The state of buildings in a locality, zone or city normally gives the first impression to a newcomer of the economic state of the area. The skyline of Dubai, Hong Kong, Manhattan and Singapore are symbols of wealth and glamour just as much as Kibera, Gugulethu, Kinawataka or the favelas of Rio are a testament that poverty and glamour rarely co-exist. Real estate investment decisions are largely affected by economic and political factors but also by sentiment and exposure.
The Covid-19 pandemic, multiple changes in the tax laws, the uncertainties surrounding Uganda’s land tenure system and the related land grab epidemic, especially in rural areas of the central region of Uganda have had a number of real estate investors start to reconsider whether it is worthwhile to leave all their eggs in one basket. There have been reports of investors delaying investment, abandoning projects and altogether pulling out of the Ugandan real estate market and trying their luck elsewhere.
This article discusses why some investors could be pulling out of the Ugandan real estate market and investing in other markets such as United Arab Emirates (UAE), Kenya and South Africa.
Economic factors
Factors such as the level of the economy, access to capital, interest rates and inflation are key determinants when an investor is making the decision of when and where to invest. Poor economic factors adversely affect the expected returns of investors on their investments making them easy targets for better markets. High levels of inflation and high-interest rates not only predict a high default rate but also undermine the economic viability of real estate projects. This worsens the investors’ return on investment and dents Uganda’s image as an investment destination.
For instance, whereas in Uganda one can set up a 3-bedroom property with USD 54,000 with an expected return on the investment of about 10 per cent, an investor who can afford to buy a 3-bedroom apartment in Dubai at USD 300,000 would rather invest in a single apartment in Dubai because of the stability of its economy other than set up 5 properties in Uganda that yield less returns.
Similarly, the limited access to capital in Uganda has also been aggravated by the raising interest rates. Uganda has the highest interest rates (23%) compared to countries such as United Arab Emirates(UAE) (4.1%), South Africa (9.750 %), and Kenya (12.410 %). This shows that local investors in the other economies have access to cheaper capital compared to investors in Uganda and as a result, the Ugandan investors have lower yields because they obtain capital at a higher cost.
The desire for higher returns may cause a shift by investors to markets that will avail them affordable capital with the added advantage of financial stability since their main aim is to make high profits.
It follows that the UAE, South Africa and Kenya, which already rank highly as tourist destinations, are better positioned and are indeed eating into Uganda’s real estate market share. As such, salvation lies in the country’s high economic growth rate and alleviation of problems such as income distribution, access to capital, interest rate and inflation.
Demand and Supply
The general rule is that an economy with a higher population growth rate has higher demand and as such, investors realise high profits. This however is not always the case.
Compared to UAE, Uganda has a higher population growth rate. Still, its real estate market has been overshadowed by the low purchasing power of the population compared to that of UAE, South Africa and Kenya. The country’s low rental yield is an indicator that Uganda suffers from a problem of limited effective demand for real estate despite its favourable housing index.
Consequently, an investor obtains a lower rental yield owing to the low effective demand coupled with high default rates by tenants. As such, investors are attracted to economies such as UAE, South Africa and Kenya where they are guaranteed higher returns and security on their investments, which may explain why some investors are running away to these markets.
On the other hand, the supply problem is embedded in the risks associated with land acquisition in Uganda as exemplified by the protracted legal battles fought in a bid to resolve endless land wrangles. These create uncertainty as to the capacity of the seller to transfer uncontested legal ownership to the purchaser of the property in consideration of the funds exchanged.
Therefore, the demand problem in Uganda is demonstrated by a lack of effective demand while the supply problem is illustrated by the risks associated with the acquisition of property and both of these fall within the domain of government policy.
Government Policy
Government policy includes the laws, regulations and policies of a country and it follows that investors will be attracted to countries that have investor-friendly laws, policies and processes, especially regarding taxation and immigration.
Uganda and Kenya have similar tax and fiscal incentives such as wear and tear incentives, and industrial building deductions e.g., 10% for hotels and 25% for residential buildings in planned developed areas. However, an investor in Kenya and Uganda must pay income tax, rental tax, corporate tax, capital gains tax and VAT depending on the development. Kenyan investors whose business is carried out over the internet are also subjected to digital services taxes. In contrast, an investor in the UAE is currently not required to pay income, rental or capital gains tax.
| Uganda | Kenya | UAE | South Africa | |
| Applicable taxes | 1. Income Tax (30%) 2. Rental Income (12% for individuals and 30% for companies) 3. Capital Gains Tax (30 %) 4. VAT (18%) | 1. Income Tax (30%); 37.5% for foreigners 2. Rental Income (10% for individuals and 30% for companies) 3. Capital Gains Tax- 5% 4. VAT (16%) | 1. No income or capital gains tax 2. VAT of 5% of registered business making a supply in UAE. | 1. Income Tax 28% 2. Capital Gains Tax- 22.4% 3. VAT (15%) 4. Dividend tax- 20% |
| Tax Incentives | 1. Industrial building deductions 2. Wear and tear deductions 3. Stamp duty incentives | 1. Industrial building deductions 2. Wear and tear deductions 3. Fiscal policies like tax holidays | 1. 0 % corporate and personal income tax for companies and individuals 2. Exemption from Customs duties and VAT for goods that meet certain conditions | 1. Depreciation and depletion of 40 % in the first year of use. 2. Some activities related to research and development activities are 150 % deductible |
Additionally, UAE has also made amendments to their immigration laws, which enable foreigners that acquire property to obtain long-term visas and this has attracted foreign investment. The more favourable laws and policies in the other economies are prompting investors with the capital to leave the Ugandan real estate market for greener pastures. The high returns and security of investment, the ease of doing business and the better tax and economic policies in these countries especially in the UAE surpass Uganda’s advantage of a cheaper cost of construction and acquisition of real property.
In conclusion, investors in real estate are reconsidering Uganda as an investment destination because the poor state of its economy is aggravated by high-interest rates, worsening inflation, and the low purchasing power of its population. Government policies such as tax incentives and allocation of land for investment are not adequate to attract investors because they are undermined by poor policy implementation and ethical issues such as corruption.
However, not all is lost because Uganda can leverage its economic growth, the housing deficit, and its high population growth to secure its market position. Thus, the Government should focus on improving the economic state of the economy and actively attracting investment in the real estate sector since investors always follow the money.