By Ortega Ian | The Ugandan Property Bubble Is About To Burst

Posted September 18, 2014 by Ugandan Diaspora News Team in Real Estate In Kampala ~ 7,843 views


real estate

I think Real Estate in Uganda is over-valued. I predict the property bubble fully popping in 2 to 3 years from now. We are already witnessing the burst in some forms. Already, most top floors of most buildings are unoccupied, there are no tenants. Most offices are shifting to the suburbs and most organizations have chosen to construct their own head-offices instead of renting.

I read a wonderful story from Drew Ddembe and he makes a wonderful analysis about the whole property bubble in Uganda: “For years I have been saying to all of my friends and family that the property market for medium to high end houses is overvalued!

The quality of the infrastructure as well as the quality of the housing plus the paucity of building regulation and housing density and zoning regulations suggests that one cannot predict the value of their property a few years later. Suburbs that appear to be fine and attractive today will be slums tomorrow particularly given that you have no control over what your neighbor will build or how many people will live in the property or to what use he or she will put it. Its not uncommon to find mansions side by side with tenements, or residential property side by side with commercial properties or even petrol stations and industrial properties and factories.

When I see Ugandan property priced at 800 million or in USD I wonder what its value will be in 10 or 15 years in an unplanned city that gets worse and not better with each year and increasing population! I have asked bankers and real estate agents in Kampala to give me an idea of the capital gains in Kampala and it is just the wild west! No one appears to have a good idea. Its all speculation!

The cost of money in Uganda is usurious with mortgage rates anywhere between 16% and 24%! The real incomes not including the gains from corruption are too low to consistently pay off a mortgage for most people. Corruption in planning and construction also means that the reported cost of building is actually much higher than the real cost with overheads increased by stealth of materials and corruption at all levels of the construction process!

A couple of cousins used to work in National Housing corporation and the stories they told explained why low cost housing was priced out of the range of the people in need of low cost housing! there was graft every inch of the way with simple things like light bulbs costing several times more to feed everyone in the chain of corruption! I watched one of the prominent real estate agents in Uganda steal 5 million shillings from a friend of mine for simply introducing him to a seller! There was no further contact from him, no help with conveyancing, no due diligence, no help with finalizing the deal and no guarantee of quality in the whole process! This is fraud. He provided no service at all yet demanded and got paid fpr a service not rendered. I have seen other people ripped off of 10% or even more in similar circumstances where the real estate agent provided no service but demanded payment!

Like all markets as Uganda grows, there will at some point have to be a correction! And I pity those who have paid a billion shillings or more for their house or even several hundred million for over valued real estate of doubtful construction quality in a surburb with no access roads, no amenities and little better than a slum!! That correction will see hundreds of millions wiped off the paper values of peoples property!

In Japan after their bubble burst, property prices for overpriced apartments were still declining fifteen years later and whole families wree mortgaged to the hilt with no hope of ever paying off the debt in ones lifetime. Corrections have wiped millions of dollars off the US, Canadian, Irish, Greek, and Australian property markets since the burst of the latest property bubble in which every mum and dad home owner saw himself becoming a millionaire on paper!
There is a need for proper research into the Ugandan property market!”

One economist, Enock Twinoburyo Nyorekwa while writing for the African Executive had this to say;
“I recently went looking for a parcel of land to purchase with my peanut savings. The broker, on knowing the amount I had in mind, called his network of brokers to help me locate a cheap plot intimating “Ono sente tayina za CHOGM” (literally meaning, he does not have CHOGM funds). This arguably among other factors could explain the exponential rise in real estate prices in Uganda. It is against this backdrop that I try to explore the sustainability of Uganda’s real estate bubble that is characterized by rapid increases in valuations of real property.
Unlike the stock market, where most people understand and accept the risk that stock prices might fall, most people who buy a house don’t ever think that the value of their house might decrease. The laws of physics state that when any object (which has a density greater than air) is propelled upward, it will return to earth because of the force of gravity acting upon it. The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion.

Prices in the housing market follow this law of mean reversion too – after periods of rapid price appreciation (or depreciation), they revert to where their long-term average rates of appreciation indicate they should be. Home price mean reversion can be rapid or gradual. So yes, at some point property prices will come down. Since the when question is one that has not empirically been answered, therefore the scope is this piece is limited to the key factors that cause the bubble as well pointers to why it might burst.

Prices are driven by demand and supply.When demand outstrips supply, the prices go high. The reverse is also true. To best understand the dynamics of real estate market, one ought to know the factors that affect both demand and supply of real estate. Assuming the supply is constant (same geographical stock of land), my analysis is limited to the key drivers of the demand side.

Land, real estate prices don’t follow the normal demand law, where the higher demand is driven by lower prices and vice versa. To the contrary, people buy more real estate when prices are high expecting them to rise further. This is primarily driven by speculation as well as lack of alternative investments in other sectors like agriculture. In Uganda, the speculation is further stimulated by the huge expectations from the oil sector where the estimates place the value of Uganda’s oil assets at a minimum of $75 billion. A substantial amount of this money is to be spent on public expenditure, with a good amount trickling into the property industry. Also worth noting is that commercial exploitation of the reserves requires about US $10bn of investment which will also inevitably trickle down. However; Oil trend significant oil revenues (worth 5% GDP) won’t happen until 2030. During the peak period – which is estimated at 15 to 40 years at maximum – revenues will be around US$ 1.1 billion. Often resource extraction often entails little job creation, unemployment rises.
The rising debt levels will likely strain the future oil proceeds. Debt levels increasing simply mean more taxes in future. Currently, Uganda’s post HIPC and MDRI debt is growing at an average rate of 17% per annum in nominal terms, whilst projected to rise to 20% per annum in the medium term and long term frameworks. If we can take a leaf from Greece or any debt ridden country, austerity coupled with increased taxation only strains the demand levels with a trickledown effect on housing prices.

It is reasonable to expect that the number of houses built will increase at approximately the same rate as population growth. However as much as there is growing demand for real estate and apparent huge housing deficits, the structure of the population demonstrates high levels of dependency with over 60% of the population being below 18years. This coupled with the growing levels of youth unemployment will prospectively lead to a dwindling demand for non-consumables including land.

Real estate bubbles are seen as an example of credit bubbles (pejoratively, speculative bubbles), because property owners generally use borrowed money to purchase property, in the form of mortgages. This is probably the case in Uganda, as in FY 2011/ 12 when the central bank initiated an inflation targeting tool- by increasing interest rates to curb the runaway inflation (30% in November 2011), construction sector grew in real terms at 1.7% in FY 2011/12 compared to 7.8% in FY 2010/11. Real sector activities have continued to grow at 5.6% over the last 4 years. Also notably, banks have consequently revised their mortgage valuations way below the market valuations. This move was prompted by the dip in housing prices in the center of town. This only points to fact that land and other real estates are wrongly priced primarily due to speculation. E.g. when will land of 1bn shillings in kololo ever pay back?

Speaking of inflation, arguably it could be here to stay primarily. There is an increasing shortage or scarcity of food inputs like land, energy, water etc. yet the demand globally is increasing due to increased population growth rate. Thus the structural changes around oil and food production may be here to stay. With persistent inflation, the consumption share of income of the already small formal sector (less than 10% of the economy) as well as others will increase reducing the available disposable income to clear mortgages or least buy off the overly priced properties.

Lastly corruption has a significant premium or call tax on the real estate pricing. Corruption which is estimated annually 10% of the national budget and about 2.2% of GDP has played a significant impact on the boom in real estate activities. Since the introduction of declaring the source of income for all properties above 50Million, the land and real estate activities have dwindled. Corruption if not curbed in the long run impedes investment, since it worsens the business indicators as well the global competitiveness index. Also notable, a strong fight against the vice will inevitably reduce demand leading to a price slump for real estate products.

Economic theory seems to suggest that the key drivers of real estate bubble such as corruption, private sector credit and remittances, among others like growth of an economy and expectations tend to be volatile in the long run. Given that real estate prices are growing faster than any macroeconomic variable, worryingly higher than real GDP growth which is a proxy for effective demand/ affordability, the bubble will inevitably burst unless the government regulates the real estate prices and controls corruption. Construction and housing bubble will burst faster in medium term (5-10 years) unless regulation happens.”

Finally Timothy kalyegira in his story about the same in Daily Monitor wrote:

“I recently had a look at two of the largest malls in Kampala, Bugolobi Village and Acacia Mall. These two malls in particular are an attempt to bring some glamour and experience of high-end shopping and café life to Uganda, such as is common in major cities in the West and other parts of the world.

A good bit of architecture they are. Acacia Mall looks much like the Westgate Mall of Nairobi. The two malls add to the number of places that the young and restless can hang out at in Kampala. However, they raise certain questions in my mind that these days is sceptical about most things.

Most of their items price out most Ugandans, from coffee to ice cream and other snacks. Granted, there always is the mass market and the high end in every market in an open society. But is Uganda ready yet for this sort of stratified consumerism? Who is the target market for these two luxury malls? It can only be as their clientele a small number of European expatriates and tourists and the small Kampala middle class.

In the late 1990s, as drinking joints, sports bars and cafés started to open in Kampala, it soon became noticeable that as soon as a new one opened, the small and usually same crowd of revellers flocked to the new ones. That was until another one opened and then they all abandoned the most recent one for the new “happening” place.

After some time, both places were struggling: the old bar or club having lost its clientele to the new bar, which in turn lost some of them to the next and so on, and finally all three or four bars were struggling financially.

The message was that there is not enough of a consumer middle class in Kampala to sustain all these places. Might the same thing be about to happen to these mushrooming malls?
Already, more established malls like Garden City and Nakumatt Oasis are starting to be noticeably affected by Bugolobi and Acacia malls, as Ugandans find the two new malls more fashionable.

It appears there are more large supermarkets and shopping malls than Kampala can support.
My view is that some of these malls should have been based in Jinja, Mbarara, Mbale, Gulu or another such towns to perhaps create a contagion effect and force property owners in these towns to raise their standard.

What does Kampala then need?
It seems to me that the much more urgent property need in the city is low cost, quality housing, two bedroom units built as estates with basic amenities like electricity, piped water and paved roads. As most of us know too well, Kampala is a city built on seven hills and seven slums. The name Kampala gives the impression that those who live in the capital are better off than those in smaller towns. But in truth there are parts of Jinja, Fort Portal, Mbale, Mbarara, Gulu and Arua where residents live in more dignified surroundings than the slum that much of Kampala is these days.

Capitalism might have triumphed over Communism starting in 1990, but after the initial euphoria and the fear of Cold War nuclear war subsided, many have started to come to terms with Capitalism’s numerous shortfalls.

It is creating unacceptable levels of income inequality. A tiny new class or group of super-rich is cropping up around the world, which controls on average 80 per cent of all national wealth.

Then the remaining 99 per cent of the population struggles for a piece of the 20 per cent.
Unfortunately, Africa which more than any other continent needed a more equitable distribution of wealth and a sense of fairness after all the injustices it has suffered for centuries, is blindly embracing the excesses of Capitalism at a time most of the continent is still feudal in its ways.

In Kenya, this artificial consumer lifestyle in the capital Nairobi has long been a mark of that country’s unequal society. Parts of Nairobi have neighbourhoods with property that could blend in well in a European suburb; while at the same time Nairobi is home to Kibera, said to be the largest slum in Africa, a city within a city, full of squalor, dirt and despair.

Africans, who like to claim or imagine themselves the warmest, most humane and God-fearing people on earth, are apparently as cold and indifferent to the suffering of fellow man as any other people.

So to the people and companies putting up these large malls, their point has been taken. But if they can, they should listen to us too. They will do Kampala a greater service by using that same capital and clout with senior government officials to build complexes and estates of quality housing.

Then when we finally have decent housing and the struggling middle class is more confident of itself, it will then, in a natural next step, start to patronise the restaurants at Acacia Mall with French names.”

From my own look of things, the property bubble is going to burst, in a period of not more than 3 years. Anyone making an investment in commercial property in the city centre is actually making the biggest gamble of all.

A lot of money has been stacked in property, thus we are also likely to see an economic crisis of sorts in the event of the burst of this bubble since most of our richest men have actually built more arcades than anyone else, most of their money comes from arcades.

You cannot have prices rising by 10 per cent a year when incomes rise by 2 per cent without grave social and economic consequences. When the bubble inevitably bursts, misery results. And Uganda is in for those hard times.

Let’s simply prepare for the burst, the prophet has spoken….quote me.

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Ugandan Diaspora News Team

Ugandan Diaspora News Online is an independent, non political news portal primarily aimed at serving Ugandans who work and reside outside Uganda. Our aim is to be a one stop shop for everything Ugandan and the celebration of our Ugandan heritage.



    Well written article with insightful analysis. Thanks you for posting it.

      James Mogi

      I think this is spot on , the house prices in Uganda are over valued in a sense that there are lots of Uganda’s there who easily mint their own huge fortune from a corrupt systems. Hence the only way to hide their loot are in properties.

      How can a civil servant managed to built or buy a house for 1 million US dollar. No.No body questioned, I would advised lot of honest decent hard working Ugandans to desist from putting too much of their liquid asset on properties.. This is a very precise analogy. Thank you so much Mr Ortega for sharing with us your very well thought opinion.


    There is one vital flaw in your analysis.

    You fail to understand that real estate prices are being driven largely by money that is stolen from government coffers that has no where else to go but be deployed in real estate.

    It is not that ordinary Ugandans are driving real estate prices upwards. It is corrupt Ugandans with no sense of business acumen whatsoever that have no option but “invest” in real estate.

    If they didn’t invest that stolen cash in real estate, it would sit in their houses and gather dust.

    It is also why the cement industry, and all the other industries in the value chain, vis. Roofings Uganda, Tororo Cement, Uganda Baati, Gentex Enterprises, Hardware Deals, etc., will continue to prosper and thrive.


    Very well written
    A house in Uganda priced at 1million $?! I still don’t get it? Who buys this rubbish?
    I just cannot wait for the burble to bust.
    It’s like an urban jungle out there!

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