Activity in the property sector was subdued in the first half of the year, especially for higher priced units. Declines were registered in unit sales, uptake, and occupancy for high end residential units, retail units, office space in the city centre, and for industrial rental properties.
The biggest decline was in demand for office space, with Kampala’s Central Business District the hardest hit. It has been falling for the last two years, according to a report by Knight Frank Uganda.
While the average asking price for prime commercial rentals in Kampala is between $15 and $16.5 per square meter, some office properties in the CBD were forced to lower their rents to $12 per square meter.
The district is losing out to new properties in neighbouring locations like Bukoto, Bugolobi, Nakawa and Nakasero, which is where most renters are preferring to set up their offices. Those locations are not as congested as the CBD, making them more attractive. Additionally, the properties are modern, spacious, and have enough parking space unlike properties in central Kampala, most of which are older.
Firms and companies looking for smaller office spaces also drove up the demand in those locations in the first half of the year, continuing a trend observed in the last two quarters of 2015. For those firms, Naguru and Bugolobi are close enough to their corporate customers in the centre of town and yet
Government ministries and parastatals took up most of the prime office space on offer – a total of 20,000 square meters, unlike the last half of last year when companies in the technology and financial services sector provided the biggest sources of demand.
Demand for office space from oil firms is also yet to recover after falling in the second half of 2015, according to the report. Before they were forced to downsize their operations because of delays in issuing oil production licences, oil firms were responsible for a good portion of the demand for prime office (and residential) space.
Expensive homes stand still
Sales of high end residential units declined, bringing down prices by 10 – 15%. The units are staying on the market longer as there are few buyers who can pay their listing prices. The report attributes the slowdown to the uncertainty and speculation surrounding February’s general elections.
The more exciting action was in middle income property. Unlike prime properties whose values depreciated, the value for middle income properties increased by 2% – 5% per annum. The report notes that there was an increase in the number of new units coming onto the market in greater Kampala. These units usually sell and rent at lower prices compared to houses in or close to the city centre.
All indicators are that this trend will hold even with more middle income properties coming on the market, given the high demand for good-quality affordable housing and office space.
The uptake of retail space was lower in the first six months of this year compared to the same period last year. The elections had little effect on retail businesses, however, with visitors to malls managed by Knight Frank reducing by only 1% in January and February. For the full period, traffic declined by 2.1% compared to the same period last year.
Additionally, some retail tenants moved to end the short-term uncertainty surrounding their rents by asking to pay in shillings instead of dollars, while some asked for rent caps.
These trends point to a correctional phase in the high end residential and prime office market in the city. High commercial bank lending rates – averaging 24.5% – put a damper on borrowing, which in turn had a downward effect on how many prime properties were sold; most properties are bought with mortgage loans, according to Knight Frank. Pessimism remains for high end properties for as long as interest rates are high and activity in the oil sector subdued.