Land ownership is an important aspect of real estate investment. What land tenure system favours or disfavours real estate investment? What should one consider before acquiring land?
There are various land tenure systems— namely customary, freehold, mailo and leasehold. It depends on the tenure that you currently have or the one you are interested in buying.
Before you venture into any real estate investment or any property investment, it is prudent to do your due diligence. At the pre-purchase stage, you need to identify the land or property you want to develop, then do your due diligence― for example, location, price, tenure, and ownership.
Understanding which tenure it is, helps you understand what the planning restrictions or requirements prior to development on the land are. What you can or can’t do on the land, may vary with the different tenures because some have fewer restrictions than others. Depending on which title you are holding, you need to make sure that you do your due diligence to ascertain exactly, what is it that you can build on that particular plot of land.
You for example need to know, how many years are left of the lease; if it is a leasehold; are there any easements; is it a wetland? You also need to find out, do you need to fulfil any planning requirements, before you build on them etc.
You need to check with the land registry to ensure the ownership of the land is regular- you have heard of situations where one piece of land has three owners registered on the same title.
Before committing money, invest some time and money as well into due diligence and get the right answers, from the right people about the most important questions such as ownership of the land, type of tenure system, local council planning restrictions as well as demand for the kind of property.
What advice would you give to someone who has money, but they don’t know the price, tax regime etc.; generally, where to start? Is there any one source of information where they can start from?
In the simplest terms, when you engage in property development, you are adding value to property or land, to earn a profit from the sale or rent of the developments. The development can either be a renovation of an existing property, conversion of a property from one user type to another or developing a vacant piece of land. Whether you are borrowing or building with your own cash, you don’t want to lose money. You want to get a return out of it.
Therefore, it is important that all t’s are crossed, and I’s dotted especially before and during development.
There isn’t a central place where you can go and collect all the information required, but developers need to take time out to study and understand what it is they’re getting involved in. You don’t have to be an expert at property development from the outset because there are people out there who can help you, but you still need a basic level of understanding and knowledge of what it is you want to do. For example, do you want to build townhouses, single-unit family dwellings, apartments etc? You need to have an idea before you go out looking for property to buy and develop.
You need to know where is your land— how big is it? How many units can fit on there? What is your target market? Where are you building? Is there a demand for the type of property that you’re building, where you’re building it? This is information that you can get from your real estate agents if you go and talk to them. Make use of the local council chairman to help you identify where these plots of land are.
You also need to understand how much money you need to have to be able to build the kind of property that you are building because you might wish to have eight apartments, but you can only afford four. After ascertaining how much money you need to take the development from the beginning to end, you then decide if you want to build at once or do it incrementally- but in that case, you need to ascertain that you have enough money for the different milestones. For example, if you say that you’re going to build from foundation to wall plate and leave it at that, make sure you have enough money to do exactly that. So, you need to figure out how much money is at your disposal and how much you can be able to borrow because you don’t need to have all the money that you need to develop the property.
If you are borrowing, you need to remember that the banks will not lend you all of the money that you need to build— they probably lend you up to 80% of the project cost, not the final value of the development. The bank won’t finance design costs or any other planning costs, only land purchases and construction costs, therefore you will also need to have some working capital.
If you have strong cash flows, strong financial cash flows and revenue streams, that will help de-risk your project and make it more attractive to the bank to lend you this money.
MADMEN, DREAMERS, AND DEAL-MAKERS - The Accidental Admen: How Uganda’s Creative Giants Found Their Way into the IndustryYou also need to understand the relationship between the sale price and the income that you’re going to get from the development when you rent it or sell it. There should only be 2 variable costs― sale price and build price. The rest should be as fixed as possible. All these are very important things that the developer needs to know. And as I said, the information is not in one databank so you have to talk to your lawyers, property advisors or real estate agents on where to buy for example, which property to buy and how much to pay for it. Talk to your architect, about what you should build on your piece of land, what can fit. Go to your town planning office, go to your district council, go to your city council and local planner to find out what is permissible where you want to build ad what are the requirements?
Again, look at the market that you’re building for. There’s no point in building something that the market doesn’t want. At the end of the day, we’re chasing profit. So, if you’re building something that the market doesn’t want, or doesn’t need, then you’re going to build at a loss or it’s going to take you a lot longer to sell whatever it is that you have built. That’s going to cost you especially if you’re borrowing from the bank.
The economy has been hit by Covid-19, including the real estate sector. How do we now recover from the Covid-19 pandemic as far as the real estate sector is concerned?
I think the biggest impediment or challenge to recovery has been the start-stop, start-stop strategy of managing the pandemic. And nobody’s to blame for that because I think the government has responded as the need arose. But unfortunately, because of the start-stop, we’ve lost momentum. As we’re just getting up and beginning to make things work and as businesses are beginning to steady their cash flows and as retailers are beginning to start trading, then we have another wave, and we have to stop again and go into lockdown again.
That’s why it is taking longer for some sectors of the economy to rebound. So, the only way to go about that and empirically what has happened around the world, is that recovery has been fast-tracked by increasing the vaccination regime. So, until we get as many people as possible fully vaccinated, we will continue having the various waves, the infection rates will continue going up and the government will have no option but to continue imposing the lockdowns and the restrictions.
Now, are there better ways of doing things better than we are doing? Yes. I think so. We need to ask ourselves, are the lockdown measures achieving their intended objectives in the first place? For example, we are the only country that still has, entire sectors completely locked down, yet we don’t have a real curfew at the end of the day, the objective is not being met, simply prolonging the curfew requirement. There is no way retail trade is going to improve when we’re closing at seven o’clock. For example, shops and or restaurants have to take their last orders at six o’clock and close by 6:30 pm because people need to go home. That sector of retail is completely dead, and they’re struggling, it’s going to take them a very long time to recover.
You know business is a whole ecosystem. For example, schools are closed, yet they are a very big source of demand for a lot of fast-moving consumable goods which then feeds into the bigger economy. The economy is interrelated and interconnected. At the end of the day, if retailers are struggling because the consumers are not there to buy the goods, then the landlords will struggle as well. The landlords have to give rebates because the tenants cannot afford to pay their rent and the vicious cycle continues.
So how are we going to recover? We will just hope that the vaccination rates increase, and infection rates are kept as low as possible on the one hand, and also government gives incentives and support to stimulate the economy and attract more investment into the country. We need to get more passengers coming in because it’s the same people that are feeding the hospitality sector and then the retail sector for example. Business needs to stabilise and begin to pick up in earnest because the traders, the office occupants, the students etc are all part of an interdependent ecosystem.
On average, Ugandans take 3 to four years to finish a home. Why is building in Uganda so expensive? Why does it take this long? Could it be a factor of cost?
It is a combination of many things but yes, build costs are generally quite expensive in Uganda. For a start, the land is expensive if the price of land is more than a third of the total project cost, the numbers begin not to make sense. The other reason is that the cost of materials is also quite high. East Africa has one of the highest costs of cement globally for one reason or another, as a result of the limited capacity of the local manufacturers to satisfy the rest of the market which is competing with demand from the infrastructure developments taking place.
Secondly, a lot of the finishing and fittings are also imported and the taxes on them is quite high, and this eventually feeds into the cost of the property. Although labour is relatively cheap, you also have the cost of finance which is high. All these factors result in increased costs of construction which have an impact on the cost and pricing of the property.
That said, we must support Buy Uganda, Build Uganda (BUBU) because a lot of the construction materials can be found here- steel, tiles, paint etc. It is just the finishes and fittings may be that we need to also work on and see if we can get good quality here.
What are your closing remarks on real estate investments in general?
First, I would like to agree with what the other panellists have said- as a first-time developer, start small, and grow as your sources of income allow you to grow. I also want to reiterate that real estate is an excellent asset class to hold, particularly if you’re using it as part of a diversified portfolio. Real estate is a good buffer for the different asset classes that one may hold because it is negatively correlated to stocks and shares for example. Additionally, please give your investments time to perform. You must know that there is a lead time to seeing returns. You don’t sow the seed and invest today, and you expect supernormal profits tomorrow. You must give your investments time to perform to be able to see if they’re profitable or not. Property is a long-term investment, not a fast-moving consumer good.
