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Housing mortgages miss target market

By Patrick Kagenda

When Housing Finance Bank last week signed a Memorandum of Understanding (MOU) with Royal Palm Estates to offer mortgages to its clients to buy houses in Butabika, a Kampala city suburb, the housing sector got a rare buzz.

Interested buyers of the houses still have to fork out US$ 80,000 (Shs 155 million) for a three-bedroom bungalow and US$220,000 (426 million) for a four-bedroom.

As the news sinks in, experts are blaming the housing high price tag on government failure to implement an incentive regime for the critical sector.

Under their MOU, for example, Housing Finance is offering a 20-year mortgage financing to Royal Palm buyers at 17% interest per year. Clients will be required to make a 20% down payment while the bank pays 80%.

The houses will be the security because under the mortgage arrangement, although it is not a debt, the interest in a property is transferred to the mortgagee until either the mortgagor pays the pledge in full or the mortgagee moves to recover its interest in case the mortgagor defaults on payment.

Housing Finance is the third bank after Stanbic and Post Bank to go into mortgage financing in partnership with private estate developers.

Mr Khamali and Pradip Karia, both directors of Nationwide Properties praised the entry of banks into the sector.

‘This is what has been lacking in the sector,’ an excited Khamali said.

In November 2007, the World Bank arm, the International Finance Corporation (IFC) launched the Uganda Mortgage Finance Programme to encourage banks undertake home loan services. IFC was to provide long term local currency financing through partial credit guarantees and advisory services. Three banks; Stanbic Bank, Orient Bank, and DFCU, were involved in the programme. NSSF was expected to lend the banks a total of US$40 million, with IFC guaranteeing US$10 million of it.

NSSF has given Housing Finance and DFCU US$12 million in long-term loans for mortgage finance. It has also acquired substantial equity in Housing Finance and committed to recapitalising it to meet the demand for mortgage finance. The project has stalled possibly because NSSF is embroiled in other challenges regarding its other investments.

Yet the housing construction sector, both residential and commercial, remains significant. The 2008/2009 national budget figures indicate that it is growing at about 13 % per annum, contributing 14% of the Gross Domestic Product.

The country also has a huge market for houses. Sector experts estimate that Kampala city has a backlog of unmet demand for up to 52,097 home units that is increasing by 30% or 15,000 units annually. Another estimated 25,000 units in Kampala need to be replaced creating a housing shortfall of about 100,000 units in the city of two million people. Countrywide, there is a shortfall of 500,000 housing units.

With a 3% growth rate per annum, Uganda’s population explosion will have created a one million housing unit deficit in Kampala alone unless the rate at which houses are coming on the market increases.

However, Uganda has only about 4,000 housing mortgages.

A sector expert said the small number of mortgages distorts the Uganda property market and contributes to high property prices.

‘Because most Ugandans don’t have the pressure of bank interest to pay,’ the expert said, ‘they can afford to keep the cost and rents of their houses abnormally high.’

In the Royal Palms three-bedroom Shs 155 million mortgage arrangement, for example, the mortgagor would be required to make a down payment of Shs 31 million and remit Shs 500, 000 per month for 20 years. Under the four-bedroom Shs 426 million, the mortgagor would require a Shs 85 million down payment and Shs 1.4 million per month for 20 years.

‘The arrangement doesn’t make sense at all if you are investing for rent,’ a real estate developer told The Independent about the costs, ‘it only favours those with a speculative motive to buy and sell.’

The developers of Royal Palm say up to 60% of the cost of these houses goes to infrastructure development, which government does not provide, while 40% is the construction cost.

Normally, construction industry experts say, infrastructure development should constitute between 30 ‘” 40% of the cost of project. In the case of the Royal Palms Estate, they say the cost of infrastructure is higher possibly because the project includes schools, leisure parks, shopping malls, theaters, and a hospital.

In any case, the high prices lock out most potential buyers and they want the government to intervene with incentives to lower cost.

‘We need government to give us the incentives and tax holidays it is giving foreign investors,’ Khamali said.

The Minister of State for Housing, Mr Michael Werikhe, told The Independent, that government is to start working with the developers to provide infrastructure so as to make houses affordable for the middle class Ugandans. He says this is based on the NRM manifesto.

The NRM Manifesto says if a private investor makes a major development in the housing sector, the government will provide the public goods i.e. roads, sewage system, and public utilities or reimburse the developer.

If the government paid or provided a tax rebate of 60% to cover the cost of infrastructure, the cost of the Shs 155 million house in the Royal Palm Estate would drop to Shs 62 million and the monthly mortgage payment would be Shs 250,000 which is more affordable.

The real estate developers also want the government to make monthly housing mortgages tax deductible from the mortgagor’s gross income before calculating the Pay as You Earn (PAYE) tax.

Under the current arrangement, if a mortgagor earns Shs 5 million gross and pays 30% PAYE, their income balance is Shs 3.5 million; minus the Shs 1 million mortgage, their income balance is Shs 2.5 million.

If the mortgage is tax deductible, the same mortgagor would have a balance of Shs 2.8 million per month because the Shs 1 million mortgage would be deducted from their gross pay before PAYE i.e. Shs 5 million minus Shs 1 million equals Shs 4 million. In this case, PAYE is Shs 1,200,000 to be deducted from Shs 4 million leaving a balance of Shs 2.8 million. The mortgagor would save Shs 72 million over the 20 year period.

Housing Fincance Bank’s Development Finance Executive Director Patrick Kabonero, however, remains optimistic.

‘We mind about the credibility of our clients and advise them accordingly not to take credit risk they won’t manage,’ he said, ‘Housing Finance has been in the field of mortgage financing for the last 40 years and there has never been any failure in loan repayment by our clients.’

The bank has successfully financed the purchase of government pool houses, condominium flats at Bugolobi, Wandegeya and Bukoto, and homes in Nalya, Lubowa and Nsambya housing estates.

Kabonero said he is aware that the current global financial crisis begun in the United States of America when housing mortgagors failed to pay and banks, inundated with foreclosures, put a squeeze on further lending and drove the economy into recession because of a slowdown in general economic activity.

Sector experts warn that investors need to keep an eye on the global financial crisis because Ugandans working abroad have been the main buyers of houses.

‘If the global financial crisis persists; their remittances are likely to slow down,’ an expert said, ‘If that happens, they will buy fewer houses and banks will be left holding houses of defaulting clients with a lower value than the mortgages’.

For now, however, the price of houses in Uganda will either continue to rise or remain stable. Experts say that the price cannot fall because most houses are not acquired under mortgages and the owners will not sell unless the price is right.


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