A housing estate in a Kampala suburb. BoU's real estate indices show a
25.4 per cent increase in land prices and a 4.2 per cent increase the
cost of residential property between June last year and June this year
and a 22.1 per cent decrease in the cost of commercial rental space
between September last year and June this year. Photo/FILE
NATION MEDIA GROUP
By Samuel Njihia
Posted Thursday, November 28 2013 at 17:33
Posted Thursday, November 28 2013 at 17:33
In Summary
- BoU's real estate indices show a 25.4 per cent increase in land prices and a 4.2 per cent increase the cost of residential property between June last year and June this year and a 22.1 per cent decrease in the cost of commercial rental space between September last year and June this year
- BoU, in partnership with the Uganda Bureau of Statistics introduced the three price indices for the real estate sector to help monitor price movements and use the information to strengthen financial stability amongst the country’s lenders
- Tracking of real estate prices was one of the measures introduced by the regulator after a sudden surge in the volume of foreign currency denominated loans last year that raised concerns of a price bubble in the Uganda market
Land prices in Kampala increased by 25.4 per
cent over the twelve month period to June this year driven by increased
demand after the opening of the land registry, Bank of Uganda’s (BoU)
real estate indices have shown.
The real estate indices, which were introduced in
2011, also show a 4.2 per cent increase the cost of residential property
between June last year and June this year and a 22.1 per cent decrease
in the cost of commercial rental space between September last year and
June this year.
BoU, in partnership with the Uganda Bureau of
Statistics (UBS) introduced the three price indices for the real estate
sector to help monitor price movements and use the information to
strengthen financial stability amongst the country’s lenders.
“The rise in the land price index of 25.4 per cent
in the year to June 2013, combined with a greater willingness on the
part of banks to lend for mortgages and land purchase relative to the
same period last year, suggests that many new borrowers will be
acquiring homes and land with higher values,” said BoU in its latest
financial stability report for the period ended June 2013.
The regulator however warned that the increase in
the underlying indebtedness of households is likely to increase their
vulnerability to a rise in interest rates.
BoU, which increased its benchmark rate – the
Central Bank Rate - to 12 per cent from 11 per cent at the beginning of
September to mitigate against inflation, said lenders should ensure
borrowers will be able to service loans even if interest rates rise
substantially.
“Rapid increases in house prices should also make
banks more careful about high loan-to-value ratio (LVR) lending.
High-LVR lending would increase losses to the banking system and the
wider economy in the event of significant reversal in house prices,”
said BoU.
BoU and UBS generate the real estate indices to
produce quarterly data on changes in the volume of real estate and
prices paid by buyers for a representative basket of real estate
properties and related services.
Tracking of real estate prices was one of the
measures introduced by the regulator after a sudden surge in the volume
of foreign currency denominated loans last year that raised concerns of a
price bubble in the Uganda market.
BoU said that the share of bank lending for land
purchase to total credit to the real estate sector rose to 1.8 per cent
as at June 2013 from 1.1 per cent in June 2012 but that this was not a
very significant exposure by commercial banks which have been lending
for land purchases, representing relatively low risk.
The regulator said that data from Uganda Revenue
Authority (URA) also showed a rise in volume of land transfers and that
the low values of land transferred in the quarter to March 2013 was
attributed to the closure of the land registry adding that the URA data
does not contradict the land price index which indicates an increase in
the value of land for sale.
The decrease in the cost of commercial rental
space and the high volume of mortgages for residential housing are
however worrying the regulator.
It said commercial mortgages comprised 21.2 per
cent of bank credit extended to the building, construction and real
estate sector as at June 2013 and the 22.1 per cent reduction in the
commercial rental cost index reflected a risk to commercial banks
arising from the ability of borrowers and builders to repay loans.
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