THE STATE OF REAL ESTATE: A dozen key things in Knight Frank’s H1 2020 Uganda property report during and post-Covid-19

OPTIMISM AMIDST UNCERTAINTY: Knight Frank believes that amidst what seems like industry dark days, there is light at the end of the tunnel as pandemic-induced crises don’t tend to last long, and that Uganda’s real eastate market is known to be resilient to even the most aggressive shocks as seen after the 2009 global financial crisis and property depressions of the recent past.

Knight Frank Uganda, the leading property consultancy firm last week released their H1 2020 Kampala Market Performance Review and Outlook report, giving a more detailed insight into the property market since Covid-19 made a landfall in Uganda towards the end of March 2020. The report provides Uganda’s most authoritative insights on the office, retail, residential, and industrial sectors and is probably the only of its kind to date.

In light of the working from home phenomenon that was necessitated by the Covid-19 measures instituted by the government, the H1 2020 report has been enriched with a market survey on what businesses, business owners and occupiers think about working from home and the impact this would have on the future of commercial office space.

The report is presented against a cooling economy- Bank of Uganda this June lowered its 2020 growth projections to between 2.5 to 3.5 per cent  and said that growth won’t recover till 2021 (4 to 5 per cent) and finally fully recover to between 6 per cent and 6.5 per cent in 2022.

CEO East Africa’s Muhereza Kyamutetera here presents a dozen key insights from the report that every property owner/developer as well as tenants/occupiers, both present and future must know.

#1: Different property segments affected differently, but the retail sector was hardest hit

First of all, Covid-19 affected and continues to affect all segments of the market- retail, office, residential and industrial sectors, but each of them has been upset in dissimilar patterns and therefore the nature, form and duration of recovery will be equally differentiated. However, the retail sector was the hardest hit because of the more than 2 months of lockdown that kept shoppers at home. The retail situation was made worse because, by its nature, shopping is physical and experiential; most shoppers love to touch and feel before believing and buying. This is unlike in the office sector where there were options of working from home and moderated access to offices as partial opening started opening towards the end of April.

#2: Tight demand for new office space as most local and foreign inquiries are put on hold

2020, according to Knight Frank kicked off in high gear with “increased inquiries and interest in office space for rent on the back of a tight demand side that had been experienced by the market” throughout 2019. However, most of these inquiries that were largely from local and multi-national corporate organisations have “been put on hold as countries emerge from lockdown.”

#3: Prime rental space shaken but not yet stirred; liquidity pressures on tenants could see possible reductions in rental yields in the coming months:

Knight Frank reported that they were yet to observe a downward pressure on prime office rents, although they quickly put a caveat that it may be too early to tell. This is because, there was reported liquidity pressure on tenants that is pushing them towards revisiting their tenancy agreements. In response, there has also been a reported landlord reconsiderations on a case-by-case basis. Knight Frank envisages that in a “worst-case scenario” there will be approximately a 10 per cent to 20 per cent reduction on net annual rent collections for prime office properties this year. It also reported a reduction in occupancy of Grade A space from 93 per cent in H1 2019 to 84 per cent in H1 2020 and a slight increase in that of Grade AB from 81 per cent to 83 per cent.

The Knight Frank H1 2020 report says that it will rain before it shines and advocates for collaboration between tenants/occupiers and landlords, saying that there is a need to
achieve an optimum outcome which balances the consequences of the lockdown on both parties.

#4: Falling rents to impact rental earnings for landlords

Knight Frank predicts that as businesses get to work post-lockdown, they will be faced with constricting margins and lower profitability especially SMEs. This coupled with social distancing requirements could see low density use of space. For example in the survey done by Knight Frank – 17.98per cent of respondents said they will need to downsize their office space while 30.70per cent believe they will reduce the number of employees- which also could translate in less space demand. All this will subsequently affect capital values for landlords. Knight Frank predicts a high likelihood that rents will fall in the medium, especially in the subprime properties where the majority of tenants are from the SME sector and are unable to leverage off the balance sheets or financial support of global parent companies. According to the report, average net rent for Grade A office space averaged USD16 while Grade AB went for USD15 and Grade B for USD12 per square metre.

#5: Covid-19 to impact negatively on real estate lending

The central bank has predicted that overall non-performing loans this 2020, are likely to increase from 4.5 per cent to 10 per cent as a result of Covid-19. As a result Knight Frank projects that real estate lending which accounts for 21 per cent of all lending as such is likely to be affected as it is heavily debt-dependent. But by how much, the report says it is difficult to tell at the moment but the picture will become much clearer this H2, 2020.

#6: Slowed decision making on space expansion as clients enter into self and capital preservations mode

As businesses get to terms with the impact of Covid-19 on their businesses and plot post-Covid-19 recovery, there is a high probability that they “will most likely put a pause on their expansion or take up decisions for the next half of the year, as they wait to see how the business performs after lockdown,” according to Knight Frank. The authors of the property report also envisage that “occupiers are likely to reduce commitments to capital expenditure which will put fit-outs and other projects on hold as most corporate attention turns towards building financial resilience to ride out the storm.”  

#7: Working from home evolving as a strong alternative to working in the office, but the office is far from being gone

Knight Frank between 11th and 20th May 2020, conducted a survey, to understand occupier sentiments towards the future of Commercial Office Space in Uganda. The survey, which garnered a 97 per cent response rate, focused on understanding insights ranging from the working from home experience, social distancing to occupier sentiment with regards to commercial office space post-COVID-19. 

According to the survey, given the option between working from home and the office, 60.87 per cent preferred a balance between working from home and the office). Looking ahead, 41.74 per cent of the respondents believe the future of the office as a workplace will remain an important part of the business while 38.26 per cent want an either-or option.    “It can, therefore, be concluded that the future of the office as a place to work is still bright albeit a different workspace. Flexibility of office space will become the new norm as occupiers look at ways of balancing available space with social distancing guidelines. Employers and their staff are going to need a balance to ensure optimal output both in work and meetings,” observes Knight Frank in their report.

#8: Prime residential sub-sector worst hit; H2 2020 recovery dependent on airports reopening and expatriates returning

As everyone sheltered and worked from home albeit forcibly, it was not possible to have viewings of new spaces, thus affecting leasing and sales activity in this segment. Movement restrictions also meant that the transactions which were in the process of being concluded were put on hold, although these are slowly being revived by interested parties.

The prime residential sub-sector was particularly affected by the mass exodus of over 1,000 foreign nationals back to their countries at the onset of the lockdown in Uganda, leaving the fate of many tenancies for private rented accommodation in limbo, according to Knight Frank. All this was against an 11 per cent increment in the supply of residential apartment units from 2,006 units in H1-2019 to 2,230 units in H1-2020. The increase in stock vs low demand forced some landlords to discount their rents to be more competitive and reduce voids given the slow economic trend. It is therefore not surprising that prime residential rent rates declined from USD2,250 in H1 2019 to USD1,860 in H1 2020 for a 2-bedroom and USD2,750 to USD2,360 for a 3-bed room apartment. Average occupancy also went down from 78 per cent to 69.9 per cent. 

A 3-bedroom-apartment-for-rent-in-Kololo. Knight Frank says that the prime residential sub-sector is one of the worst hit and that H2 2020 recovery would be heavily dependent on airports reopening and expatriates returning

Regarding the residential sector, Knight Frank concludes: “Our outlook for the residential sector forecasts the next six months as one of the worst phases in terms of demand, particularly in light of closed airports and restricted air travel globally which will stifle demand for prime rental property from expatriates. It is most likely that leasing activity will remain below par during this period. Similarly, our outlook on future rental appreciation is bleak and we expect rents to either remain stagnant or slide under the current uncertain economic scenario.”

#9: Tight retail conditions as tenants and landlords work on a solution to stay afloat

Occupiers in the retail sector had a good year opening with sales growing at an average of 14 per cent for January and February 2020, reaching a peak of 20 per cent as shoppers did panic buying ahead of the Covid-19 lockdown. April 2020 sales nosedived by 52 per cent as most stores closed and traffic (footfall) reduced by 80 per cent as most people were locked at home.

This subsequently impacted major pipeline activities in the retail sector such as the planned opening of Turkish-based international fashion chain LC Waikiki’s 2000m² store at Acacia Mall, the largest LC Waikiki store in Africa, that was slated for July 2020 but was pushed to later in the year. The planned reopening of phase one of the redeveloped Metroplex Mall due for April 2020 was also deferred to later in the year.

Knight Frank says that the outlook after lockdown for retail trading remains uncertain, and “most landlords have undertaken to give stimulus solutions to their tenants on a case by case basis” to “achieve an optimum outcome which balances the consequences of the lockdown on both parties, against the symbiotic and mutual relationship needed for retail business to succeed.”

The report authors estimate that although the retail rental rates remained stable in the first quarter of 2020, there is a good probability that there will be a contraction of up to 30 per cent post lockdown, “depending on the ability of the general economy to bounce back, and consumer spending to return to pre-Covid 19 levels.”

#10: Declining imports, supply chain disruptions and crunches in manufacturing hurt demand and prices for industrial property

With China closing for business at the beginning of the year in their fight to contain the pandemic, imports into the country slowed down, affecting wholesale and subsequently retail traders who are the biggest source of demand for storage space. Additionally, the lockdown, saw several manufacturers slow down production or shut down altogether. This, added to an already slowing down industrial sector and reduced purchasing power as a result of dwindling disposable income, further diminishing the demand for warehousing space.   

Knight Frank reports that there’s yet to be a significant downward pressure on prime office rents, although it may be too early to tell. It is envisaged that in a “worst-case scenario” there will be approximately a 10 per cent to 20 per cent reduction on net annual rent collections for prime office properties this year.

#11: Valuation of properties to be affected; but full extent won’t be clear till about 6 months

From all the above, it is clear all sectors of the real estate market will be affected, albeit differently. Needless to say, those with good quality assets will feel less pinch than those with poorer quality assets. But overall, much as there is no clear-cut data yet, it is prudent to say, net rent collections will be affected and with that, capital values and subsequently property valuations too. According to Knight Frank, the full picture will fall into place over the next 6 months as “businesses will have had a chance to stabilise and make decisions on their space requirements.”  

#12: Collaborating and flexibility between tenants and landlords key to win-win solutions

Everybody- tenants and landlords, has been affected by Covid-19. Even after reopening, both parties still have to contend with cooling demand and new costs of meeting social distancing requirements. In the residential sector, sales transactions have slowed down considerably due to the lockdown, and the appetite for new developments seems to also be on a low for now. The mortgage market too will be impacted as banks reassess their risk appetite as developers and borrowers also wait to stabilise cash flows. Tenants will without a doubt be looking for rent concessions and or deferred rent payments to allow them the breathing space to reopen and revive their businesses after lockdown.

On the retail side, sales will remain under pressure for some time as jobs, incomes, the economy, and subsequently, consumer demand pick up. Amidst this, landlords and occupiers must work together to find middle grounds for landlords tend to win more sustainably when their tenants are winning too.

Conclusion: Optimism amidst uncertainty

Knight Frank concludes that although it is not yet clear when the Covid-19 pandemic will be brought under control and when the knock-on effects will end, generally health pandemic induced crises tend to not last longer compared to economic crises. In their view, “this is a health pandemic which has impacted the economy and not an economic crisis per se.”

The traditional crises and their knock-on effects on the real estate sector are normally driven by a combination of undercapitalised banks, over-leveraging (over-borrowing), oversupply and market sentiment, and the shocks tend to be more aggressive and take longer to overcome for this sector,” the report authors say, adding that: “there is a strong possibility that the Kampala real estate sector will return to normalcy and regain its posture sooner than we imagine.”

Our real estate market is known to be resilient to even the most aggressive shocks as seen after the 2009 global financial crisis and property depressions of the recent past,” concludes the report.

About the Author

Muhereza Kyamutetera is the Executive Editor of CEO East Africa Magazine; strategic communications consultant, social-economic analyst and travel enthusiast based in Kampala.