FINAL REPORT

HOUSING MARKET RESEARCH AND FOCUS GROUP SURVEY

CONSULTANTS: Universal Institute for Securities and Investments (UNISIS)

1

LIST OF ABBREVIATIONS

BoU Bank of Uganda CEO Chief Executive Officer DCA Development Credit Agency DFCU Development Finance Company of Uganda Limited EADB East African Development Bank FGD Focused Group Discussion FIA Financial Institutions Act 2004 GDP Gross Domestic Product HFCU Housing Finance Company of Uganda Limited MoFPED Ministry of Finance, Planning and Economic Development NGO Non-Governmental Organization NHCC National Housing and Construction Corporation NSS National Shelter Strategy NSSF National Social Security Fund NWSC National Water and Sewerage Corporation PEAP Poverty Eradication Action Plan SAS Shorebank Advisory Services UBOS Uganda Bureau of Statistics UEDCL Uganda Electricity Distribution Company Limited UNISIS Universal Institute for Securities and Investments USA United States of America USAID United States Agency for International Development

2 TABLE OF CONTENTS 1 INTRODUCTION...... 6 1.1 BACKGROUND ...... 6 1.2 OBJECTIVES AND PURPOSE ...... 6 1.3 TIME FRAME OF THE STUDY ...... 6 1.4 METHODOLOGY AND APPROACH ...... 6 1.4.1 Interaction with SAS Officials...... 7 1.4.2 Desk Research...... 7 1.5 FOCUS GROUP DISCUSSIONS (FGD S)...... 7 1.5.1 Residential Focus Groups...... 8 1.5.2 Commercial Focus Group Discussions ...... 8 1.6 CHALLENGES AND CONSTRAINTS ...... 9 1.6.1 Time...... 9 1.6.2 Bureaucracy and Reluctance to Provide Information ...... 9 1.6.3 Geographical and Thematic Scope Covered ...... 10 1.6.4 Limited Number of Upcountry Based Clients of HFCU ...... 10 2 FINDINGS OF THE STUDY ...... 10 2.1 SUMMARY OF INFORMATION GATHERED AND CLASSIFICATION ...... 10 2.1.1 National Housing Policy (2 nd Draft)...... 10 2.1.2 Housing Stock and Condition ...... 11 2.1.3 Economic Background and Highlights of the 2004/5 Budget...... 13 2.1.4 Land and Housing Markets...... 14 2.1.5 Population and Urban Growth...... 14 2.1.6 Legal Framework...... 14 2.1.7 Kampala Residential and Commercial Property Market Survey ...... 15 2.1.8 Contracting Capacity and Supply of Building Materials ...... 16 2.1.9 Summary of Residential FGD Findings (Quantitative) ...... 16 2.1.10 Summary of Residential FGD findings (Qualitative)...... 18 2.1.11 Summary of Commercial FGD Findings - Quantitative...... 22 2.1.12 Summary of Commercial FGD Findings – Qualitative ...... 23 2.2 HOUSING MARKET OVERVIEW ...... 28 2.2.1 Key Players in the Housing Finance Industry ...... 28 2.2.2 Analysis of Market Problems...... 29 2.2.3 Analysis of Market Supply and Demand...... 31 2.2.4 Market Opportunities...... 33 2.2.5 Market Weaknesses...... 34 2.2.6 Proposed Interventions ...... 36 3 CONCLUSION AND RECOMMENDATIONS...... 38 3.1.1 Action Planning and Strategy ...... 39 4 APPENDICES...... 40

3 EXECUTIVE SUMMARY

The study sought to ascertain demand and supply factors influencing housing, both residential and commercial, in Uganda as well as to establish HFCU’S loan mortgage market potential in Uganda and general public perception about their services. The study involved focus group discussions (FGDs), desk research, and discussions with key informants. A total of 5 FGDs were carried out and involved potential (90%) and existing customers (10%) of HFCU covering Kampala, Jinja, Mbarara, and Lira. The second aspect of the study was desk research to establish the policy and legal framework, status of the housing industry, nature of competition, demographics, and use of secondary data to project supply of housing units and changes in the foregoing factors for the next 5 years. Information gathered at FGD meetings and the Desk Research was validated with information from key informants.

This report is organised in 4 parts: Part 1 - Introduction - covers objectives, methodology and challenges faced when undertaking this assignment; Part 2 - Summary of Findings - covers the FGDs, Desk Research, information from Key informants, and the housing market overview (key players, market problems, weaknesses and opportunities); Part 3 - Conclusion and recommendations - includes a matrix of the action plan activities and the strategy; Part 4: Appendices.

The housing market in Uganda suffers major constraints on the supply and demand side. The housing backlog for Kampala alone is estimated at 52,097 (in 2002) units and growing by over 4,500 units a year at the current supply levels. The supply problem is aggravated by low prioritization of the sector by Government, limited sources of housing development funding, poor infrastructure, limited contracting capacity and poor enforcement of standards in the construction sector, lack of equipment, preference for bungalows (stand-alone houses) compared to flats thus limiting number of housing units per acre of land. The housing market is vastly undeveloped and fragmented with very limited use of mortgage financing. It is estimated that 80% of the residents of urban areas are salary earners, and 60% rent houses instead of paying mortgages. There are only 2

4 mortgage companies in Uganda with offices located in Kampala only. There is widespread ignorance about the use of mortgages to finance property development.

UNISIS established that there is a very large market for mortgages if the financial sector could evolve to provide longterm funding for property development and mortgages. Additionally, fundamental changes are needed in land and housing markets, security of tenure, along with transformation in the approach by players like HFCU to be more responsive to client needs.

5 1 Introduction

1.1 Background

HFCU is a leading mortgage financial institution in Uganda with its Head Office located at the center of Kampala and a sub-branch at Namuwongo. The company has been in existence since 1967 offering loans for housing and savings bank services. The shareholders for HFCU are NHCC (50%), wholly owned by the Government of Uganda, and NSSF (50%). HFCU commissioned Shorebank Advisory Services to develop a strategic business plan that will take a critical review of the industry and enable HFCU to reposition itself competitively in the market.

1.2 Objectives and Purpose

SAS contracted UNISIS to undertake housing market research to ascertain demand and supply factors influencing use of mortgage financing for investment in residential real estate in Uganda. The objective of this housing market research is to develop a thorough understanding of the mortgage market potential in Uganda and to ascertain general public perception of HFCU’s existing products and services. The study covered specific urban areas in Uganda particularly: Kampala, Entebbe, Jinja, Mbarara and Lira. Terms of Reference for this study are included under Appendix 1.

1.3 Time Frame of the Study

The housing market research commenced on Tuesday 12th October 2004 and was scheduled to be completed in 3 weeks with submission of a written report, acceptable to SAS, not later than 30th November 2004.

1.4 Methodology and Approach

The assignment encompassed 7 main tasks, as outlined under Appendix 2 of this report. These tasks include: Initial meetings and identification of information sources; collection and analysis of available data regarding existing and future potential borrowers; available housing supply data; conducting focus group discussions, preparation and presentation of

6 findings to SAS through oral presentations, email, preparation and submission of the draft/final reports to SAS.

1.4.1 Interaction with SAS Officials

UNISIS interacted with the SAS Officials via email, conference call, and meetings at various stages of the assignment. Initial meetings were held between Paula Tjossem of SAS and the UNISIS Consultants to generate a common understanding on the nature of the assignment and to agree on expectations and sources of information for Desk Research. This report summarizes the UNISIS’ findings after considering feedback from SAS Officials at various stages of this assignment.

1.4.2 Desk Research

The most notable and relevant documents reviewed included: the National Housing Policy (2 nd Draft) authored by Eddie Nsamba Gayiiya, former Chief Government Valuer; The Kampala Residential and Commercial Property Market Survey undertaken by NHCC in 2002; pertinent laws such as: Condominium Properties Act 2001, Land Act 1998 along with the Land (Amendment) Act 2004, Financial Institutions Act (FIA) 2004; Bank of Uganda Annual Report 2002/3; and to a lesser extent the National Shelter Strategy for Uganda (Volume 1) prepared by the Department of Housing, Ministry of Lands, Housing and Urban Development. Desk research also relied heavily on key informants for critical but sensitive information, such as competitor information.

Highlights of the review of documents and information from key informants collected during the desk research are discussed under Section 2 of this report. A list of sources, contact persons, and key informants is attached under Appendix 10.

1.5 Focus Group Discussions (FGDs)

As per the terms of reference, four residential focus group discussion meetings were held covering participants from each of the towns of Kampala (combined with Entebbe), Jinja, Mbarara, and Lira. Prior to holding the FGD meetings, an FGD tool was developed by the UNISIS and agreed to by SAS Officials. A pilot residential FGD was held in

7 Kampala on Friday 22 nd October 2004 to test and refine the residential FGD tool. A copy of the FGD tool and questionnaire are attached under Appendix 2.

1.5.1 Residential Focus Groups

The main client target of this assignment were potential (and to a limited extent) current residential mortgage consumers. UNISIS therefore selected FGD participants to generally comprise of potential non-clients (90%) and existing clients (10%) of HFCU. SAS and UNISIS agreed that FGDs would focus on the following population subgroups: Sub- group 1 (low income around Shs. 300,000 per month, junior level staff; Subgroup 2 (Middle level and senior management earning at least Shs. 500,000 per month; and Subgroup 3 (Top Management, Board members and Businessmen). Each FGD lasted about 3 hours and responded to the same tool. Results of the residential FGDs are summarized under Section 2 of this report. Profiles for the FGD Participants are indicated under Appendix 9.

1.5.2 Commercial Focus Group Discussions

While SAS indicated that HFCU primarily targets middle and high-income residential customers, UNISIS was asked to conduct 1 commercial FGD in Kampala to ascertain demand and supply factors for this niche of the market. UNISIS developed a tool and questionnaire, in consultation with SAS, which were utilized at the commercial FGD meeting on Friday 22 nd October 2004.

Commercial FGD participants consisted of owners of diverse properties, property developers (joint venture based and others), contractors, engineers, service providers (property lawyers and vendors of building materials), and property managers. UNISIS undertook a qualitative analysis of the FGD responses as well as quantitative analysis using SPSS software. Findings are discussed under Section 2 of this report. The commercial FGD tool and Questionnaire are included under Appendix 3.

8 1.6 Challenges and Constraints

1.6.1 Time

The major challenge for UNISIS was the limited time allotted to this assignment as UNISIS had to conduct 5 FGDs (3 upcountry and 2 in Kampala), of which one was a commercial FGD in Kampala. UNISIS had to develop the tools, questionnaires, and conduct 5 FGDs within 10 days. Four FGDs were conducted in a space of 2 days i.e. between 20 – 22 nd October 2004, three of which were held upcountry. The limited time caused some no-shows leading to average FGD participation of about 15 participants compared to the planned target of 20.

1.6.2 Bureaucracy and Reluctance to Provide Information

UNISIS faced a major problem when it came to getting useful data from agencies like Uganda Bureau of statistics (UBOS), Uganda Electricity Distribution Company Limited (UEDCL), and National Water and Sewerage Corporation (NWSC). Results of the Housing Survey undertaken by UBOS recently have not been released and were, therefore, unavailable to UNISIS. Owing to the shortage of current data on stock of houses at UBOS, UNISIS resolved to utilize paid-up electricity power connection applications per month as a proxy indicator for new houses coming up around the geographic areas of interest.

UNISIS took over a week to get data from the various locations at UEDCL but did not get the categorization residential customers by tariff bands so as to estimate the number and value the new units by tariff category i.e. lower end, middle end, and high end assuming that power usage has a strong bearing on the categorization of UEDCL domestic/residential consumers. Key informers, in many companies and departments, were reluctant to provide information for fear of breach of confidentiality with their employers.

9 1.6.3 Geographical and Thematic Scope Covered

This housing market survey covered Kampala, Entebbe, Jinja, Mbarara, and Lira. The same residential tool and questionnaire was utilized at all the locations, except for Kampala where the test tool and questionnaire were utilized for the residential FGD. Following the Kampala Residential FGD, substantive items of the tool were maintained but the text amended slightly for purposes of enhancing clarity of the questions for the participants. While SAS identified the above areas, UNISIS found Mbale to be a very vibrant area in residential housing development. Going by the proxy of paid up domestic applications seeking to be connected to UEDCL mains, Mbale rivals Mbarara in the number of housing units added each year.

1.6.4 Limited Number of Upcountry Based Clients of HFCU

UNISIS found it difficult to locate upcountry based clients of HFCU to include in FGD meetings except in Jinja where there were a large number of persons who bought Government pool using a HFCU mortgage. While UNISIS planned for FGD participants to comprise of 80% non-HFCU clients and 20% clients, it ended up with 90% non-clients and 10% clients of HFCU due to no-shows experienced.

2 Findings of the Study

2.1 Summary of Information Gathered and Classification

2.1.1 National Housing Policy (2 nd Draft)

While a 2 nd draft, UNISIS and SAS agreed to utilize the information in the National Housing Policy (2 nd Draft) because it is based on credible and verifiable sources of information. The policy cites the colonial policy of separation of Europeans, Asians, and Africans – and application of rigid rules as the major cause of uncoordinated peri-urban development. In an attempt to address this problem, Government came out with the first Policy on African Urban Housing in 1954. However nothing much was achieved until 1964 when NHCC was established with two objectives: firstly, to construct houses for rent or purchase by low-income persons, and to sell building materials at affordable prices.

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Owing to the political chaos of the 1970s, little was done to capitalize on the achievements of NHCC though there was a futile attempt to draft a comprehensive housing policy in 1978. After 1986, the Government outlined a National Human Settlement Policy aimed at provision of infrastructure and plots in urban areas. Accordingly, Government embarked on implementation of the Namuwongo Low Cost Housing Project and Masese Self-Help Women’s Project. Additionally, Government adopted a National Shelter Strategy (NSS) in 1992, in response to UN Resolution 41/90 on the international year for the homeless. Government, through this policy transformed itself into an enabler of individual households and private suppliers to play a primary role in the development of housing.

Implementation of NSS led to reforms in land tenure and management in the 1995 Constitution and the subsequent land Act of 1998. Government also divested itself from provision of physical housing to civil servants. The NSS was formulated within the Poverty Eradication Action Plan (PEAP) framework, which stipulated a minimum growth rate of 7% in GDP so as to reduce the proportion of people living below the poverty line from 35% (in 2001) to below 10% by the year 2017.

The construction sector has grown at a rate above 7% per annum since 1999, except for 2001 when it recorded a growth rate of 1.8 percent. This growth in demand has translated into increased demand for cement, bricks, iron sheets, tiles, and other building materials. Due to massive budgetary pressures and the poor state of the economy, the housing sector has not received a lot of institutional and budgetary support from Government.

2.1.2 Housing Stock and Condition

According to the Uganda National Housing Survey 2002/3 undertaken by UBOS, Uganda’s housing stock stands at 4.9 million units with an average household size of 5.1 persons (4.1 persons in urban areas). Urban households doubled in 10 years; from 0.4 million in 1992/3 to 0.8 million in 2002/3 though there was only a slight increment of about 1 percentage point in people living in urban areas. This indicates overwhelming demand for housing even with a marginal increase in population in urban areas. This

11 trend suggests overcrowding coupled with substandard housing conditions forcing residents to construct more units as the urban centers expand. Over 99% of the housing in Uganda has been built and owned privately with the bulk of urban population living in informally produced shelter. Access to infrastructure is still poor with less 9% (40% in urban areas) of the population accessing utilities like power for lighting. However, access to safe drinking water has improved from 57% of the population in 2000 to 68% in 2003. Access to safe drinking water is much better in urban areas at 84% of the population living there. Water is normally classified as safe if it is drawn from a tap (piped), boreholes, and springs.

The housing sector is characterized by poor quality housing especially in the rural areas and low-income, high density, urban settlements (slums). The Uganda National Household Survey of 2002/3 indicated that overall, most houses are in poor condition with 63% roofed with iron sheets and 35% grass thatched. Use of iron sheets for roofing in Urban areas stood at 86% of the housing units there while grass thatch was used for roofing 8% of housing units in urban areas. The floor materials are predominantly poor with 73% having earth floors and only 24% having cement floors. Table 1, below, shows materials used for construction of houses in rural and urban areas in Uganda.

Table 1: Households by Type of Roof, Wall and Floor (%age) Year, Area, 1999/2000 2002/2003 Materials Used Rural Urban Total Rural Urban Total Type of Roof Total 100 100 100 100 100 100 Iron Sheets 52 87 57 59 86 63 Thatched 48 8 42 41 8 35 Other Roof 0 5 1 0 5 1 Type of Wall Bricks 34 72 40 45 77 51 Mud and Poles 63 23 56 52 17 46 Other Wall 3 5 4 3 6 3 Type of Floor Cement 12 72 22 15 67 24

12 Year, Area, 1999/2000 2002/2003 Materials Used Rural Urban Total Rural Urban Total Earth 88 28 78 83 27 73 Concrete/Stone 0 0 0 1 5 3 Other 0 0 0 1 1 0 Other roof includes tins, tiles, asbestos; other wall includes wood, stone with cement, blocks; other floor includes wood and any other not explained. Source : Uganda National Household Survey 2002/2003 (UBOS).

2.1.3 Economic Background and Highlights of the 2004/5 Budget

Uganda’s per capita income was Shs. 376, 951 (approx. US$210) in 2002/3. The real GDP growth rate in real terms for 2003/4 was 6% up from 5.2% in 2002/3 (Article 7: Budget Speech 2004/5, MoFPED). The budget deficit for 2003/4 stood at 11.5% of GDP and was projected at 11% for 2004/5. Uganda’s external debt stood at US$ 4.2 billion as at end of June 2003; representing 67.2% of GDP. This implied a total debt service of US$ 101.1 million per year or 12.8% of total exports of goods and services (BoU Annual Report, 2002/3). In the Budget Speech for 2004/5, the Minister of Finance announced reforms in the pension sector that will lead to payment of Shs. 300 billion in pension arrears over the medium term along with an allocation of US$ 20 million to rehabilitate existing land records, establish a land information system, and to equip zonal land offices.

While the economic outlook is gloomy in terms of inflation, per capita income, debt burden, and low prioritization of the housing sector – the resolution of pension arrears worth Shs. 300 billion will inevitably translate into increased demand for housing as these payments will go to salary earners who are biggest residents in urban areas (over 76% of FGD Participants) and renters (57.4% of FGD Participants, and 61% of participants in the NHCC Housing Survey, and 65% of Kampala Residents according to the UBOS National Housing Household Survey 2002/3) of residential properties in urban areas.

13 2.1.4 Land and Housing Markets

Land and housing markets are mainly informal with a few institutionalized property dealers located in urban areas. According to the Uganda National Housing Survey 2002/3, fifty four percent (54%) of the households live on customary land while 35% live on freehold land. Leasehold and Mailoland each account for 4% of land ownership types in the country. The Northern Region has the highest number of households living on customary land (85%) while freehold and Mailo are the most common in the Central region (Buganda, includes Kampala and Entebbe but excludes Jinja) accounting for 83% of the land in the region. Land ownership and level of urbanization have a direct bearing on marketability of real estate. It is not surprising, therefore, that most land and housing markets are more developed in the Central Region. With the institution of the Land Act 1995, Condominium Act 2001, increasing interest by institutional property developers, and Government allocation of US$ 20 million in the 2004/5 Budget towards reform of the Land Registry; the land and housing market is expected to gain momentum within the next 5 years.

2.1.5 Population and Urban Growth

According to the Uganda Population and Housing Census 2002 undertaken by UBOS, Uganda’s population in 2002 was 24.7 million people, of whom 12.1 million (49%) were male and 12.6 million (51%) were female. Only 2.9 million people (12%) live in urban areas with 41% of these living in Kampala alone. The percentage of urban population living in Kampala declined compared to 56% in 1969 meaning that other urban centers are gaining prominence. Uganda’s urbanization rate of 4.6% may not be sustainable given the escalating backlog in housing supply and limited investment in housing infrastructure; both leading to development of slums along with the attendant problems of poor structures, poor sanitation, and diseases.

2.1.6 Legal Framework

The 1995 Constitution introduced fundamental reforms in the tenure, ownership and management of land. While it addressed the ownership of land by declaring customary land a legal tenure with permanent ownership similar to freehold, its implementations has

14 been slow; we were advised that no single customary land title has been issued since the law was enacted in 1995. The 1995 Constitution also protected lawful and bonafide occupants on registered land. The Land Act of 1998 operationalized the 1995 Constitution and gave rights to vulnerable groups like children, women and orphans. The 1995 Act requires mandatory consent of spouses to transactions involving a matrimonial home. While the 1995 Constitution clarified tenure issues thus widening the market base for land and housing, spousal restrictions on the matrimonial home raises issues that should be addressed critically prior to consummation of a mortgage transaction.

The passing of the Condominium Act 2001, along with the promulgation of the Model Rules for Residential Condominiums (2003) by the Ministry of Works, Housing, and Communication also provide immense opportunities on the supply side. As a consequence, NHCC is undertaking sale of its 1,500 flats in Nakasero, Bugolobi, and Bukoto.

Clarification of land tenure and passing of the supporting laws along with the institutional framework is a positive development in boosting supply of land and housing. However, lack of infrastructure, inadequate capacity and tools of urban planning, insufficient coordination among actors and bureaucracy severely impair development of land/housing markets. UNISIS does not anticipate major changes in the legal framework in the next 5 years but the country is bound to see a lot of mobilization of resources to take advantage of the enabling environment to develop large housing estates.

2.1.7 Kampala Residential and Commercial Property Market Survey

This survey was undertaken by NHCC in February 2000 to investigate housing and demand factors in Kampala, housing preferences, market potential for various specified housing, level and quality of services required in the housing options. Based on the findings, the Corporation would pursue strategies that facilitate development and marketing of houses in planned estates. According to this survey 61% of respondents rent houses, 49.7% prefer houses costing less than Shs. 44 million, 54% prefer completed

15 houses, 56% preferred payment in installments, 85.9% could afford mortgages not exceeding Shs. 25 million, and 32% preferred mortgages of 5 to 10 years.

The most preferred house type was a bungalow (61%) i.e. standalone, self contained, non-storeyed house. Fifty-six percent (56%) of the respondents preferred houses with 3 bedrooms. Among the NHCC sites, Lubowa was the most preferred site with 29.4% of the respondents followed by Kireka with 27.3% of the respondents. A fully completed house was the most preferred with 54% of the respondents, a view that was reinforced by 72.4% of participants in our FGDs. Going by these findings, Ugandans’ preference for completed houses is on the increase.

The report estimated an annual housing need of 9,578 units in Kampala alone and put the formal market supply as at 5,000 units per annum which will only worsen the backlog of 52,097 housing units (as estimated in 2002) by a further 4,578 units per year.

2.1.8 Contracting Capacity and Supply of Building Materials According to the National Housing Policy (2 nd Draft by Eddie Gayiiya), the construction industry in Uganda suffers from poor coordination, lack of capacity, and limited use of professional services due to the perceived high costs involved. Heavy use of imported materials and technology escalates construction costs. Lack of equipment and skills along with use of poor of materials compromise the quality of buildings. Government has not promoted the use of local materials through research and standardization as evidenced in the low budget allocation and prioritization of the housing sector.

2.1.9 Summary of Residential FGD Findings (Quantitative)

The analysis of responses to the quantitative questionnaire is summarized as follows:

a) Gender: 72.3% of the FGD participants were male and 27.7% were female. According to the UBOS National Household Survey 2002/3, women constituted 5.5% of the population in paid employment in Uganda. UNISIS deliberately decided to have more women in the focus groups than the national percentage of

16 women in paid employment, due to their importance in making home acquisition decisions. b) Age: 76.6% of the FGD participants were aged between 25 to 40 years with 48.9% aged between 30 to 40 years. The UBOS National Household Survey 2002/3 also indicates that Uganda’s population is very young with 52.4% below 15 years of age. UNISIS views this young population as a big market for residential housing, and a challenge for Government and the private sector to supply sufficient housing units to meet the high demand in the next 20 to 30 years. c) Size of Income and Source: 15.2% of the FGD participants earned not more than Shs. 300,000 per month; 60.9% earned not more than Shs. 500,000 per month while 80.4% earned not more than Shs. 900,000 per month. Salary earners accounted for 80.9% of the FGD participants. While FGD income figures cannot be assumed for the total population, the distribution generally reflects the high incidence of potential clients in the lower income brackets i.e. not exceeding Shs. 500,000 per month. HFCU may target these through mortgage products tied to salaries and repayable in a short period e.g. 2 years. d) Owner-occupier versus rental: 57.4% of the FGD participants live in rented houses and hence the high frequency (29.4%) of semi-detached units, as these are the most common residential rental properties around Kampala. The National Household Survey 2002/3 indicated that 64% of the population in Kampala live in semi-detached units. The NHCC Housing Survey (2002) put the percentage of renters at 61% though it covered Kampala only. UNISIS thinks this trend will subsist for the next 5 years but may change in the medium term as Government and the private sector devote money and resources to the development of large housing estates for sale to the public.

17 e) Level of completion and house type: 72.3% of the FGD participants preferred purchase of fully completed houses such as bungalows, condominiums, semidetached units, and flats. When probed for their preference if they were to build from scratch, FGD participants preferred own construction (hire and supervise technicians) to use of a fully-fledged contractor. Preference for a completed house especially in the lower category implies that participants would compromise their strong desire for own construction and purchase completed housing units if quality of work and a reasonable price can be guaranteed.

A detailed summary of quantitative responses for residential FGDs held in Kampala, Jinja, Lira and Mbarara is included under Appendix 4.

2.1.10 Summary of Residential FGD findings (Qualitative)

UNISIS conducted FGDs based on tools and questionnaires agreed to by SAS. Responses were classified into 3 categories i.e. highly rated, medium rated and low-rated. UNISIS did not undertake a headcount of participants per response in the qualitative section but classified responses based its assessment of general interest in the response. Accordingly, UNISIS estimated highly rated responses to have generated over 80% consensus, middle rated responses generated 50% to 79% consensus, and low rated generated less than 50% consensus among FGD Participants. The following highlights are therefore, subject to the above observations and the responses are presented in order of declining importance (most important, first). This section should be read in conjunction with Appendix 6, which presents a ranking of highly rated and other FGD responses.

a) Reasons for investment in real estate : Participants in Kampala and outside Kampala cited the desire to own a family home as the major reason for investment in a residential property. Participants outside Kampala cited affordability (availability of income) and peer/social pressure as the other reasons for investment in a residential property. Besides the desire to have a family home, participants in Kampala were more income focused as they considered rental income and rental savings as their next reasons for investing in a residential property.

18 b) Reasons for renovation : Participants outside Kampala cited family expansion as the major reason for renovating a property followed by social pressure, then improvement of a house and cultural ties or events as the other reasons. Kampala participants cited business income as the major reason for renovating a property. Their other reasons, in order of declining importance, include pressure from tenants and competitors in the neighborhood, improvement of security through adding a wall fence and burglar proofing, family expansion, and fitting of utilities. c) Reasons for building (from scratch): Participants outside Kampala cited the desire to customize property to their own specifications and lower cost compared to purchase as their major reasons for building houses from scratch. Participants from Kampala cited customization to meet own specifications/tastes, building at own pace, and lower cost compared to purchase as their reasons for building from scratch. Kampala participants, however, alluded to the fact that they suffer high costs of rent for houses they occupy while building their own. d) Considerations before Investment in a residential property: Participants outside Kampala cited source of income, political atmosphere, marketability, location, cost, type of tenure and security at location as key considerations for investment in a residential property. Most participants from Kampala cited income, location, return on investment, cost, terms of purchase and payment, type and clarity of tenure, type of building and its status as their major considerations prior to making the investment. e) Reasons for not investing in a residential property: Participants outside Kampala cited lack of knowledge, fear of fraudulent titles and disputes, lack of funds, insecurity, other family priorities, and poor neighborhoods as their major reasons for not investing in a residential property. Participants in Kampala cited lack of income, fear of fraud, risk of political instability, bad location, terms of purchase and age of building as their major reasons for not investing.

19 f) Events influencing purchase: Participants outside Kampala cited events like marriage, age of the children coupled with school fees obligations, family size (getting children and dependants), and age of the head of the family as major events influencing investment in a residential property. Participants in Kampala cited level of income due to a promotion or better employment, marriage, family size (children and dependents such as HIV orphans), improvement or detorioration in security, and peer pressure as events that influence their decision to invest in residential properties. g) Perception of mortgages: Participants outside Kampala perceive mortgages as very risky products with unfavorable terms (expensive) and have little information about them due to lack of sensitization. Participants in Kampala perceived mortgages as an avenue to loss of ones property, products with unfavorable terms, and with little or no supporting sensitization programs. The word ‘mortgage’ was generally resented by participants. UNISIS suggests the use of terms such as ‘Housing Loan’ or ‘Building Loan’ or ‘Home Acquisition Loan’ instead of ‘mortgages loans’.

h) Reasons for taking a mortgage loan: Participants outside Kampala cited lack of lumpsum funds and payment in manageable installments as their major reasons for opting to take a mortgage loan. Participants in Kampala cited lack of alternatives, saving in time to complete and occupy a house, and the desire to acquire property (accumulate wealth) as their major reasons for taking a mortgage loan.

i) Reasons for not taking a mortgage loan: Participants outside Kampala cited income insecurity due to unstable business and job insecurity, unfavorable terms of the mortgage, lack of collateral, and bad past experience with banks as major reasons for opting not to take mortgage loans. Most participants in Kampala cited fear of loss of property, unfavorable terms, and lack of knowledge about products

20 as major reasons for not taking loans. UNISIS thinks that fear of loss of property is more pronounced among Kampala participants due to ease of marketability of Kampala properties, which makes mortgage companies less tolerant to defaulters with Kampala collateral. j) Other sources of funding : Participants cited savings; salary based loans from employers, banks and microfinance institutions; suppliers credit, other income from other businesses, corruption proceeds, and to a lesser extent donations (including remittances from abroad) from family – as their other sources of funding. k) Household considerations for acquiring a loan: Participants outside Kampala cited terms of payment, purpose of the loan, other needs of the family, and adequacy of income as key household considerations prior to taking a mortgage loan. Participants in Kampala cited inadequacy of income, terms of the loan, size and purpose of mortgage, and availability of alternative sources of funding as key household considerations prior to taking a mortgage. Strong views were aired to the extent that the head of the household reserves the right to make the decision without involving the family in the decision process. However, Section 39 of the Land Act 1998, as amended by Section 20 of the Land (Amendment Act) 2004, makes spousal consent mandatory for transactions involving the family home. This consent requirement is now widely enforced by financial institutions in Uganda. l) Knowledge about HFCU products: Upcountry participants did not know much about HFCU products. Even Jinja participants indicated that they entered a packaged deal involving the sale of Government pool houses but did not know much about the details. Kampala participants did not know much about HFCU products except for a few mortgage clients who knew the terms of the products. Participants did not know much about HFCU savings and other products.

21 However, participants generally regarded HFCU to be synonymous with mortgages.

m) Quality of HFCU services: Most participants expressed ignorance on the quality of HFCU services since many were not clients of HFCU. Participants who were mortgage clients of HFCU, commented on poor service in respect of slow processing and poor customer service especially during collection of arrears. Participants were uncomfortable with advertisements of defaulters in the print media, use of aggressive debt collectors, and rushed foreclosure of collateral even in cases of a minor default.

n) Consultation before purchase: Most participants preferred to consult with a person with previous experience with mortgage loans from HFCU or other provider, then spouse and family, and business associates.

A detailed summary of qualitative responses for residential FGDs held in Kampala, Jinja, Lira and Mbarara is included under Appendix 6.

2.1.11 Summary of Commercial FGD Findings - Quantitative

Of the Commercial FGD participants, 77.8% preferred a shorter repayment period (5 to 10 years), compared to the 42.6% of the Residential FGD participants who preferred repayment periods not exceeding 10 years. Commercial participants underscored the importance of matching the repayment period with the payback period on the investment, which was generally noted to be between 5 to 10 years. Salary earners expressed willingness to take a mortgage to invest in commercial real estate and repay with payroll deductions provided their monthly installments do not exceed 40% of net monthly salary.

Most of the participants (66.7%) derived their income from business, 11.1% from salary only, and 22.2% from salary and business. Mortgage providers like HFCU have to realize that salary is a potential source of repayment of mortgages for commercial real estate and may consider launching into funding commercial real estate through this avenue. 44.4%

22 of the participants indicated preference for a down payment not exceeding 12% of the loan amount though 11% were comfortable with a down payment of 40 percent. UNISIS thinks down payment will range between 30% and 50% among key players for the next 5 years. A detailed summary of qualitative responses for the commercial FGD is included under Appendix 5.

2.1.12 Summary of Commercial FGD Findings – Qualitative

Whereas commercial FGDs were not the primary target of this assignment, UNISIS was asked to conduct one commercial FGD in Kampala to determine supply and demand factors for this niche of the market. UNISIS conducted a commercial FGD using a tool and questionnaire agreed to by SAS. The commercial FGD was divided into two homogeneous groups – the group of property owners and the group of service providers. Responses were classified into 3 categories i.e. highly rated, medium rated and low-rated.

UNISIS did not undertake a headcount of participants per response in the qualitative section but classified responses based on its assessment of general interest in the response. Accordingly; highly rated responses were estimated to have generated over 80% consensus; middle rated, 50% to 79% consensus; and low rated, less than 50% consensus among FGD Participants. This section should be read in conjunction with Appendix 7, which presents a detailed ranking of commercial FGD responses.

The following highlights are therefore; subject to the above observations and the responses are presented in order of declining importance (most important, first).

a) Reasons for investment in commercial real estate: FGD participants cited earning a good return in form of rental income and capital gains (appreciation in value of the property over time) as their major reasons for investing in commercial real estate.

b) Reasons for renovating: FGD participants cited customization to specific needs as the major reason they would undertake renovation of a commercial building.

23 Property developers cited enhancement of security e.g. through addition of a perimeter wall as their next reason for undertaking renovations while service providers considered tenant requirements as the next reason for undertaking renovations. UNISIS thinks this difference arose from the fact that service providers were more conversant with the uptown commercial premises where big high value tenants are mostly located. These tenants often bargain for structural changes to suit their needs. Expansion to maximize on space utilization and mandatory adjustments required by agencies like NEMA and KCC were cited as reasons for undertaking renovations. Peer pressure was not considered a major reason for undertaking renovation of commercial properties. c) Types of property in order of preference: Property owners mostly preferred investment in residential houses for rent or sale followed by schools and hostels. Service providers, however, ranked warehouses highest followed by shopping malls and schools. Service providers rated houses for rent or sale and hostels lower than the property owners. UNISIS noted that property owners do not have a broad view of the sector but tend to invest with a very narrow focus e.g. investing in residential houses for sale or rent. Consequently, UNISIS recognized a need for sensitization of property owners to appraise alternatives and seek a higher return in their investment decisions. d) Primary areas of opportunities: Commercial FGD participants rated Kampala and its suburbs most attractive followed by Entebbe and Mbarara. Lira was middle rated but Jinja was rated very low due to its poor local economy. Location of a property was a very key factor in this niche with International agencies (Diplomats, Corporates, and Investors) regarded as the most attractive tenants. e) Considerations before investment: Property developers rated demand and location highest followed by return on investment and availability of income as their major considerations before investment in real estate. Service providers rated availability of income as their major consideration followed by demand

24 influenced by location of the premises, return on investment, marketability of property, and security in the area. While the participants generally preferred freehold (Mailo) land, they were willing to invest on leasehold land, as this is the most common in the urban areas. f) Reasons for not investing: All participants rated insufficient income highest as their reason for not investing in commercial real estate. Property owners then considered poor location and political instability as their other major reasons for not investing. Service providers, on the other hand, rated fear of fraudulent dealers and availability of superior investments as their other major reasons for not investing in commercial real estate. As discussed earlier, service providers had a broader view of the sector and were aware of the investment options available and hence the difference in ranking of reasons under this item. g) Market changes that may influence the decision to invest: Service providers rated losses in core business, changes in demand for the premises, and taxation rates as major market changes that may influence their decision to invest in commercial real estate. Most of the property developers in the FGDs did not regard commercial real estate as their core business and would consider investments in real estate only if their core businesses are operating smoothly. Service providers considered changes in interest rates as the most important market parameter influencing their decision to invest followed by changes in government policies on (economy, housing sector, major projects to be undertaken). h) Perception of Mortgages: Property owners perceived mortgages to have very stringent requirements (e.g. collateral, business plans, financial records) and terms (downpayment, high interest rates). Property owners also perceived a lot of bureaucracy and delays in the processing of mortgages. Service providers perceived mortgages to have limited providers and hence the slow pace of utilization of mortgages to fund property development. Service providers noted

25 that few property owners have business plans and financial records, except those that regard real estate as their core business. Generally all participants were concerned about the bureaucratic process and delays in processing mortgages. i) Reasons for taking a mortgage: All participants cited limited resources as the main reason they would take a mortgage. Property owners then considered the need to leverage their resources and to accumulate wealth as the other reasons. Besides limited resources, service providers cited attractiveness of terms and easiness (small installments paid) on cash flow as their other major reasons for taking a mortgage. While property owners generally disliked loan monitoring, service providers liked it and maintained that it promotes good financial discipline. These responses underscore the need for sensitization of property owners on the importance of loan monitoring. j) Reasons for not taking a mortgage: Property owners cited stringent requirements and unattractive terms as their major reasons for not taking mortgages. Property owners then considered insufficiency of income to service loan, ignorance and lack of collateral as the other reasons for not taking mortgages. Service providers rated sufficiency of own resources, ignorance, and risk aversiveness as major reasons for not taking mortgages. Considering these responses, potential mortgage clients have collateral to pledge but have a big attitude problem towards the product. k) Other forms of finance: All participants rated savings highest as the other source of funding for property development. Property owners then cited salary loans and to a limited extent, moneylenders as other potential sources of funding. Besides savings, service providers rated commercial loans higher than salary loans as their next sources of funding. Service providers also noted microfinance loans as an increasingly important alternative source of funding. These differences in rating of alternative sources are brought about because most property owners operate very informally limiting their access to sources like commercial loans from banks.

26 l) Factors in evaluation a mortgage: Property owners cited purpose of the loan as the major household consideration followed by collateral, willingness of family members, and terms of the loan as the other family considerations. Service providers differed and maintained that the investment should be appraised professionally with little household intervention. While the professional evaluation cannot be overlooked, it is important to note that many commercial properties are owned by individuals/families and not big corporates. Responses of property owners would be very important considerations in the design of marketing programs to target family/individual investors in commercial real estate.

m) Knowledge of HFCU products: Property owners did not know much about HFCU products. Service providers, however, knew about the mortgage product. Service providers, generally heard about banking services provided at HFCU but could not list the various products and their associated terms.

n) Knowledge about HFCU services: Participants noted poor customer relations especially in the event of default and lack of marketing as the major characteristics of HFCU service delivery. Participants, however, noted that HFCU provides the cheapest mortgage product on the Ugandan market.

o) Person consulted before taking a mortgage : Property owners would consult mostly with people with past mortgage experience, then their spouses, contractors, and loan officers at financial institutions. Service providers would consult with company accountants and lawyers before consulting with persons with past mortgage experience and contractors in that order. This underscores the fundamental difference in marketing strategies for individual property developers and to institutional investors. HFCU could market its mortgages to individual owners by using its existing clients and reach out to institutional investors through professionals such as accountants and lawyers.

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p) Form of disbursement : All participants preferred direct disbursement to the borrower. The borrower would be responsible for monitoring to ensure implementation of the project. Alternatively, disbursement would be made directly to the contractor but this partly shifts the responsibility of monitoring to the financier.

q) Other support services: Property owners requested sensitization of the public on mortgages, expansion of branch network by mortgage providers to cover most urban centers in Uganda, and provision of professional services such as legal and valuation services. Service providers requested support toward formation of joint ventures to develop large housing estates and provision of professional services.

r) Perception of insurance : Property developers perceived insurance as a ‘necessary evil’ but service providers perceived insurance as key and recommended that it should be made mandatory. Again this points to the need for sensitization of property owners on the need for insurance, especially in a mortgage transaction.

2.2 Housing Market Overview

2.2.1 Key Players in the Housing Finance Industry

There are two established housing finance companies in Uganda: HFCU that has offered mortgage services since 1967; and DFCU Mortgages that started operations in 2003. HFCU is located in the heart of Kampala with a single branch at Namuwongo. HFCU offers mortgages with a repayment period of up to 20 years at 16% - 18% per annum. DFCU offers residential and residential commercial mortgages not exceeding 7 years at 19% and 23%, respectively. Mortgage rates are variable which means they may be adjusted to respond to changing money market conditions. Potential new entrants on the market include Stanbic Bank Limited, microfinance institutions such as Uganda Microfinance Union, and East African Finance and Leasing Limited. The potential new

28 player to watch is Stanbic Bank (Uganda) Limited with its wide branch network, expertise and international linkages.

It is worth noting that the maximum loan term offered by DFCU Mortgages (7 years) is less than half of that offered by HFCU (20 years). UNISIS thinks the reasons for the shorter loan term at DFCU range from customer responsiveness, compliance to stringent liquidity requirements under Sections 28 of Financial Institutions Act 2004, and funding constraints due to lack of long-term debt instruments on the market.

2.2.2 Analysis of Market Problems

a) Lack of financial intermediaries to provide households and developers with long-term loans. Most FGD participants cited savings from salary and business as their main source of funds for housing development. Many of the FGD participants were living in rented houses, a fact also supported by the NHCC survey where 61% of their participants lived in rented houses. This is a fundamental distortion that has to be corrected so Ugandans can cease to be rent- payers and become mortgage payers.

b) Shortage of mortgage financing at reasonable terms is also a big problem in the market. Most FGD participants complained about the high interest rates generally charged on mortgage loans, aggressive collections methods, high equity (down- payments at 30% for residential properties in Kampala and 40% for non- residential properties), inflexible prepayment terms (in multiples of 10% of loan amount for HFCU), long delays in processing mortgage loans (6 to 9 weeks for HFCU) and the fact that there are only 2 mortgage providers located in Kampala with products designed to appeal only to the high-end of the market. This oligopolistic structure and lack of focus on the lower end of the market has impaired outreach to the majority of the population.

c) Lack of collective private sector led housing development institutions like cooperatives and NGOs to champion sensitization and development of housing

29 especially for the lower end of the market. Such schemes would work well especially for development of properties where political stakes are high e.g. re- development of the Naguru and Nakawa Estates that was halted by Government in June 2003, when the tenants resisted eviction. d) High poverty levels , which has led to low savings and spending on housing development. Poverty is the major constraint on the demand side as most FGD participants cited lack of income as one of their major hindrances to investment in real estate. e) High construction costs due to high transportation costs and use of imported materials. UNISIS estimated that over 50% of the cost of building is spent on imported materials. f) Poor enforcement of construction standards , corruption, use of poor materials, poor workmanship, poor coordination and supervision increases risks in the housing sector. A number of new buildings under construction (e.g. the Bwebajja hotel complex) have collapsed lately causing deaths and massive financial losses.

g) Lack of sensitization as highlighted in our FGDs where most participants, especially those outside Kampala, responded positively to utilizing mortgages to fund their property development but lacked information on the products and the providers.

h) Low prioritization of the housing sector by Government and limited budgetary allocations for development of supporting infrastructure. This is compounded by the poor state of the economy

i) Excessive intermediation in land and housing markets leading to overvaluation of properties especially in Kampala. This is compounded by lack of

30 published indicative prices by location that would minimize overpricing and hence enable development of a smooth property resale market.

2.2.3 Analysis of Market Supply and Demand a) Estimation of supply: As noted earlier in this report, demand for housing surpasses supply in urban areas especially Kampala. According to the Kampala Residential and Commercial Property Market Survey undertaken by NHCC in February 2002, supply of new housing units in the formal sector is estimated at 5,000 units per annum against an annual housing need of 9,578. This means that the housing backlog estimated at 52,097 units in 2002, is growing by 4,578 units each year. UNISIS estimated that housing supply for the next 5 years in Kampala and Entebbe will total 79,575 units, averaging 15, 975 units per year. UNISIS estimated the resale market at 1,200 residential properties per year under the assumption that the top 3 property dealers control about 50% of the resale market. The remaining 50% of the resale properties are transacted through other property dealers and private sales. Table 2, below, shows the estimated number of units to be added per year for selected urban areas for the next 5 years:

Table 2: Projections of supply of New Housing Units Eligible for Mortgages in the next 5 years Area Year 1 Year 2 Year 3 Year 4 Year 5

Kampala 12,556 14,329 17,324 18,514 16,851

Jinja 696 717 739 761 784

Mbale 880 933 989 1,048 1,111

Lira 351 379 409 442 478

Mbarara 949 1,006 1,066 1,130 1,198

Total (New) 15,432 17,364 20,527 21,895 20,421

Resale – Kampala 1,200 1,200 1,200 1,200 1,200 Total (New & 16,632 18,564 21,727 23,095 21,621 Resale)

31 Estimates based on paid-up applications for power to UEDCL and Information from Leading Property Dealers in Kampala. Detailed projections and assumptions shown under Appendix 9.

Considering that most housing developers in the formal and informal sector seek to connect their houses to UEDCL supply, especially in Kampala, UNISIS deem the estimates using paid up domestic applications for connection to UEDCL power as a good proxy for the number of new houses that would be eligible for mortgages. UNISIS assumed that residential property developers seeking connections to UEDCL have a relatively higher standard of living and stable income – and hence are eligible for mortgages. This estimate combines eligible clients from low, middle and high-end niches of the housing market. b) Housing Estate Developers such as Akright, Nsimbe Estates, First Homes, SBI, and NHCC will be developing/offloading 13,530 properties on the market in the next 5 years (figures included in Table 2 above with details shown under Appendix 9). However, activity in this area was slowed down by alleged corruption in the Nsimbe Estates joint venture that caused the suspension of the entire Board and CEO of NSSF. UNISIS thinks this project will continue, nonetheless, after a delay of about one year. Projections of housing units to be developed in large estates are shown in Table 3 below, and in detail under Appendix 9.

Table 3: Estimates of new housing units to be added under large estates or sale of Existing flats by NHCC Developer/Period Year 1 Year 2 Year 3 Year 4 Year 5 Akright 500 800 1,400 2,000 2,000 NHCC - Flats (1500 units) - 30% sold off 300 300 450 NHCC - Naalya Houses 40 60 60 60 60

Nsimbe 500 2,000 2,500

First Homes 250 250 Total 840 1,910 4,160 4,560 2,060

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c) Enabling laws like the Land Act 1998; Condominium Act 2001 which have enhanced security of tenure and collective ownership of apartment blocks. While the laws and guidelines are in place, implementation and establishment of supporting institutions have been slow. For instance, our key informants indicated that limited funding at HFCU has caused a 2-year delay in the sale of the 1,500 flats by NHCC. d) Entry of professional property developers and construction companies in the sector such as Akright, and SBI International signifies a high level of commitment of resources and expertise to boost supply on a sustainable basis.

2.2.4 Market Opportunities a) Successful Issuance of Long-term Bonds by institutions like the 10-year bond by BOU and earlier bond issues by MTN and EADB signify readiness of the market for such instruments. Institutions like HFCU could be assisted by BOU to issue long-term bonds to improve their funding position. Development Partners could also assist HFCU in issuing long-term bonds by using guarantee instruments like the Development Credit Agency (DCA) guarantee scheme. b) Availability of development funding due to heightened interest in development of organized housing estates. Akright Projects has already accessed such funding from institutions such as Shelter Afrique, EADB, and DFCU. c) Tapping into the longterm funds of insurance companies and NSSF. A window has already been opened at NSSF, for housing estate development funding, starting with the Nsimbe Estates joint venture though implementation has stalled due to allegations of corruption.

33 d) Liberalization of the pension sector that will free long-term investment capital and Government’s indication, in the 2004/5 Budget Speech, to pay pension arrears estimates at Shs. 300 billion in the medium term will enable civil servants to purchase Government pool houses. Many occupants of Government pool houses are still waiting for valuations and offers to be made so they can purchase these houses. Payment of pension arrears will enable sitting tenants to make downpayments on these houses and acquire mortgages, if they so wish. HFCU has already funded civil servants to acquire pool houses that were offered by Government earlier in Kampala, Entebbe, and Jinja.

e) Housing demand estimated at 9,578 units per year in Kampala alone against estimated formal sector supply of 5,000 units per year, compounding the backlog of over 52,097 (as estimated in 2002).

f) Improving provision of utilities like piped water, electricity, telephone, and public transportation that have enabled expansion of Kampala City’s radius. New housing projects are planned in areas more than 20 Kilometers from the city center, e.g. Nsimbe Estates.

2.2.5 Market Weaknesses

UNISIS reviewed this issue basing on information gathered during the desk research, interviews with key informants, market intelligence, and FGD meetings.

a) Insecure tenure and common instances of fraudulent titles are major weaknesses that have hampered smooth operation of the property market.

b) Inefficiencies at the land registry and absence of title insurance are other weaknesses that discourage some Ugandans from investing in real estate. An industry has evolved of agents who follow-up titles at the Land Registry at a fee but even then long delays are not very unusual. Unfortunately, risks and costs of such inefficiencies are passed on to the buyers.

34 c) Lack of sensitization (education) on mortgages is also a major weakness. UNISIS did not come across any NGO or Cooperative organization dedicated to housing development and sensitization of Ugandans on use of mortgages. It is not surprising that Ugandans struggle to build out of their own savings while paying rent for the premises they occupy while building instead of taking mortgages to purchase and occupy houses instantly. d) Preference for bungalows (stand-alone, self-contained, single-level) houses makes land a major cost factor since there are fewer housing units per acre. New schemes like collective ownership of condos are picking up, but at a slow pace, where the cost of land would be spread over many units leading to a lower cost of land per housing unit. e) Lack of secondary market for mortgages is also another weakness. Mortgage companies have difficulty in raising longterm, reasonably priced, funding to match the maturity of their portfolios with their funding sources. Availability of a secondary market would enable specialization for instance; HFCU could specialize in origination of mortgages. HFCU could also refinance its mortgage portfolio through issuance of long-term bonds against the mortgage installments.

f) Lack of funding for housing development is also another market weakness. However, some positive developments have been recorded in respect of funding extended to Akright Projects by Shelter Afrique, EADB, and DFCU; along with the NSSF’s involvement in joint ventures such as Nsimbe Estates.

g) Resale market characterized by unprofessional and quite often fraudulent dealers who are not monitored at all. Memories of the collapse of M/s Kasulu Property Masters, one of the larger property dealers on the market, are still fresh in people’s minds.

35 h) Excessive intermediation has led to overpricing of land and houses. This is escalated by lack of published indicative prices for real state by location to minimize speculation and overpricing.

i) Shortage in supply and an escalating backlog of housing estimated at over 52,097 units in 2002 and growing by over 4,500 units per year. j) While the Ugandan economy has experienced relative macro-economic stability lately, interest rates are still too high to support development of a vibrant mortgage industry reaching out to low-income earners.

2.2.6 Proposed Interventions

a) Following the successful issuance of 10-year bonds by BOU, Government should seek assistance to guarantee (e.g. DCA Guarantee Scheme) issuance of longterm bonds for mortgage companies like HFCU to provide more liquidity in the market. Stringent liquidity requirements under the FIA 2004 and the high interest rates in the economy do not favor issuance of longterm mortgage products. The situation could be assisted greatly by prospecting such longterm funding avenues. b) Secondary market – creation of an organized market for sale of mortgage loans. c) Accelerate reforms in the land registry and establishment of title insurance through effective use of the US$ 20 million announced in the 2004/5 Budget for the purpose (Budget Speech 2004/5, MoFPED). d) Formalize land tenure systems as per Land Act 1998 and accelerate issuance of titles pertaining to the varied systems so as to boost land transactions outside the Central region.

36 e) Develop shorter-term mortgage products as per preferences of the clients. 42.6% of the residential FGD participants preferred a repayment period not exceeding 10 years. f) Housing finance institutions such as HFCU and DFCU should set up a national network either by setting up own branches or entering strategic alliances with institutions such as PostBank Uganda that already have a network. There is a lot of ignorance outside Kampala on housing finance companies and the products they offer. Even in Kampala, there is very little awareness and utilization of mortgage loans to finance property development. g) Mortgage companies should develop products that target the lower end of the market in Kampala and areas like Mbale and Mbarara. h) Design and offer salary-based mortgage products with less conditions and a shorter repayment period, as salary earners are generally averse to commitments exceeding 2 years. Fear of loss of employment (job insecurity) came out prominently in FGDs as a major reason for participants not to opt to take a mortgage loan. i) Players in the industry should lobby Government to prioritize the housing sector through budgetary allocations for development of supporting institutions and infrastructure, more coordination of agencies in the industry, and granting of incentives to developers of large housing estates. j) Investigate other collateral substitutes such as death and disability insurance that is now widely offered by microfinance institutions. Housing finance companies should focus on securing the primary source of repayment e.g. direct payroll deduction and remittance by employers for salary guaranteed loans. By evaluating these avenues, mortgage companies can offer cheaper mortgage products to salary

37 earners since they will be dealing with the mass-market and saving on costs of collection and monitoring of loan facilities.

3 Conclusion and Recommendations

The housing market in Uganda suffers major constraints on the supply and demand side. The housing backlog for Kampala alone was estimated at 52,097 units in 2002 and is growing by over 4,500 units a year at the current supply levels. The supply problem is aggravated by a preference of outright land ownership and thus preference for bungalows compared to jointly owned properties (like flats, condos) which makes the cost of land a major component of the value of housing units. Major problems in the housing sector include: poor infrastructure such as water, and electricity; low prioritization of the sector by Government; limited sources of development funding; poor standards in the construction sector; poor contracting capacity; and lack of equipment.

The housing market is very undeveloped and fragmented with very limited use of mortgage financing. It is estimated that 80% of the residents of urban areas are salary earners, and 60% rent houses instead of paying mortgages with a view of owning houses in the longrun. There are only 2 mortgage companies with offices located in Kampala only. There is widespread ignorance about the use of mortgages to finance property development. Specific recommendations are summarized in the action planning and strategy matrix below.

38 3.1.1 Action Planning and Strategy Table 3, below, is an action plan indicating key areas of weakness and strategies to be undertaken to address the key weaknesses identified.

Table 3: Action Plan and Strategy for HFCU Activity Strategy Specific Areas Remarks Systems Restructuring Findings and Will be impacted by recommendations in the new direction Ernst &Young report Human Resources Capacity Recruitment of new staff to Lack of customer care Development handle new products, and slow processes training on customer care, noted as major problems competency profiling, by the FGD participants undertake Human Resource Audit Marketing Customer Focus Review FGD findings and This should be other information; embark undertaken after on aggressive targeted addressing systems, marketing through radio ads, personnel, products and brochures, testimonials of funding issues. success stories, e.t.c. Loan Processing Efficiency Reduce documentation, Major complaint noted Improvements processing time to 14 days, among participants in reduce number of the FGDs. Committees involved Existing Products Rationalization and Review terms: down FGD participants customer payment, prepayment policy, lamented the harsh and responsiveness offer shorter repayment rigid terms, and rushed period, review collection foreclosure. methods i.e. minimize ads in papers ad use of crude court bailiffs. Funding Access cheap long- Prospect issuance of long- Support Government term funds term bonds and joint efforts for guarantees ventures with NSSF and and other players to Insurance companies. establish secondary market for mortgages New Products Innovation and Introduce short term salary Salary earners Diversification based mortgage products constituted over 80% of with our FGD participants. Distribution Channels Enhance Outreach Open up own branches or HFCU has no presence enter strategic alliances with outside Kampala but the companies that already have approach should be a network in places like consolidation in Mbarara, Mbale, Lira and Kampala prior to Jinja. branching out. Sensitization of Clients Education Sponsorship of Radio This is a task that can be programs, NGOs involved in undertaken in housing education, conjunction with Cooperative housing Development Partners projects, e.t.c. and Government.

39 Activity Strategy Specific Areas Remarks Governance Rationalization Reduce bureaucracy especially in processing loan applications. Industry Issues Government Support Boost funding and Guarantees for long-term Be seen as a key Institutional funding, standardization and player/partner and Support research, development of provider of information infrastructure, coordination to influence efforts by agencies Sensitization of Clients Education Sponsorship of Radio This is a task that can be programs, NGOs involved in undertaken in housing education, conjunction with Cooperative housing Development Partners projects. and Government. Market Development Formalization Development of formal Stand out as key player market for properties, in industry and support publication of indicative or aid such initiatives if property values, monitoring appropriate of property dealers Housing Development Value-Added Joint venture with key Housing backlog Partnerships stakeholders like NSSF and estimated at 52,097 NHCC, other private sector units, growing by over partnerships to be prospected 4,500 units per year.

4 Appendices

Appendix 1: Terms of Reference Appendix 2: Residential FGD Tool and Questionnaire Appendix 3: Commercial FGD Tool and Questionnaire Appendix 4: Quantitative Analysis - Residential (Graphs and Tables) Appendix 5: Quantitative Analysis – Commercial (Graphs and Tables) Appendix 6: Summary of Residential FGD Responses - Qualitative Appendix 7: Summary of Commercial FGD Responses - Qualitative Appendix 8: Profile of FGD Participants Appendix 9: Projections of New Housing Units to be added in the next 5 years Appendix 10: List of Documents and Key Informant Information Reviewed

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