market and the poor location of some of the malls *SQM- Square Meter

Source: Cytonn Research

Exchange rate 1 USD= 3,600 UGX

4. Land

Average Land Prices in Kampala Suburbs
Area		Average Price 2017 USD Per Acre		Average Price 2017 UGX Per Acre
Nakasero		3,000,000		10,800,000,000
Kololo		2,500,000		9,000,000,000
Mbuya		1,500,000		5,400,000,000
Naguru		1,000,000		3,600,000,000
Bugolobi		1,000,000		3,600,000,000
Muyenga		277,778		1,000,000,000
Naalya		277,778		1,000,000,000
Makindye		222,222		800,000,000
Buziga		194,444		700,000,000
Lubowa		166,667		600,000,000
Ntinda		166,667		600,000,000
Mulago		166,667		600,000,000
Kulambiro		138,889		500,000,000
Kira – Namugongo		97,222		350,000,000
Namave		97,222		350,000,000
Seeta		83,333		300,000,000
·         Prime land in Kampala in suburbs such as Kololo and Nakasero sell for more than USD 2.5mn an acre
·         Land is relatively more affordable in middle income areas selling for between UGX 300mn to UGX 1 bn per acre
·         According to real estate experts, land in the city has grown 3 fold on average over the last four years which is     equivalent to an annual capital appreciation of 31.6%
·         The capital appreciation has been boosted mainly by rapid infrastructural development

Source: Cytonn Research

Exchange rate 1 USD= 3,600 UGX                                                                                                           

Comparative Analysis

On comparing Kampala with Nairobi and Kigali, Kigali recorded the highest yields with Kampala recording higher rental yields than Nairobi across all themes as shown below:

Comparative Analysis: Kampala, Nairobi and Kigali
City	Residential	Commercial Office	Retail
*Kigali	9.2%	12.9%	13.1%
Kampala	6.8%	10.6%	10.2%
Nairobi	5.6%	9.3%	10.0%
·       In comparison with other East African cities, Kampala has higher yields than Nairobi with average rental yields of 6.8% 10.6% and 10.2% for residential, office and retail, respectively against Nairobi’s 5.6%, 9.3% and 10.0% for the same themes ·       Kigali however has the highest yields with on average yields of 9.2%, 12.9% and 13.1% for residential, office and retail themes, respectively ·       The Kigali Market is however nascent and small as the city has a population of 1.1 mn against Kampala’s 1.5 mn people and Nairobi’s 3.6 mn in 2016 according to the country’s respective national statistical bureaus ·       *2016 Performance

Recommendation:

To identify the specific areas investment areas, we ranked the areas based on yields, land prices and ease access judged by infrastructure and the recommendations area as below:

Recommendation: Investment Areas in Kampala
Theme	Class	Areas	Specific Areas and Themes for investment	Reasons
Residential	High Income	Nakasero, Kololo, Bugolobi	Kololo - High End Serviced Apartments	High demand evidenced by the more than 85% occupancy, proximity to CBD
	Upper Middle	Naguru, Lubowa, Mbuya, Luzira, Munyonyo	Naguru - 3 bed apartments	High demand, low supply, proximity to CBD, ample  supply of amenities including schools and hospitals
			Ntinda, Lubowa – Mid Income Stand Alone houses	Good performance with yields of more than 6%, improvement in infrastructure attracting population to these areas
	Middle Income	Naalya, Ntinda, Kiwatule, Bukoto, Nagira	Naalya and Namugongo - 2 and 3 Bed Apartments	High demand and uptake, good infrastructure
Commercial Office	Grade AB	Kololo, Nakasero, Bugolobi	Kololo -Grade AB	High demand, low supply, proximity to CBD, ample  supply of amenities, attractive returns with rental yields of on average 11.4%
For residential, 3 bedroom apartments offer the best investment opportunity  in both the upper middle income areas and in the middle income areas as they have high returns with yields of 9.0% and 7.2% and uptakes of 93% and 95%, respectively The opportunity in Kampala is in Grade A commercial office blocks which have high yields of 11.4%, high occupancy of 87.3% and are in low supply

We have a positive outlook for the Kampala real estate market driven by the high demand and returns, a growing population, entry of multinationals and increased infrastructural development. And our preferred investment areas are commercial office, grades AB and mid to high end residential.

For comprehensive market research on residential, commercial and retail themes in Kampala and its environs, refer to the full report here: Kampala Real Estate Investment Opportunity.