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Ban dollar rent, then what?

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Added 2nd July 2019 10:07 AM

Contrary to what the parliamentarians are claiming, the Bill, as it is, in no way protects the small trader or tenant

Ban dollar rent, then what?

Contrary to what the parliamentarians are claiming, the Bill, as it is, in no way protects the small trader or tenant

By Judy Rugasira Kyanda

At 8:00 pm on Wednesday, June 26, news broke that Parliament had passed the Landlord and Tenant Bill 2019 in its original form despite several pleas from landlords, tenants, the financial sector and more recently some enlightened Members of Parliament and cabinet ministers to review the Bill and make it fit for purpose. So, what does this mean moving on?

My newspaper article in New Vision of April 25, 2018, laboured to explain the dire consequences of passing the Bill as had been originally drafted. For the record, and avoidance of doubt, I will reiterate some of the points I raised in that article.

I am a proponent of the legislation. Good legislation that will enable a strong and stable property market by encouraging and attracting local and foreign investment, creating employment in this sector and growing our tax revenue and economy ultimately.

Contrary to what the parliamentarians are claiming, the Bill, as it is, in no way protects the small trader or tenant.

Actually, it has just made their situation worse, by making them more prone and susceptible to the consequences of a weakening shilling and arbitrary rent increments. On a more macro level, the Bill has diminished the comparative advantage of Uganda over other countries as a real estate investment destination for foreign and local investors, who invest in hard currencies like the US dollars, for hard currency rental income streams and better yields on investment.

It would have been more practical to separate the Act regulating commercial and residential tenancies, instead of having them regulated under the same Act. For obvious reasons, these tenancies are different and cannot be regulated the same way. The law regulating an apartment, will not be applicable to that regulating a shopping mall.

For example, the capital costs incurred by a residential tenant to fit out their apartment with movable fittings, cannot be compared to those incurred by a retailer in a shopping mall. Some retail anchor tenants incur fit out costs of up to $5m! As such, the latter will require guaranteed tenure for the lifespan of their tenancy whereas residential tenants require the flexibility of notice periods.

The Bill as passed has protected small traders from the fixed term of a lease, but will impact significantly on commercial tenants as they are not in a position to set up business where they cannot guarantee the full tenure.

The cause of arbitrary rental increments, specific to KACITA tenants, is simply because the relationship between the landlords and tenants is informal. The tenants have no tenancy agreements and landlords take advantage of this. Treating the symptom of increasing rents is pointless, if the root cause has not been addressed. You cannot enforce the terms of a verbal agreement and this should not be an option, if they hope to achieve their desired objective.

Question, why are these challenges of arbitrary and unfair rental increments not seen in the more prime malls where tenants are paying dollar rents? Answer: because the landlord/tenant relationship is formal, contractually bound by a lease agreement which is signed by a willing tenant and willing landlord prior to the tenant taking occupation.

The terms and conditions of the lease are very clear, both parties know what to expect and there are no surprises. A landlord cannot decide to wake up one morning and shut down an entire mall (which

has become a habit downtown) to settle scores with their business partners, leaving tenants totally helpless. Is this also because of dollar rentals? This impunity from landlords is because there is no legal recourse.

All attention and focus have been given to the issue of currency in which rent will be paid and this seems to be the fulcrum on which the need for a landlord and Tenant Bill is turning. However, addressing this issue alone is pointless, if other aspects of property management and financing are ignored. As I have argued before, this issue is bigger than KACITA, and KACITA is not Uganda.

Nor do they control the property market of Uganda. In fact, even their contribution to the tax revenue of the country is incomparable to property developers/owners of commercial properties in the country at large.

How then do you ban dollar rentals, without giving due consideration to other factors in the property development cycle and value chain? It is inconceivable to outlaw dollar rents without bearing in mind the impact of such a regulation on the finance sector and the economy as a whole. I am hoping that our honourables are aware that dollar-denominated loans are cheaper (8%) than shilling loans (20%), which is why most commercial properties are financed by dollar loans. This being the case, were the banks consulted on the feasibility of converting these dollar-denominated loans into shilling loans?

In order for the borrowers to afford their repayments, they will have to increase the rent extortionately and the tenant will pay the price. However, there is also a possibility that the banks will not accept to reschedule these loans. Have the repercussions of this been thought through? Or the fact that non-performing loans will increase, repossessed properties will become the order of the day crashing the property market to smithereens?

The arguments in Parliament were that countries like UK, US, Europe, China, insist on local currency rents. This is correct, but why? For example, the USD is found in a pair with all of the other major currencies and often acts as the intermediary in triangular currency transactions. This is because the USD acts as the unofficial global reserve currency, held by nearly every central bank and institutional investment entity in the world. It is for this reason that Uganda fixes her exchange rates to the USD to stabilise it, rather than allowing the free (forex) markets to fluctuate its relative value. Why is this the case? Because of the volatility of the shilling to many external factors. Pray I ask, is the shilling a globally traded currency? When our honourables travel to America, are they able to take shillings and exchange them for dollars at JFK Airport? Or London's Heathrow for that matter? But you can exchange dollars in London, Japanese Yen in Switzerland and the Euro in South Africa. The common thread being that these are strong, stable currencies.

No prudent investor will go to America and get property development financing in Pounds Sterling or Euros, simply because it would not make any economic sense. It would be more expensive to borrow in any other foreign currency than the local currency - the USD. Why? Because the USD is a strong, stable currency and there are several federal reserve banks with adequate deposits to lend at affordable rates.

In Uganda, it is cheaper to borrow in USD because the reverse is true. It will also make sense to make loan repayments in the same currency as you have borrowed, because it is the terms and conditions of our financing institution and dollar rentals are cheaper than shilling rentals because they are more stable (minimal fluctuation to CPI).

At the end of the day, $10.00 per square metre converts to sh37,550 and can fluctuate up or down, but mainly upwards, by up to 30% in one year.

Rentals will still remain pegged to the dollar, but paid in shillings, subject to the exchange rate, and annual escalations on the shilling of over 20% to keep up with interest rates, instead of 3% escalations on the dollar as is the market rate. So, who will be most affected by the dollar rental ban?

The Bill attempts to limit the extent of the above collateral damage to the tenant by stating that rent increments per annum will be capped at 10%. Are they also going to cap interest rates? I am sure the MPs also appreciate why our finance costs are high? Put simply, our savings as a banked demographic are low, therefore, banks do not have enough deposits to lend at affordable rates. They in turn need to borrow the money they require to lend to borrowers and this comes at a cost (both of borrowing and hedging against forex losses). Shouldn't we be focusing more on how we can increase savings and deposits as a means to lowering interest rates and stabilising the shilling?

The need to review this Bill is not an option, it is a necessity or our property market is going to be destroyed. The Uganda property market does not operate in a vacuum and is a market which is open to both local and foreign investors, not just tenants. We must legislate for all with a long-term view on things. You cannot pass a Bill on the whims of one interest group to the economic and social disadvantage of the rest of the country! China and America have shown increased interest in investing in Uganda's real estate sector.

I am not certain, however, that with such legislation, which makes the ease of doing business in Uganda rankings plummet, alongside facing the fear of being imprisoned for "annoying" a tenant and the inability of a landlord to distress for rent, pits Uganda as an unattractive investment destination for property.

I am appealing to President Yoweri Museveni not to assent to this Bill in its current state. Property experts and professionals have offered their free services to help draft a better Bill, which will stand the test of time and encourage a vibrant property market in Uganda, but to no avail. 

The writer is the managing director of Knight Frank Uganda

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