Rent charges stagnate

By Vision Reporter

PROSPECTIVE real estate developers will have to be more choosy about the location and design of their buildings if they are to get good returns on their investments.

BY RICKS KAYIZZI

PROSPECTIVE real estate developers will have to be more choosy about the location and design of their buildings if they are to get good returns on their investments.

Buildings within meters of each other can be fully or barely occupied as tenants become more conscious about facilities therein and the surrounding environment.

Although buildings in prime areas along Kampala Road have a record 100% occupancy rate, those located a few meters away in downtown Kampala have occupancy of as low as 60%. The drastic increase in construction costs suggests an impending upward spiral in rental charges.

The cost of building materials has gone up. The cost of a 50kg bag of cement [Tororo or Hima] for instance, has shot up from sh22,000 to sh2,4500, while a four-litre tin of paint has shot up from about sh18,000 to sh22,000. The price of a 32 gauge piece of iron sheet has also risen from sh15,000 early this year to the current sh19,500.

This should normally translate into higher rental charges as property developers try to pass on the high cost of construction to their tenants.

But charges have so far remained stagnant. Reason? Increased competition has cancelled out higher construction costs, keeping rentals stable at worst.

Commercial [office] space is now going for between $10-$15 per square meter per month, while retail [shop] space is anywhere between $12-$20 per sq meter per month. These rates have not changed much over the last one year. Commercial rentable space in Kampala has a record 95% occupancy although pundits have disclosed that by the time the construction of several commercial complexes is completed, the demand is likely to even out.

Upon completion of the NSSF Towers along Lumumba Avenue and Eco Towers along Nile Avenue and others in downtown Kampala – between late 2009 and early 2010, the demand would have been tamed.

However, a spot survey conducted by The Business Vision recently revealed a rather gloomy picture, especially for high rise building owners off the high streets. It was discovered that although most of the big and strategically located buildings are recording in 100% occupancy rates, the majority of high rise buildings have occupancy of as low as 60%.

The five-floor Kalungi Plaza has most of its office space on the top floor vacant while Kirumira Towers and Ivory Plaza, both on Wilson Road, have 60 and 80% occupancy rate respectively.

The seven-floor Kizito Towers on Luwum Street is worse off. After the 4th floor, most of the office space is vacant, with entire floors having an average of three tenants each as opposed to eight rooms that are available for rent. Its property manager complained of the high rate of defaulting, especially among the new proprietors.

“Many tenants usually flee after accumulating rent arrears. When they discover that the amount of rent demanded far outstrips the value of property bolted in their offices, they never come back,” he said on condition of anonymity. The newly constructed Esami House located on Bombo Road towards Wandegeya, and is being managed by Bageine and Company, was fully booked even before completion this September, says Sabiiti.

He attributed this to its magnificent design and an aggressive marketing strategy.

The seven- floor Carol House near Wandegeya, which has a sizable number of NGO’s is fully booked while Shoal House and Bhatia House on Bombo Road have 90% occupancy rates. King Fahd Plaza, a eight floor expansive building owned by the Islamic University in Uganda also has many vacant offices, especially in its two top most floors.

Conrad Plaza on Entebbe Road is occupied by several multinationals who rent whole floors and has 100% occupancy while the strategically located Communications House on Parliamentary Avenue is also fully booked.

Impala House on Kimathi Avenue, which charge their tenants in dollars, has only 168 sq meters of office space available, which in total goes for $2308 including VAT, according to V. Marisamy, the financial controller of the Alam Group-owned building.

Whereas Knight Frank’s recent Africa report said Kampala was short of office, retail and commercial accommodation, it pointed out that telecommunication companies and other multinational service providers that have set up operations in the city have created a scamper for prime office space.

The report further said that rental yields in Kampala are higher in the region at 9% for a 100 sq meter apartment compared to Kenya’s 7% and Tanzania’s 8%. “This has attracted a sizable number of off shore investors to cash on the market. While office prime rent fetches $15 per sq meter and a yield of 11%, a four bedroom house in a prime location brings in $5,000 in rent per month and a return on investment of 8%,” reads the report in part.

Surveys have revealed that urban areas have a backlog of up to 144,000 housing units. Recently there has also appeared a trend by many commercial establishments to shift shop from the city centre to Kampala’s suburbs.

“In a period of five years, I see office premises extending beyond the central business district (CBD) boarder line. People would have gotten accustomed to working outside the city centre,” said Herbert Sabiiti, Bageine and Company’s business development manager. Defending their stand to collect rent in dollars, Brian Tabaruka, Knight Frank’s Head of residential management and commercial agency, said with this they are insulated from the frequent fluctuations of the Uganda shilling since it suffers adversely due to inflationary rates.

He pointed out that the global financial crisis is already affecting the sector, in that not many businesses are shopping around for more office space.

“The crisis has affected the exchange rates. In instances where a tenant is making their monthly payments in dollars, they have to dish out more shillings with each square meter that they are renting in order to equate the dollar,” said. But rather than fall due to the anticipated slow down in demand for space, rent charges are likely to stagnate.

“The rates will stagnate rather than come down. This is because the cost of construction has shot up tremendously in the recent past. So it would not be worthwhile for developers to construct at high rates and then reduce rentals,” said Tabaruka. “For the bigger part of this year, the shilling had been strong in value compared to the dollar. So it had been playing to the advantage of the tenants. Even then, we decided not to renege on our position to charge in dollars,” he said.

He said that they are yet to see a flight of their tenants due to the financial meltdown, since most of them are under contract.

Preference for people to move from the CBD to suburbs has been blamed on the technocrats at KCC, who lack manpower and goodwill to ensure that building regulations are followed to the letter. The buildings in town are so close to each other, roads so narrow that given the increase in the population of people in the city centre congestion is unavoidable.

In some instances, approved architectural designs are not adhered to by contractors, which lead to exclusion of fire exits, erection of stair ways on the exterior of buildings and converting basements, which are normally reserved for packing, into office space.

Urban Tibamanya, the state minister in charge of urban planning said through the National Action Plan for Human Settlement and Housing Policy, Government has prioritised slum profiling.

“We are working hand-in-hand with KCC to ensure that order is restored in the city. We will soon embark on demolition of all illegal structures in Kampala,” he said recently.

However, Uganda currently lacks both the urbanisation and housing policies that can help guide regulators in enforcement.

Living in organised environments, which has eluded many Ugandans could be established both through the enforcement and introduction of legal instruments.

A report from the ministry of housing revealed that legal frameworks like the Condominium Properties Act, which was enacted in 2001 leading to the sale of NSSF flats, has yielded fruits thereby increasing home ownership by 5% in urban areas.

Housing development outfits such as Nationwide Properties, Akright Projects, Blue Ocean Developers, Kesington Real Estate Company, Jomayi Property Consultants, Turipati Developments and Pearl Real Estate Developers, some of the companies that have surfaced because of the booming mortgage finance segment of the housing sector, are henceforth making a killing.

The number of housing initiatives these companies have launched are likely to turn vacant patches of land into satellite cities with social amenities unheard of before in the history of this country’s housing sector.

Rent charges stagnate