In a bid to limit over exposure to the real estate sector amidst what the central bank calls a potential “double-digit decline in real estate valuations” Bank of Uganda, last week, directed all lenders under its jurisdiction to limit their Loan to Value Ratio (LTV), for residential mortgages and loans for land purchase to a maximum 85 per cent.
In a June 1st circular to CEOs of all Commercial Banks, Credit Institutions and Deposit-taking Institutions under the ambit of the regulator, Dr. Tumubweine Twinemanzi, BoU’s Executive Director, Supervision told the financial institutions that “current projections and market intelligence indicate that the COVID-19 pandemic might in the near term, potentially lead to a double digit decline in real estate valuations.
“This would increase the risks of: downward pressure on banking asset quality; reduced collateral valuations; increased expected credit losses; and invariably breaches of Loan to Value (LTV) limits,” he said, adding: “In the event these risks are realized, in combination with a prolonged period of dislocation in the economy, the banking sector capitalization would be negatively affected, and vulnerability of the sector increased.”
“As a risk mitigation measure, BOU hereby sets a maximum limit of 85% on the Loan to Value Ratio (LTV), for residential mortgages and loans for land purchase, wherein ‘Value’ means the appraised market valuation. This will take effect from June 1, 2020 and stay in force until further notice,” Dr. Tumubweine directed.
Bank of Uganda in its State of the Economy March Report projected that Non-Performing Loans to gross loans ratios are expected to jump to 5.94 per cent at the end of March 2020, up from 4.71 per cent at the end of December 2019 on the back of significant defaults in the the trade, tourism, transportation and construction sectors. This would be as a result of cooling growth in the sectors that account for 45 per cent of all private sector credit.
Just today, BoU also revised their 2020 growth projections from 3 to 4 percent projected in April 2020 to now between 2.5 to 3.5 percent.
Real estate players express mixed reactions on BoU’s directive
In various interviews with CEO East Africa, selected market leaders in the real estate sector expressed mixed views on the directive.
Judy Rugasira Kyanda, the Managing Director of Knight Frank Uganda, a leading independent real estate consultancy said that although the central bank was “being prudent and trying to mitigate potential risk and outcome of NPLs on the banks,” the move could send wrong signals in the market.
“Whilst I agree with him (Dr. Tumubweine) in exercising caution and financial diligence and taking the lead in ensuring good governance and diligence within the financial institutions, there is no data to back any trends and this is not a typical crisis where we can expect a typical outcome,” she said adding that there is not enough data to back up the double-digit devaluation fears yet.
Letters to My Younger Self: Winnie Nakimuli—"You Are Worthy Simply Because You Exist"“The real estate market will be predicted yes, but not to the extent that is being portrayed and at times like this, market sentiment is critical in supporting the recovery of the sector, and as such the right sentiment needs to be put out there, to send out the right signals. Negative sentiments simply drives fear and uncertainty and can lead to a much worse outcome. But it is good to see Central Bank being pro-active,” she told this reporter in a WhatsApp interview.
Dr Sudhir Ruparelia, the Chairman of Ruparelia Group, whose real estate arm, Meera Investments is probably Kampala’s largest landlord and recently ventured into the build-to-own property space, said that the move, will make it “too expensive to borrow from today’s markets” and this will eventually “push a number of real estate businesses out of the markets since there will be no buyers.”
Dennis Lutalo, the Country Manager for Broll Property Group agrees with BoU that the projected contraction of the economy would affect the real estate sector too and setting the upper limit of LTV Ratio at 85% would mitigate the inherent risks associated with higher LTV, however the BoU move would make it a notch harder for borrowers in the sector.
“The higher the LTV ratio, the higher the risk for the banks and usually informs the final interest rate charged to any borrower and capping this to 85%, BoU has basically raised a cautionary note to the commercial banks. Simply put, it means that going forward, mortgage borrowers will have to jump more hurdles before loans are approved and the appraisal process will be more stringent which will definitely impact the effective demand of the real estate projects especially housing (demand side) but also new project pipeline ( supply side),” said Lutalo.
“For those of us playing in the real estate investment value chain, we need to be very cautious as we advise our clients- both users of space and investors of space because the knock on effect will be real and impact will be felt across the entire value chain. The music is slowing down, our prayer is it doesn’t stop completely,” he reiterated.
Michael Mugabi, the Managing Director of Housing Finance Bank, the No.1 mortgage lender said BoU’s directive would safeguard industry financial stability and asset quality.
“Essentially BOU, recognizing that property values are likely to be depressed in the short to medium term, is guiding Supervised Financial Institutions (SFIs) to exercise caution (at their discretion) in order to curb the risk that may result from the depressed property prices in this area when considering new lending (remembering that this is key as a driver of both financial stability and asset quality within sectors reliant on collateralized lending),” he said.
A statement from Stanbic Bank, Uganda’s largest lender said: “Stanbic will implement in line with the Government advisory as it’s a cautionary measure that is appropriate at this time.”
