1 2 3

Economic Update Sector by sector H1 2021 Outlook Analysis H2 2020 Market Performance Review and

H1 2021 Outlook. knightfrank.com/research January 2021

The Arena Mall, . KAMPALA MARKET UPDATE H2 2020

Key Insights

,QƂDWLRQDYHUDJHGDWE\ƁQDQFLDO\HDUHQGHG'HFHPEHU

The Central Bank Rate reduced to 7% in June 2020

Supply of residential apartment units increased by 6%

2ƃFHVSDFHYDFDQF\LQFUHDVHGE\

Prime residential occupancy declined by 8%

Grade A passing rents declined by 7%

Cover Image: The Arena Mall, Nsambya. Space available to let. Turkish Fashion brand, LC Waikiki, opens at Acacia Mall.

ECONOMIC OVERVIEW

The Economy However, in Q3 2020, different real sector indicators recorded improvements according to

Uganda’s economy remained subdued against the Bank of . This was largely attributed to backdrop of strict lockdown measures imposed easing of the lockdown restrictions which started in March 2020. According to the Uganda Bureau in June. The month-on-month Composite Index of Statistics (UBOS), GDP growth was recorded at of Economic Activity (CIEA) increased by 5.3% in According to the Uganda 2.9% for FY2019/20, largely due to the mitigation June and 3.5 % in July, against the backdrop of a Bureau of Statistics (UBOS), strategies that were undertaken to curb the 3.0% and 3.6% decline in the months of May and GDP growth was recorded at spread of the virus. Growth is further anticipated April respectively, indicating an improvement 2.9% for FY2019/20 to remain under pressure until FY2022/23 due in economic activity relative to the contraction to disruptions on the economy caused by the registered in Q2 2020. pandemic. The economic slowdown in 2020 resulted in revenue deficits and an increase in The Business tendency indicator greatly expenditure to deal with health interventions improved in the months of September, October, in response to the pandemic and in an attempt and November 2020, signifying an increase in to contain the transmission of the virus. As a business confidence and optimism for the future result, public debt stock is projected to increase as the economy slowly continues to recover to 49.9% of GDP in FY 2020/2021 from 41.2% in towards pre-COVID-19 times. FY 2019/2020. 2 KAMPALA MARKET UPDATE H2 2020

Ministry of Health (MOH) reported a surge in the number of COVID-19 cases and deaths in +ZLWKRYHURIWKHWRWDOFRQƁUPHG Figure 1.0: Business Tendency Indicator 2020 cases reported in the last four months of the year, largely due to the election campaigns 70.0 and preparations for the festive season. The

60.0 recent approval of several vaccines provides hope for a quicker return to normalcy, although 50.0 there remains a long and uncertain lag before 40.0 vaccine acquisition and deployment may be

Points achieved. 30.0

20.0 As of 31st December 2020, the country had recorded 35,511 cases and 265 deaths, with 10.0 the highest daily case tally (1,199) recorded on

0.0 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 8th December 2020. Kampala is currently the Years District with the highest number of COVID-19

Business Tendency Indicator cases.

Source: The government instituted various interventions with the aim of mitigating the VRFLDODQGHFRQRPLFHƀHFWVRIWKHSDQGHPLFRQ the economy, key of which included increasing access to credit through the provision of Figure 2.0: Uganda Covid-19 Cases and Deaths from Jan to Dec 2020 DƀRUGDEOHORDQVZLWKUHGXFHGLQWHUHVWUDWHV for small, medium, and large-scale enterprises 16000 100 through Uganda Development Bank. Others 90 14000 included provision of seed capital to organized 80 12000 special interest groups, rolling out of the Social 70 Assistance Grant for the Elderly to cater for 10000 60 relief food, expediting the payment of arrears 8000 50 Cases Deaths RZHGE\*RYHUQPHQWWRSULYDWHVHFWRUƁUP 40 6000 DQGGLƀHUHQWIRUPVRIORDQUHVWUXFWXULQJWR 30 4000 encourage spending and re-ignite business 20 2000 activity 10

0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Months

Cases (35,511) Deaths (265) As of 31st December 2020, the country had recorded 35,511 Source: WHO/MOH cases and 265 deaths

Figure 3.0: The Money Market Dec-19 to Dec-20 Money Market

25.0 Month-on-month commercial bank lending rates on shilling denominated loans that had 20.0 reduced at the start of the year, from 19.88% 15.0 in January 2020 to 17.73% in April 2020

% Rates increased in July 2020 to 20.93%. However, 10.0 since August, the lending rates were relatively 5.0 stable, averaging at 19.5 % between August and November 2020. The Central Bank Rate was 0.0 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 maintained at 7% from June 2020 to sustain Months OLTXLGLW\VXSSRUWWRVXSHUYLVHGƁQDQFLDO Lending Rates 91-Day Treasury Bill Yield 364-Day Treasury Bill Yield Central Bank Rate institutions amid the slow economic conditions Source: Bank of Uganda FDXVHGE\WKHHƀHFWVRI&29,'

3 KAMPALA MARKET UPDATE H2 2020

Above all, 91 days government securities, which had declined for the larger part of H2 2020 increased to 8.3% for the year ended December Figure 4.0: Headline Index and Annual Inflation Developments: Dec-19 to Dec-20 2020 from 7.6% recorded for the year ended

November 2020, while yields on long term (364 10.0

days) treasury bills remained relatively stable in 8.0

the quarter to October but increased to 13.5% in 6.0 December 2020 from 12.8% in November 2020. 4.0 The decline in yields for short-term securities was 2.0

attributed to subdued loan demand by the private 0.0 % Change sector and increased appetite for less risky and -2.0 Index

liquid assets due to negative sentiments caused by -4.0

COVID-19. -6.0

-8.0

-10.0

Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20

7KHDQQXDOKHDGOLQHLQƂDWLRQ Months

rate was recorded at 3.6% for Headline Index Headline Core Foodcrops and Related items Energy, Fuel and Utilities the year ended December Source: Source: Bank of Uganda 2020 compared to the 3.7% registered for the year ended November 2020

Figure 5.0: Exchange Rates: Dec-2019 to Dec-20

3,850 2 Inflation 1.5 3,800 he annual headline inflation rate was 1

recorded at 3.6% for the year ended 3,750 T 0.5 December 2020 compared to the 3.7% registered 0 3,700

for the year ended November 2020. This was Period Average (US$) Annual appr./dep. Rate(%) attributed to a decline in the annual Energy -0.5 3,650 Fuel and Utilities (EFU) inflation that decreased -1 to -4.6 % in December 2020 relative to -1.4% 3,600 -1.5 registered for the year ended November 2020. Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Months Annual Core Inflation which had dropped by 0.5% in November to 5.8% increased to 5.9% for Period Average Annual Appreciation/Depreciation Rate

the year ended December 2020. Food crops and Source: Bank Of Uganda related items inflation was recorded at -7.0% for the year ended December 2020.

Exchange Rate

The Uganda shilling recorded relative stability against the USD in the second half of 2020, appreciating by 1.2% month-on-month in December 2020 to an average rate of 3,666.5 to USD. This was attributed to subdued aggregate demand, and a weaker USD against other international currencies. According to Bank of Uganda, the exchange rate is likely to remain stable on account of matched corporate activity; and a projected USD depreciation against other reserve currencies.

Shoprite, Acacia Mall.

4 KAMPALA MARKET UPDATE H2 2020

2020 as compared to the same period last year, sales turnover post lockdown compared to The Real mainly attributable to landlord interventions pre-COVID-19 levels largely due to redirected on agreements and the opening of LC Waikiki demand as a result of the international travel Estate Sector Uganda. ban that lasted over 6 months until October ZLWKDVLJQLƁFDQWSRUWLRQRIWKLVGHPDQG Average year-on-year footfall reduced by 30% in favoring international brands. Retail H2 2020 as compared to H2-2019. This is directly The period under review saw spas and salons FRUUHODWHGWRWKHHƀHFWVRIWKHRQJRLQJFXUIHZDQG The lockdown resulted in the increased use of being allowed to trade from July onwards. FRQWLQXHGUHVWULFWLRQVRQVSHFLƁFUHWDLOVHJPHQWV online retail shopping platforms by consumers, Cinemas and gyms were opened up from such as bars and nightclubs still under lockdown. and e-commerce retailers saw trade spike mid-November albeit with restrictive standard However, monthly averages showed major VLJQLƁFDQWO\GXULQJWKHORFNGRZQSHULRG7KLV operating procedures emanating from the improvements, recording an 8% month-on-month consumer transition to online retail however, was COVID-19 pandemic, and curfew from 9pm to 5am average growth in H2-2020, with July registering WHPSRUDU\DQGVLJQLƁFDQWO\GHFOLQHGDIWHUHDVLQJ still being enforced. The impact of these measures the highest record in the half year at 22% as up of lockdown measures. Instead, consumers on retail as a whole, is that trade in Uganda is still consumers got to grips with the new normal. gravitated back to bricks and mortar shopping. under severe pressure, and is further impacted This trend was noticed across several markets $YHUDJHWXUQRYHUZDVODUJHO\DƀHFWHGLQGXH by lack of consumer spending on the back of a internationally and has put an end to the debate to the lockdown measures imposed to curb the slowdown in the economy. That said, retail activity on online trading taking over from bricks and spread of the COVID-19 virus. Several formal retail saw a sharper fall than workplace activity in the mortar. The theory now is that online trade will stores were closed for the months of April and May ƁUVWKDOIRIWKH\HDURQWKHEDFNRIVXSSO\FKDLQ eventually end up being a support to traditional and some up until the end of the year. Shoppers disruptions and extremely restrictive government retail, accounting for approximately 20% of all were forced to change shopping patterns due to measures adopted to curb the spread of COVID-19. retail trade. curfew and restrictions on travel, so they opted for neighborhood shopping centers as compared However, average turnover, footfall and occupancy to the formal shopping centers. Year-on-year OHYHOVUHFRUGHGVLJQLƁFDQWLPSURYHPHQWLQ WXUQRYHUƁJXUHVLQ+UHGXFHGRQDYHUDJH the second half of the year, demonstrating, by 20%. the sector’s resilience and increased demand for formal retail in Uganda. The pandemic has However, month-on-month improvements were prompted new innovative thinking around the Average year-on-year footfall recorded as restrictions on lockdown were eased retail sector moving forward in regards to space during the year, with December 2020 registering reduced by 30% in H2 2020 as utilization, rent models and interactions with the highest monthly growth in turnover due to compared to H2-2019 customers. Hand sanitizing, social distancing, increased shopping in preparation for the festive wearing of masks and temperature checks are season and the Knight Frank Black Friday Sales now accepted as part of the “new normal’’. Several which was run in all our managed Malls in the last landlords considered incentives for their tenants week of November. The sale this year was held and review of lease agreements in order to attract over 5 days and not the traditional one day so as new tenants, and retain existing ones. Some of the to take into account social distancing guidelines. LQFHQWLYHVLQFOXGHGUHQWUHGXFWLRQVIRUVSHFLƁHG A few branded fashion retailers improved their timeframes especially for the months during and after the lockdown, deferred payments and rent-free months to tenants on a case-by-case Figure 6.0: Annual and Monthly Growth in Footfall in Knight Frank basis, among others such as purely turnover based Managed Malls rentals. 80%

The sector registered expansions and new entrants 60% into the market in 2020, with Carrefour growing its 40% presence in Uganda (Metroplex Mall store being 20% ƁWWHGLQWKLVSHULRGDQGGXHWRRSHQLQ)HEUXDU\ 0% 2021), Shoprite set to expand its store number Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -20% to 6 with the anticipated opening of the Arena % Change in footfall Mall in 2021, and LC Waikiki, a Turkish based -40% international fashion chain opening its 2000m² -60%

$IULFDƂDJVKLSVWRUHDW$FDFLD0DOOLQ'HFHPEHU -80% 2020. -100% Months

Year-on-year retail occupancy remained Annual Change 2020 Vs 2019 2020 Monthly Change relatively stable with a slight increase in H2- Source: Knight Frank Research

5 KAMPALA MARKET UPDATE H2 2020 corporate organizations.

Several re-occupancy strategies were adopted Table 1: The Growth Year-on-Year and Month-on-Month Table 1: Year-on-Year and Month-on-Month Turnover including 2-meter distancing between desks Growthof Turnover in Knight in Knight Frank Frank Managed Managed Supermarkets Supermarkets LQRƃFHVWKXVUHTXLULQJDUHYLHZRIRƃFH FRQƁJXUDWLRQVDQGVWDƀFDSDFLW\OHYHOVLQVHYHUDO Month Annual Change Monthly Change RƃFHVUHJXODWHGDFFHVV RQHZD\WUDƃFƂRZV  (2020 VS 2019) (2020) WRVSHFLƁHGDUHDVZLWKLQWKHRƃFHWHPSHUDWXUH

July -21% -19% testing, hand sanitizing, increased cleaning frequency, disinfecting and safety signage display August -24% 2% DWWKHZRUNSODFH6KLIWZRUNLQRƃFHVZDVDGRSWHG by several organizations due to the inability to September -32% 21% DFFRPPRGDWHDOOVWDƀPHPEHUVLQFXUUHQWRƃFH premises, while adhering to set SOPs. The binary October -22% -12% RSWLRQRIZRUNLQJIURPKRPHDQGRUWKHRƃFHKDV November -15% -0.4% become the preferred solution for many and will most likely carry on for the foreseeable future. December -8% 111%

Similarly, several corporate organisations were Source: Knight Frank Research forced to rethink their business strategies to UHPDLQDƂRDW6RPHRIWKHVHLQFOXGHGGRZQVL]LQJ their space requirements, relocations, lease Table 2: Prime Retail Rental Rates in Kampala reviews and renegotiations, and postponing (COVID-19 Impacted) occupancy plans, among others, which had a great LPSDFWRQWKHRƃFHVHFWRULQWKHSHULRGXQGHU review. Size Rates

Knight Frank registered a 6% year on year increase <10m2 $200 LQYDFDQFLHVIRUSULPHFRPPHUFLDORƃFHVSDFH

<50m2 $36 (Grade A and AB) from 17% in H2 2019 to 23% in H2 2020. This was as a result of downsizing of <100m2 $22 RƃFHVSDFHUHORFDWLQJWRPRUHDƀRUGDEOHRƃFHV DQGSRVWSRQLQJWDNHXSRIQHZRƃFHSUHPLVHV <500m2 $17 EHFDXVHRIFRQVWUDLQHGFDVKƂRZVDWWULEXWHGWR

1000m2 $15 the slow economic conditions caused by the pandemic. However, the anticipated rebound in RƃFHDFWLYLW\H[SHFWHGLQRQWKHEDFNRI Source: Knight Frank Research 7KHVHƁJXUHVDUHDYHUDJHUHQWDOVIRUJURXQGƂRRUVSDFHLQ.DPSDOD6KRSSLQJ0DOOVEXWGRQRWWDNH6KRS the much-anticipated Final Investment Decision IURQWWRGHSWKUDWLRLQWRDFFRXQWDQGH[FOXGHVHUYLFHFKDUJH on oil production, coupled with the anticipated rollout of the COVID-19 Vaccine will go a long way Retail rental rates were impacted in the past decline in the number of leasing inquires since in improving performance of this sector. half year due to the COVID-19 pandemic and the most businesses were not operational. However, concern over the future which is unpredictable the progressive easing of the lockdown ignited 7KHLQFUHDVLQJYDFDQFLHVLQWKHOHDVHGRƃFH hinges on the majority of the population being DVWDUWRIRƃFHOHDVLQJDFWLYLW\ZLWKLQTXLULHV sector experienced in H2 2020 led to softening of vaccinated. At current projections, this might only from both individuals and organisations looking RƃFHUHQWVDVWHQDQWVFRQWLQXHGWRGULYHKDUGHU be achievable in late 2022. The rental rates in table to downsize, relocate or sell their properties. bargains for lenient lease terms during lease 2 are inclusive of various landlord interventions Similarly, requests for rent reductions and early renewals. Grade A passing rents declining by 7%. to ensure sustainability in the sector and are terminations were rife, as tenants did not foresee It must be noted however, that this decline was short term rates, being revised monthly based on DQLPSURYHPHQWLQWKHLUƁQDQFLDOVLWXDWLRQLQWKH for rents which were considered “over - rented” trading patterns and lockdown measures. near future and working from home looked like a (where the passing rent is higher than the market suitable semi-permanent option moving forward. rent for new leases at reversion). This was mainly 2ƃFH as a result of contractual escalations which were A major trend that was observed in H2-2020 was being marked to market at review or renewal. -XVWOLNHWKHRWKHUUHDOHVWDWHVHFWRUVWKHRƃFH a renewed focus on health and well-being of 3ULPHRƃFH\LHOGVDYHUDJHGEHWZHHQDQG VHFWRUZDVQRWVSDUHGWKHDGYHUVLWLHVRIWKHHƀHFWV RƃFHRFFXSLHUVEHLWVWDƀRUWHQDQWV:KHQWKH in the period under review. RI&29,'7KHVHFWRUVWDUWHGRƀZHOOZLWKDQ lockdown was initially lifted in June 2020, the

LQFUHDVHLQLQTXLULHVDQGLQWHUHVWLQRƃFHVSDFH reality of having to rethink ways of supporting ,QJHQHUDORƃFHVHFWRU/DQGORUGDQGWHQDQW until March when the lockdown was announced. business continuity while keeping the workforce relationships in H2 2020 were dominated by The period during the lockdown saw a drastic safe was a priority for many landlords and conversations and increasing pressure for 6 KAMPALA MARKET UPDATE H2 2020 rent concessions. In other instances, these conversations wound up in vacancies across various buildings. As a result, our outlook is Figure 7.0: Monthly Average Net Rent (US$) per square meter in Kampala's Prime Office Market. that prime rentals (which had already seen a correction in 2019) will likely remain stable or 18 88 fall depending on the bargaining strength of 16 86

HDFKWHQDQWDVODQGORUGVVWULYHWRƁOOFXUUHQW 14 84 vacancies resulting from relocations and 12 82 downsizing. 10 80 8 78 0RVWRIWKHQHZRƃFHVWRFNDUHGHYHORSPHQWV Occupancy Rate(%) 6

which had started in 2018-2019, with limited if Monthly Net Rent per sqm(US$) 76 4 any new construction that commenced in 2020 2 74 due to a halt in construction activity during the 0 72 lock down, causing delays and postponement in 2017 2018 2019 2020 delivery. Most of the new developments coming Years up are for owner occupation with the majority Grade A Grade AB Occupancy 23% Vacancy rate in prime commercial offices ranging between 1,500-4,000sq.m while the 7% Decline in rents for Grade A offices bigger pipeline developments are for both owner Source: Knight Frank Research occupation and investment purposes.

4

6PDUWEXLOGLQJVWRSOD\DYLWDOUROHLQHQVXULQJKHDOWKDQG ZHOOEHLQJ&RQWDFWOHVVWHFKQRORJ\LQWHJUDWHGLQWR 2ƃFH6HFWRU7UHQGVWR FRPPHUFLDOGHYHORSPHQWVZLOOEHDNH\WUHQGPRYLQJRQ 7KLVZLOOLQFOXGHPRWLRQDQGYRLFHDFWLYDWHGDQGIDFLDO UHFRJQLWLRQWHFKQRORJ\DQGVHQVRUVWRPRQLWRURFFXSDWLRQDO ZDWFKRXWIRULQ GHQVLW\DQGDLUTXDOLW\DVLVDOUHDG\KDSSHQLQJLQYDULRXV PDUNHWVDQGEHFRPLQJDQH[SHFWDWLRQRIJOREDORFFXSLHUV 5

)OH[LEOHRƃFHVSDFHZLOOEHFRPHLQFUHDVLQJO\VRXJKWE\ RFFXSLHUVLQWKHVKRUWWRPLGWHUPDVFRPSDQLHVGHFLGHRQ WKHLURFFXSDQF\VWUDWHJLHV)OH[LEOHDQGFRZRUNLQJVSDFH ZLOOSOD\DQLPSRUWDQWUROHDVDIHDVLEOHRSWLRQZKLFKFDQEH 1 VFDOHGXSDQGGRZQDVUHTXLUHG

:HHQYLVDJHƂH[LELOLW\LQWKHFKRLFHRIZRUNSODFHZKHUHE\ RUJDQL]DWLRQVDVVXPHřGD\VDZHHNLQRƃFHIRUWKRVH ZKRKDYHQRWRSWHGWRKDYHWKHLUWHDPVZRUNLQJLQVKLIWV 6 :RUNLQJIURPKRPHWRVXSSOHPHQWZRUNLQJIURPWKHRƃFH ZLOOFRQWLQXHWREHDYLDEOHRSWLRQDVEXVLQHVVHVHVWDEOLVK 7HQDQWH[SHFWDWLRQVUHJDUGLQJRƃFHVSDFHTXDOLW\DQG ZD\VWRSURPRWHKHDOWKDQGVDIHW\ZKLOHDFFRPPRGDWLQJ EXLOGLQJVHUYLFHVDORQJZLWKRWKHUVRIWVHUYLFHVZLOOLQFUHDVH VWDƀZLWKRXWQHFHVVDU\LQFUHDVLQJWKHLUVSDFHUHTXLUHPHQWV DVDUHVXOWRIRƃFHVXSSO\DYDLODEOHRQWKHPDUNHW6SDFH ZKLFKGRHVQRWPHHWH[SHFWHGVWDQGDUGVZLOOEHFRPH UHGXQGDQWSDUWLFXODUO\DVYDFDQFLHVLQFUHDVHLQ 2

'RZQVL]LQJDQGVXEřOHDVLQJRIRƃFHVSDFHZLOOGRPLQDWH 7 WKHPDUNHWLQDVRFFXSLHUVVHHNWRGRPRUHZLWKOHVV 7KHUHZLOOEHLQFUHDVHLQGHPDQGIURPVPDOOHURƃFH /DQGORUGVDUHOHVVOLNHO\WRRƀHUDQ\IXUWKHUVXEVLGLHVRQUHQW RFFXSLHUV řVTPŜV SDUWLFXODUO\60(ŜV1*2VDQG RUOHDVHWHUPVLQZLWKSDUWLFXODUUHIHUHQFHWRWKRVHZKR SURIHVVLRQDOƁUPVZKRSUHIHUVPDOOHUVSDFHQRZWKDW PDGHJHQHURXVRƀHUVDQGWRRNDKLWODVW\HDU$VEDQN ZRUNLQJIURPKRPHLVDVHPLSHUPDQHQWRSWLRQ7KLVFRPHV UHVWUXFWXULQJDQGRWKHUFRQFHVVLRQVFRPHWRDQHQGLWLVDOVR RQWKHEDFNRIORZVSDFHXWLOL]DWLRQDVDUHVXOWRIDORZHU H[SHFWHGWKDWODQGORUGVZLOODGRSWDƁUPHUVWDQFHWRZDUGV KHDGFRXQWDQGGDLO\DWWHQGDQFHLQRƃFH DQ\GLVFXVVLRQVRQUHQWGLVFRXQWV 3 8

)OH[LEOHOHDVHWHUPVWRFKDUDFWHUL]HVHYHUDOWHQDQFLHVIRUWKH 7KHRƃFHZLOOUHPDLQNH\LQFROODERUDWLRQWUDLQLQJDQG QH[WřPRQWKV.QLJKW)UDQNREVHUYHGWKDWWHQDQWVDUH FRKHVLRQRIWHDPVDVVHOILVRODWLRQLVQRORQJHUPDQGDWRU\ LQFUHDVLQJO\UHTXHVWLQJIRUƂH[LELOLW\LQWKHGXUDWLRQRIWKHLU DQGWKHUHDOL]DWLRQWKDWLWLVYHU\GLƃFXOWWREXLOGWHDPV WHQDQFLHVDVRSSRVHGWRƁ[HGOHDVHSHULRGVZLWKW\SLFDOOHDVH YLUWXDOO\:KLOVWWHFKQRORJ\LVDJUHDWIDFLOLWDWRURIZRUNƂRZ WHUPVQRZEHWZHHQř\HDUVDVRSSRVHGWR\HDUVWKDW SURFHVVHVLWFDQQRWEHDWWKHWRWDOFRVWRUUHSODFHPHQWRI ZHUHFRPPRQSUH&RYLG KXPDQWRKXPDQLQWHUDFWLRQ

7 KAMPALA MARKET UPDATE H2 2020 6HFWLRQDO2ƃFH6SDFH rules as laid out by the Body Corporate. Unlike accommodation which as many have described it A Growing Trend Freehold ownership, sectional title unit owners resulted in “cabin fever”. The need for living and in Kampala’s Prime pay a monthly fee including maintenance of the green space which was not as important pre-Covid &RPPHUFLDO2ƃFH6HFWRU common property, property manager’ s fees and, ZDVFHUWDLQO\DPSOLƁHGGXULQJWKHORFNGRZQ utility bills required for the common property. These shifting trends will shape the Kampala With the current uncertainty caused by COVID-19, housing market outlook over the next 18 months. developers have been inquiring if now is the right time to invest. The cyclical nature of the real estate Residential H2 2020 left landlords and tenants in uncharted development process has proved that there is no waters, as both parties were forced to renegotiate such thing as ‘the right time’, but rather how bold 7KHGHƁQLWLRQRIKRPHWRRNRQDZKROH their terms, from rent discounts to deferrals in DQGƂH[LEOHRQHLVWRFHDVHLQYHVWPHQWRSSRUWXQLWLHV new meaning in 2020 when lockdown was a rapid sequence of events over a short period in the market. announced. Overnight, homes became schools, RIWLPH,QWKHƁUVWTXDUWHURIWKH\HDUIRUHLJQ RƃFHVFKXUFKHVVWRUHVDQGPDQ\RWKHUXVHV nationals, who form a large part of the tenant One of the new opportunities currently in Kampala’s VLQFHSHRSOHZHUHIRUFHGLQWRFRQƁQHPHQW market repatriated to their home countries at SULPHFRPPHUFLDORƃFHVHFWRULVWKHRZQHUVKLSRI and self-isolation. This led to a rethink by the announcement of the lockdown, resulting VHFWLRQDORƃFHVSDFH,QYHVWRUVVHHNLQJORQJWHUP many occupiers on the type of home they LQDGYHUVHHƀHFWVRQRFFXSDQF\DQGUHQW returns, but unable to or uncertain of whether or want and provoked questions and decisions levels. Average occupancy in prime residential not to develop themselves, are opting to buy on a between owning or renting, apartments or apartments dropped by 8% year-on-year in H2 sectional title basis for owner occupation or as an detached houses, and the importance of green 2020 as compared to H2 2019. investment. space for families who found themselves in

6DOHRIRƃFHVRQDVHFWLRQDOEDVLVLVDUHODWLYHO\QHZ concept in Uganda but steadily gaining popularity. The current practice is that a portion of the space Figure 8.0: Monthly Net Rents($) for Furnished Apartments in Kampala's is sold per square meter while the residual portion Prime Residential Areas is leased out. Currently, a typical example of such a development is Lugogo One, a nearly completed 3500 development on Lugogo By-Pass. 3000

2500

2000

1500

1000

500

0 2017 2018 2019 2020

2-Bed, 3-Bed,

Source: Knight Frank Research

Knight Frank recorded a 6% year on year already oversupplied prime residential market, increase in supply of apartment units coming WKDWKDGEHHQDƀHFWHGE\WKHHƀHFWVRI&29,'

Lugogo One, Lugogo bypass. Space available to let. onto the market particularly in the prime As a result, overall average prime rental rates for residential areas of , , , furnished apartments declined by 4% in H2 2020. Commonly known as a condominium title for Bugolobi, and Naguru. The increase in stock Rental yields in prime residential suburbs averaged residential properties, a sectional title describes forced some landlords to discount their between 8% - 10%. separate ownership of units or sections within a rents in order to remain competitive in an commercial complex or development. When one buys into a sectional title building, they purchase a section or sections and an undivided share of the Table 3: Average Rents and Selling Prices of Residential common property, collectively known as ‘units’. Units in Kampala

Sectional title developments are governed by a Body Description Rent (Furnished) Sale Corporate who are responsible for managing the 2-Bedroom Apartments $1,650 $215,000 property, setting and enforcing rules, and managing ƁQDQFHVDQGEXGJHWV,QYHVWRUVLQDVHFWLRQDOWLWOH 3-Bedroom Apartments $2,700 $325,000 scheme own part of a development, meaning that the owner is part of a small community and will Source: Knight Frank Research need to comply with the management and conduct

8 KAMPALA MARKET UPDATE H2 2020 It is expected that approximately 110-150 housing stay in areas with good infrastructure, security Free Zones units (mainly apartments and townhouses) will DQGSUR[LPLW\WRGLƀHUHQWVHUYLFHV7KHUHLV come onto the market over the next 12 months in higher demand for modern housing, thus forcing The Uganda Free Zones Authority, a body Kampala’s prime residential suburbs. Demand owners of older properties to reduce their asking corporate under the supervision of the Ministry of for prime residential rental accommodation is rents or renovate their property so as to compete Finance, Planning and Economic Development, mainly driven by members of the diplomatic favorably with the newer stock. responsible for the establishment, development, community and multinationals who prefer to management, marketing, maintenance, supervision and control of free zones within the country aims at creating 8 private and 2 public free Table 4: Market sentiment Survey H2 2020 zones with the aim of encouraging investment, increasing export earnings and creating jobs. The Market Inquiries Completed Postponement of Achievable Market Conditions (Tenant, Landlord ƁUVWSXEOLFIUHH]RQHORFDWHGLQ(QWHEEHZKRVH Transactions Deals Rents Favourable or Balanced) construction was commissioned by the Minister Residential Tenant of Finance will be the pioneer public free zone in the country. Upon completion, the zone will Commercial Tenant accommodate 7 production units and a trade KRXVHWKDWZLOOKRVWGLƀHUHQWJRYHUQPHQWRƃFHV Source: Knight Frank Research to oversee business in the area.

Developing and/or operating in a free zone comes within the country, championed by Uganda Industrial with various tax incentives among which include; Investment Authority under its mandate to tax holidays, exemption from payment of stamp establish 27 industrial and business parks, aimed duty for land owned by the Authority, unrestricted Travel restrictions and closing of the border at creating jobs, easing accessibility to land for UHPLWWDQFHRISURƁWDIWHUWD[UHQWIUHHODQGIRUD during the lockdown period resulted in noticeable investment, introducing new research, technology VSHFLƁHGSHULRGHWF increase in the need to repurpose production lines and skill development as well as boosting exports for manufacture of certain products most of which therefore, increasing Uganda’s revenue base. With supportive business policies coupled with were essential and urgently required in response The Industrial Business Park locations include WKHGLƀHUHQWWD[LQFHQWLYHVGHYHORSPHQWRI to the pandemic. The increase in e-commerce Kampala, Mbarara, Jinja, Kasese, Soroti, Moroto, industrial parks and free zones are anticipated trade during lockdown increased the need for Nakasongola, Bulisa, Gulu, Lira, Arua, Tororo, to boost Uganda’s industrial sector by attracting stock piling in a bid to meet the growing demand Iganga, Luwero, Bushenyi, Kabale, Kabarole, productive investment, ensuring economic growth by online retailers for essential goods and services. Rakai, Mubende, Hoima, Nakaseke, Kyankwanzi, and job creation. This resulted in the short-term increase in demand Rubirizi, Pakwach, Kamuli, Mbale and Masaka. for storage space in the traditional industrial areas (1st – 8th Street), Nalukolongo, and The anticipated completion of the industrial parks VValuationaluation & Advisory / Industrial areas. As a result, leasing will add value to locally available raw materials activity in the industrial sector remained relatively thus boosting agriculture, business growth and the Valuation9DOXDWLRQVXUYH\LQJZDVDƀHFWHGE\&29,' & Advisory was affected by COVID-19 stable for the period under review. industrialization agenda. and the mode in which properties were inspected changed. To minimize transmission or contracting The biggest determinants of demand were; According to the Uganda Investment Authority, the virus, there was regulated access to areas accessibility/proximity, size, eaves heights, investors can apply for land in these industrial within premises to be inspected, either because DPSOHSDUNLQJ ODUJH\DUGV DGGLWLRQDORƃFH parks for as long as they have a registered the clients were being cautious or Valuers space on the warehousing facility as well as high company, an investment license, a comprehensive were limiting exposure, resulting in increased TXDOLW\VSHFLƁFDWLRQVLQIRUPRIƂRRUORDGLQJ EXVLQHVVSODQVROLGSURRIRIƁQDQFLQJDQGD time spent inspecting. In addition to the usual requirements. Average rents for warehouses sketch map of land utilization. Satisfying these inspection equipment, Valuers incorporated hand remained relatively stable, ranging between US$4- requirements accords an investor an initial lease sanitizers, face masks, and gloves as protective US$6 per sqm for warehouses in the Kampala of 5 years, which will be extended to 49 years upon gear. Industrial Business Park (KIBP), while the older completion of development. stock especially those found outside the KIBP had Real estate, as compared to other investments rental rates of approximately US$2.5 to US$4.5 per is known to be illiquid, and as such recording sqm. Table 5: Average Net Rent changes in value is not as immediate as other (US$) for Warehouse forms of investments. With leases running for The Kampala Industrial Business Park (KIBP) three and more years and transactions that require continues to remain the preferred area for large Description Rent Per Square Meter (US$) long timelines, real estate values usually move at a industrial companies looking to construct their Within KIBP 4.0 - 6.0 slower pace. As such, impacts of the pandemic on own premises and as such has seen tremendous property values may take a while to fully manifest growth of purpose-built warehouses for owner- Outside KIBP 2.5 - 4.5 DQGEHTXDQWLƁDEOH occupation as opposed to renting. There has been growth of several industrial areas Source: Knight Frank Research

9 KAMPALA MARKET UPDATE H2 2020

Due to the uncertainty surrounding valuations, the cautious approach to investment before and a global shutdown of trade which led total the Royal Institution of Chartered Surveyors LPPHGLDWHO\DIWHUJHQHUDOHOHFWLRQVZLOODƀHFW stagnation of supply chain and distribution routes (RICS) issued a Valuation Practice Guideline, new developments and leasing activity across into the country. This led to a short-term increase advising RICS regulated members to add a all property sectors in 2021. We were already in demand for storage space from the health Material Valuation Uncertainty Clause, allowing seeing potential investors adopting a “wait and sector, e-commerce, and pharmaceuticals. values provided to be supported by a caveat, which see approach” to the anticipated increase in serves as a precaution but does not invalidate country economic and political risk. The recent Much as retail was quicker to rebound from the the valuation. The current market conditions development and anticipated rollout of vaccines, lockdown than any other property sector, the and valuation uncertainty have prompted gives hope to a quicker recovery of the economy HƀHFWVDQGLPSDFWZLOOEHIHOWIRUDORQJWLPHWR valuers to advise banks to keep valuations under and real estate market in general. come. constant review given the unknown future impact There is an underlying level of uncertainty in COVID-19 might have on the real estate market. There is going to be continued emphasis on WKHVHFWRUGXHWRWKHSRVVLEOHQHJDWLYHHƀHFWRI KHDOWKDQGVDIHW\HVSHFLDOO\LQWKHRƃFHDQG increased import duties on a range of products There was a marked reduction in valuation retail markets, with contactless technology and particularly processed foods, which could instructions received from the banks in Q3 2020 continued social distancing measures as a major dampen the potential growth of retail sales as the mainly attributed to the lockdown instituted area of focus in the wake of the pandemic for new associated costs will be passed on to the consumer. in March, which resulted in closure of business and existing prime developments. Technology will Additionally, pent up spending after lockdown operations in the country, and in particular continue to play a major role in real estate, as a was short lived as consumers are still being WKH/DQGV2ƃFHIRUWZRPRQWKV7KHPDUNHW PHDQVWRIDFLOLWDWHZRUNƂRZVDQGUHGXFHSK\VLFDO cautious in their spending habits, whilst others uncertainty caused by the pandemic forced a contact. are still avoiding “crowded” places which include number of banks to lend cautiously as a way of VKRSSLQJPDOOV7KLVLVHYLGHQWLQWKHIRRWWUDƃF mitigating the likelihood of increasing non- 2ƃFHRFFXSLHUVDUHVWLOOWDNLQJDFDXWLRXV numbers registered at shopping malls in H2 2020 performing loans (NPL) which were initially DSSURDFKWRRƃFHH[SDQVLRQHYHQLQUHVSRQVH compared to same time last year. The ongoing anticipated to increase from 4.6% to 10%. Despite to social distancing requirements. Working from curfew and restrictions on bars will continue to the pandemic, Knight Frank recorded an increase home and in shifts will continue through 2021 as impact on the sector until they are fully lifted. The in commercial valuation instructions in Q4 2020 HPSOR\HUVDQGRUJDQLVDWLRQVHVWDEOLVKDQGUHƁQH reduction in numbers of outbound travelers from as compared to residential instructions, majorly workplace strategies that favor their employee’s Uganda, may indirectly support and increase retail due to the loan restructuring opportunities that ZHOIDUHKHDOWKDQGVDIHW\7KHWUDGLWLRQDORƃFH sales of children’s clothing and footwear. Similarly, banks availed to their borrowers, that seemed to however still remains the core of work and its cosmetics and healthcare products will likely be appeal to commercial property owners than any environment, and is yet to be superseded by the big winners until such a time as it is felt safe to other property type. working from home, although some elements of travel abroad. The supply chain disruptions which ƂH[LEOHZRUNLQJZLOOEHFRPHPRUHQRUPDOL]HG plagued retailers last year seem to have eased up somewhat, though restocking of shops is still It is evident that landlords across sectors are EHLQJLPSDFWHGE\FDVKƂRZVDQGVORZWXUQRYHU intent and more focused on recovering from the The current market rent concessions and stimulus interventions they The jury is still out as to whether 2021 will be a conditions and valuation put in place for their tenants in 2020, and are less year of recovery from the total disruption and uncertainty have prompted inclined or accommodating of any more requests destabilization of the real estate sector in 2020. valuers to advise banks for further rebates. This sentiment is reinforced Whilst it is reasonable to forecast a gradual and to keep valuations under E\WKHEDQNVDQGƁQDQFLDOLQVWLWXWLRQVZKRDUH modest improvement in the performance of the constant review also not open to further concessions to borrowers sector in general, it is important to bear in mind now that the initial period allowed for loan that momentum of this improvement will be restructuring is over. determined by how quickly and positively the economy rebounds to reasonable growth levels. H1 2021 Market Outlook Prime residential leasing activity remains under Similarly, it is hoped that the speed with which pressure as expatriate numbers have dwindled in the vaccine is acquired and administered, will light of second lockdowns and restricted travel in also play a big impact in curtailing the spread of According to the Bank of Uganda State of the Europe and United Kingdom. Since this remains the virus, and enabling a faster return to some Economy Report for December 2020, economic the biggest driver of demand for this sector, we semblance of normalcy all things remaining the growth is projected to remain below expected anticipate prime residential rents in turn coming same, and no new variants to further complicate levels until FY2022/23, with estimates of 5.5%- 6.5 under pressure and reducing further as vacancy the situation. We can only wait in hope, as we do % projected for FY2021/22. Growth will be hinged rates also increase. our best to stay safe. RQPRQHWDU\DQGƁVFDOSROLF\VWLPXOLDVZHOODV rebound in both foreign and domestic demand 7KHLQGXVWULDOVHFWRUVHHPVWRKDYHEHQHƁWWHG following the development of the Covid-19 from the lockdown and restricted travel which vaccines. forced manufacturers and traders to be innovative DQGƁQGZD\VDQGPHDQVRIUHVSRQGLQJWRORFDO The current property market uncertainty demand for essential goods and services amidst associated with the pandemic, heightened by

10 The Arena Mall, Nsambya. Space available to let.

JUDY RUGASIRA KYANDA VALUATION & ADVISORY RESIDENTIAL AGENCY MANAGING DIRECTOR Lucy Kaitesi Wamimbi +256 414 344 365 Arafat Katugga Head - Residential Agency [email protected] Head - Valuation & Advisory +256 414 341 391 +256 414 341 391 [email protected] [email protected]

RETAIL AGENCY & MANAGEMENT RESEARCH & CONSULTANCY OCCUPIER SERVICES & COMMERCIAL AGENCY Marc Du Toit Patience Taaka Head – Retail Agency & Management Sharon Kamayangi Head - Research & Consultancy + 256 414 344 365 Head - Occupier Services & Commercial Agency +256 414 341 391 [email protected] +256 414 341 391 [email protected] [email protected]

Recent Publications Africa Retail Report 2020 H1 2020 Kampala Market Update Africa Residential Dashboard $IULFD2ƩFHV'DVKERDUG

Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients Knight Frank Research Reports are worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All available at our clients recognise the need for expert independent advice customised to their specific needs. Important Notice: knightfrank.ug/research © Knight Frank LLP 2019 This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.