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A report released today by one of the region’s real estates players, Cytonn investments reveals that 60% of residents in Kampala live in informal settlements as the country and the city is faced with a deficit of housing units of about 1.6m.
Reading the report, the CEO, Cytonn investments Johnson Denge reveals that performance on average for residential in Kampala has a yield of average 6.8%, commercial office 10.6% and retail at 10.2% compared to Nairobi which stands at 5.5%, 9.3% and 10.0% for residential, office and retail respectively with the driving factor attributed to increasing population, urbanization, infrastructure development, among others.
Now the finance minister, Matia Kasaija challenges real estate developers to ensure that they consider constructing housing unit to accommodate low income earners among them being those living in slams like Katanga, Katwe among others.
The real estate industry is now challenged to increase their investment priorities for the country to cut on the housing deficit in the country and Kampala and its nearby areas.
The report pointed out that the most attractive typologies and areas for development are Grade A offices (yield of 11.4%), 2-bedroom apartments in Kololo (yield of 10.0%), 3-bedroom houses in Naguru (yield of 8.9%), and 3-bedroom houses in Naalya (yield of 7.2%). This is mainly as a result of high demand for real estate residential units in these markets against low supply, and demand for institutional Grade A commercial offices.
Looking at the regions where we have done market research, Nairobi, Kampala and Kigali, Kampala ranked very compelling, coming up as the second most compelling market in terms of returns.
Speaking during the release of the report, Cytonn’s Managing Partner & Chief Executive Officer, Edwin H. Dande, noted that “Cytonn has over Kshs 82 bn of projects under mandate, across 10 real estate projects, all of which are in Kenya. It is not time to provide diversification to our investors. We have registered Cytonn Uganda, we have completed market research, we are now looking for opportunities in this market.” Edwin added that “Cytonn is going to partner will local experts and networks to do adapt what we have done in Kenya to the compelling Kampala market – delivering the best returns to our investors, housing the middle class, creating jobs and training entrepreneurs. We shall be targeting to deploy at least USD 100 million of investment in this market.”
Speaking during the release, Cytonn Investments Senior Manager, Regional Markets, Mr. Johnson Denge, noted that “before making any investment, our Research and Deal Origination (RDO) team spends time in the target market, collecting and analyzing data to make the best investment recommendation for our investors. 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.” Real estate in Kampala has attractive returns with average rental yields of 6.8%, 10.2%, and 10.6% in residential, retail and commercial office, respectively, against average rental yields of 5.6%, 10.0% and 9.3% for similar themes in Nairobi. Development of real estate continues to provide attractive returns, while delivering housing to combat the housing deficit of 1.6 million units in Uganda, which grows by 100,000 units per annum in Kampala alone. The key drivers for the attractive returns in the Kampala market for the best performing zones have mainly been high demand in the areas, ease of access from the CBD, and low supply in the market to cater for the high demand.”
According to the report, on average high end residential zones of Kololo, Naguru and Bugolobi had rental yields of 6.1% and occupancy levels of 83.9%, with Upper Middle Income areas consisting of zones such as Naguru, Mbuya, Ntinda, Muyenga and Lubowa having on average rental yields of 7.4% and 84.9% occupancy, middle income areas of Naalya, Kiwatule, Namugongo and Kira among others recorded average rental yields of 5.9% and 88.8% occupancy, with commercial offices having average rental yields of 10.6% at 86.0% occupancy and retail recording average rental yields of 10.2% and 71.2% occupancy. Speaking during the release, Cytonn Investments Head of Private Equity, Mr Shiv Arora, noted that “performance of the retail sector was construed by the high supply in the market as a result of a retail boom over the last five years that saw malls coming up next to each other in the City. We thus expect to witness reduced development in the retail sector with investment development activity being concentrated in the middle income residential sector and in Grade A offices in areas with low supply such as Kololo.”
To identify the investment opportunity in the Kampala Market, the report ranked the various submarkets based on rental yields, land prices per acre and state of infrastructure in the suburbs. Based on the ranking,For two bedroom units, Kololo and Nakasero were the best investment areas in the high end areas with Namugongo and Naalya being the best investment areas for two bedroom apartments in the middle class due to the lower land prices and higher yields,For three bedroom apartments, Naalya was the best investment destination for middle income areas due to improved infrastructure and Naguru the best for high income areas, For standalone units, Ntinda offers the best investment opportunity due to high yields of more than 6%, relatively low land prices compared to Nakasero and Kololo areas and good infrastructure including well tarmacked roads with access to main highways.
In the commercial office and retail theme, Grade A offices in Kololo offer the best investment opportunity due to the low supply and high returns with average rental yields of 11.4%.
The Report noted that the key drivers for the real estate market in Kampala are mainly population growth at 3.2% p.a, compared to a global average of 1.2% p.a, urbanization at 5.2% p.a compared to a global average of 2.0%, improved infrastructure, and increased incomes as seen through economic growth with an average GDP growth rate of on average more than 5.0% over the last five-years. The key challenges remain to be, high construction and infrastructural costs, inadequate off taker financing in the market and high financing costs of up to 28% hindering provision of affordable real estate products.