High prices, loan rates lock East Africans out of property market

Tuesday June 28 2022

Apartment blocks. East Africa is grappling with housing shortage, while real estate investors blame high interest rates for low sales. PHOTO | SHUTTERSTOCK


East Africans interested in home ownership still have to walk a tortuous road even with the obvious shortfall in provision of affordable units.

Ugandans and Kenyans are particularly hard hit, with realtors in Kampala terming Bank of Uganda’s (BoU) decision to cap the loan to value ratio on residential mortgages and land purchases at 85 percent a tight lending condition that will translate into higher interest rates for housing loans.

In Kenya, the property market is facing uncertain times over falling investments and reduced demand for home ownership as growing inflationary pressures, both locally and globally, hit consumer incomes.

Investments in the sector through the Nairobi Securities Exchange are also attracting investor apathy. Kenya’s efforts to promote investments in the property market through the real estate investment trusts (Reits) are facing difficulties largely due to a punitive taxation regime, cumbersome and multiple land laws and high compliance and listing costs.

Read: Kenyan MPs double tax on sale of property and securities

A recent survey by the Kenya Bankers Association shows that investment in the property market is shrinking while the demand has also fallen.


Between October to December 2021, house prices declined at a much faster rate than the third quarter, according to the Kenya Bankers Association-House Price Index .

The prices contracted by a higher rate of 3.99 percent during the fourth quarter, compared with a contraction of 3.7 percent July to September

“The steady decline in house prices broadly reflects the headwinds in the economy that influenced both demand and supply characteristics of the market,” the survey says.

Low investments

The sharp drop in prices during 2021 reflected subdued investments that limited the rollout of new supply as demand remained low.

Early this month, the Bank of Uganda raised its benchmark rate to 7.5 percent among other loan conditions, which are set to further stress Uganda’s real estate developers and potential home owners.

The developers are also taking issue with policies by the government such as taxation on purchase of land and the landlord/tenant bill.

“On paper, lenders advertise 17 percent to 19 percent, but when you enter a banking hall, mortgage financing is out of reach for many ordinary Ugandans at over 24 percent including fees,” says Nicholas Arinaitwe, executive director of Real Estate Institute of East Africa.

Uganda shortage

While Kampala has seen many high-rise commercial buildings, Mr Arinaitwe says most developers opt for lowly priced short-term loans to fund these.

Uganda’s housing loan book expanded by a paltry 1.3 per cent in the first four months of 2022, BoU lending data shows. Residential mortgages expanded from Ush15,564 billion ($4.1 billion) to Ush15,767 billion (4.2 billion.

Michael Mugabi, managing director of Housing Finance Bank, blames the slow pick up of the EAC mortgage market on the Covid-19 pandemic.

“On the positive side, we are beginning to observe a persistent increase in sector activity, which is likely to be sustained over the long term, driven by improvements in the activity across other sectors of the economy,” Mr Mugabi says.

Bank Populaire du Rwanda Managing Director George Odhiambo notes that demand for housing exists but affordability remains a challenge due to incomes disruptions in the last two years.

The Democratic Republic of Congo faces the highest housing backlog in affordable housing finance in the region with a deficit of four million units.

Tanzania closely follows with a deficit of three million units, Uganda 2.4 million, Rwanda 2.3 million units and Kenya two million units.

In Uganda, realtors say the country produces an estimated 60,000 housing units against a demand of 200,000 housing units a year.

Rwanda borrowed concessional loans to create liquidity in commercial banks to start offering long term financing to the housing sector. The $150 million five-year Rwanda Housing Finance Project partly financed by World Bank has pushed downwards the mortgage rates to an average of 15 per cent per annum for commercial banks.

“There are schemes like Rwanda Housing Finance Project that go as low as 12.5 percent and there are highs of 17 percent per annum,” notes Mr Odhiambo.

But he says construction loans for residential units are higher at 18 per cent given the risks.

According to FinScope 2020, about 149,000 households in Rwanda have mortgages.

Low mortgage uptake

In Kenya, the outstanding value of non-performing mortgage loans increased to Ksh 28.3 billion ($241.88 million) from Ksh 27.8 billion ($237.6 million) in December 2020, according to the central bank.

The number of mortgage loans declined to 26,723 from 26,971 mainly due to a higher number of mortgage loans that were repaid compared to the number of new mortgage loans granted in the year impacted by Covid-19 pandemic and low levels of income.

The average interest rate charged on mortgages increased to 11.3 percent from 10.9 percent.

“While there are certain headwinds facing global debt and equity markets as well as geo-political tensions, we are confident that the East African property market offers clear value for investors wishing to make risk-adjusted returns in frontier markets such as Kenya, Tanzania and Uganda,” said Somaya Joshua, head of Africa regional operations at Absa Corporate Investment Banking.

According to Cytonn Investments Ltd investors in Kenya are expected to be more conservative in the residential market sector due to the upcoming general elections on August 9.

The investor firm noted that its outlook for the REITs market is ‘negative’ due to the continued poor performance of the Fahari I-REIT, which is the only listed instrument.

“We are still of the view that for the REIT market to pick, a supportive framework needs to be put in place to increase investor appetite in the REIT market,” the firm said.

Read: High taxation, multiple land laws curb growth of real estate investment trusts

According to a regional property developer Saif Real Estate, investments from Kenyans in the diaspora could boost the local housing market in 2022.

Kenya’s real estate market is primarily a rental market due to unaffordability of home ownership. It is estimated that only 20 percent of Kenyans living in urban areas own their homes.