Land prices in Kampala increased by 25.4 per cent over the twelve month period to June this year driven by increased demand after the opening of the land registry, Bank of Uganda’s (BoU) real estate indices have shown.

The real estate indices, which were introduced in 2011, also show a 4.2 per cent increase the cost of residential property between June last year and June this year and a 22.1 per cent decrease in the cost of commercial rental space between September last year and June this year.

BoU, in partnership with the Uganda Bureau of Statistics (UBS) introduced the three price indices for the real estate sector to help monitor price movements and use the information to strengthen financial stability amongst the country’s lenders.

“The rise in the land price index of 25.4 per cent in the year to June 2013, combined with a greater willingness on the part of banks to lend for mortgages and land purchase relative to the same period last year, suggests that many new borrowers will be acquiring homes and land with higher values,” said BoU in its latest financial stability report for the period ended June 2013.

The regulator however warned that the increase in the underlying indebtedness of households is likely to increase their vulnerability to a rise in interest rates.

BoU, which increased its benchmark rate – the Central Bank Rate - to 12 per cent from 11 per cent at the beginning of September to mitigate against inflation, said lenders should ensure borrowers will be able to service loans even if interest rates rise substantially.

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“Rapid increases in house prices should also make banks more careful about high loan-to-value ratio (LVR) lending. High-LVR lending would increase losses to the banking system and the wider economy in the event of significant reversal in house prices,” said BoU.

BoU and UBS generate the real estate indices to produce quarterly data on changes in the volume of real estate and prices paid by buyers for a representative basket of real estate properties and related services.

Tracking of real estate prices was one of the measures introduced by the regulator after a sudden surge in the volume of foreign currency denominated loans last year that raised concerns of a price bubble in the Uganda market.

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BoU said that the share of bank lending for land purchase to total credit to the real estate sector rose to 1.8 per cent as at June 2013 from 1.1 per cent in June 2012 but that this was not a very significant exposure by commercial banks which have been lending for land purchases, representing relatively low risk.

The regulator said that data from Uganda Revenue Authority (URA) also showed a rise in volume of land transfers and that the low values of land transferred in the quarter to March 2013 was attributed to the closure of the land registry adding that the URA data does not contradict the land price index which indicates an increase in the value of land for sale.

The decrease in the cost of commercial rental space and the high volume of mortgages for residential housing are however worrying the regulator.

It said commercial mortgages comprised 21.2 per cent of bank credit extended to the building, construction and real estate sector as at June 2013 and the 22.1 per cent reduction in the commercial rental cost index reflected a risk to commercial banks arising from the ability of borrowers and builders to repay loans.

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“The changes in rental cost may be partly caused by changes in exchange rate (for rent charged in foreign currency) or a drop in rental cost due to increased supply of rental space from the construction observed in the regions,” said BoU in the financial stability report.

The 4.2 per cent rise in the residential property price index between June 2012 and June 2013 was attributed to the rise in house prices over the period of time and this is expected to continue as economic activity picks up and if banks continue to report an easing of credit standards for mortgages.

“At bank level, as a ratio of lending to the real estate sector, residential mortgages account for 29.3 per cent of bank credit and so, banks should take into account the rise in house price inflation to avoid significant exposure,” said BoU.

The building and construction sector received 25.4 per cent of the total foreign currency loans last year and loans to this sector had more than doubled in value according to BoU banking supervision report for the period ended December last year.

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In the three months to September this year, the volume of foreign currency loans rose by 2.8 per cent to Ush3.13 trillion ($1.23 billion) from Ush3.04 trillion ($1.17 billion) as at the end of June 2013.

In the six months to June however, the volume of foreign currency loans had dropped by 3.9 per cent from Ush3.17 trillion ($1.18 billion) as at December 2012, after jumping by 56.3 per cent from Ush20.3 trillion ($821.8 million) as at December 2011.

The drop between June this year and December last year was attributed to the new measures introduced to curb the growth of dollar denominated loans.

The low interest rates s the main reason why foreign currency loans have remained popular.

In its latest monetary policy statement for the month of October BoU said that domestic currency denominated lending rates fell marginally to 23.10 per cent in August from 23.15 per cent in July, while foreign currency denominated lending rates increased to 9.57 per cent from 9.18 per cent.

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