Landlords, tenants face off over dollar rentals

Traders at Zai Plaza riot due to increased rent recently. Business people are saying that fluctuation in rent costs arising from depreciation of the shilling against the dollar increases their expenses. The consequence of this, is the inability to service their loans, run a well-capitalised business. PHOTO BY RACHEL MABALA 

In Summary

Section 3 of the Income tax Act 2017 dictates, “Notwithstanding the provisions of this section, all rental agreements shall be executed and effected in Uganda shillings.” As debate rages over banning
renting in foreign currency, most people currently renting buildings in dollars are unaware that they are committing an offence. Prosper magazine’s Christine Kasemiire engages property developers who suggest that dollar-based charges cushion them from a depreciating shilling. But tenants are opposed to that saying rental charges in dollars reduce their profits.

By Christine Kasemiire

A four-storey grey sky scrapper in Kyanja with a hint of yellow and red on the sides, is guarded by a state of the art gate built to lure tenants in.

While scrolling the online property agents’ website, a wagging $2,000 (Shs7.3m) price tag per month greets you.
“This is a four-bedroom house for rent in Naguru going for $2,000 per month. The house is in a secure location and has three bathrooms, a spacious and manicured compound…” reads an advert that welcomes you to Uganda Property Agents’ home page, alluding to a beautiful light brown residential house in the suburbs.

A scenery of multiple houses with somewhat similar description meets your eyes as you slowly scroll down the page.
While some adverts on the page are old, the property agent admits to renting some buildings in dollars.
Whereas current debates are centered on banning renting in foreign currency, most people renting buildings in dollars currently are unaware that they are committing an offence.

Section 3 of the Income tax Act 2017 dictates that “Notwithstanding the provisions of this section, all rental agreements shall be executed and effected in Uganda shillings.” Implementation of the law, however, is still lacking with many landlords still charging rent in dollars.

Issues of Jurisdiction of who the enforcer of the law should be, are also meagre as Parliament and Uganda Revenue Authority (URA) officials play ping pong with the responsibility.

Chairman Parliamentary Finance committee, Henry Musasizi, referred Prosper Magazine to URA in a bid to determine why implementation of the ban of renting in foreign currency is yet to be realised.

“We passed the law in 2017 but implementation is still a problem. Parliament does not implement laws so it is better you ask URA why they have not implemented,” he says.

In his response, Mr Ian Rumanyika, URA manager public and corporate affairs, says he has no knowledge of people charging rent in dollars, explaining that all taxes relating to rental income are paid in shillings.
“The Income Tax Act provides for return declarations in Uganda shillings as well as payment of tax using prescribed rates,” he says.

Member of Parliament (MP) Musasizi says government, intends to clear the grey area surrounding payment of rent in foreign currency vis- a- vis the domestic through the Landlord and Tenant Bill.

Not so liberal economy
Uganda operates in a liberalised market, meaning different players set their own price. In essence, banning dollar-based rentals clashes with that philosophy.

According to Ms Getrude Karugaba, a partner in Sebalu and Lule Company Advocates, the Income Tax Act and Landlord and Tenant Bill, through banning renting in foreign currency not only takes away people’s negotiating power but also renders that clause meaningless in a free market economy.

“To ban foreign currency would be inconsistent with the liberalised economy government has been pursuing. If you make it a law, everyone will have to comply but I think it’s a policy issue,” she says.

Ms Karugaba argues that it also assumes that people cannot negotiate, yet they should because if someone is paying rent of $5,000, they can negotiate terms of payment, for instance, at a fixed exchange rate.
The Landlord and Tenant Bill, is envisaged to make a further binding law between landlords and tenants, scrapping all foreign currency based rent payments, something commercial tenants in downtown Kampala consider a win-win.

Traders’ views
Mr Everest Kayondo, the chairman of Kampala City Traders Association (KACITA), said exploitation of Ugandans renting in dollars has lived past its lifetime and ought to stop.

However, to ban renting in foreign currency could cost the country all future prospects of real estate development, Knight Frank Uganda warns.

“Only 10 per cent of the landlords downtown are charging rent in dollars. The majority of landlords are charging shilling rentals, and it is the shilling rentals which are being arbitrarily increased over and above (by up to 300 per cent), the depreciation rate of the shilling against the dollar,” Ms Judy Rugasira, managing director Knight Frank says.

Prone to dollar-based loans popular for their single digit interest rates, ranging between 7 and 8 per cent, if forced to rent in shillings, real estate developers could lose their investment appetite since the value of investment will be lower than their initial investment.

Put in perspective, Knight Frank cites Zimbabwe as a case study of a country that has never seen a crane work to construct a building, a consequence of the ban prohibiting foreign currency based rentals.

The situation is worsened by high interest rates on shilling-based loans used in development financing, which only prolong the time an investor can break even.

Even while the landlords of dollar-based rentals do not increase rent costs, Mr Kayondo says by virtue of the appreciating nature of the dollar against the shilling, rent prices automatically supersede the shilling based real estate.

“Even if they do not increase rent, the dollar usually appreciates against the Uganda shilling. So by implication, people will convert more Uganda shillings to get dollars, so it will have increased,” he says.

Banks, savings deal big blow to real estate
Consequential to Ugandans’ poor savings culture, characterised by short term deposits, banks in Uganda refrain from lending large sums of money to real estate, which is usually a long-term investment.

“The kind of deposits we have in Uganda are short term in nature, so you cannot commit deposits for long term and project development is long term. It would create a mismatch in your balance sheet,” Mr William Sekabembe, Dfcu bank executive director says.

According to Ms Rugasira, this forces developers to rely more on foreign funding especially dollars, which requires proof of a dollar-based source of earning as a prerequisite for loan acquisition.

Nonetheless, the banking community in Uganda believes they are fully equipped to lend to the real estate sector, revealing that many buildings in Kampala were financed by loans issued by local banks.

Dfcu bank, Mr Sekabembe says, has 15 per cent of its portfolio in project financing, which is attributed to the financial institution’s ability to attract funds from Europe that are intermediated for a long period of time.

Reiterating Mr Sekabembe, executive director, Uganda Bankers Association (UBA) Mr Wilbrod Owor says, “Ugandan banks are fully capable of lending to real estate.”

Real estate overrated The absence of a crane in Uganda poses no threat to the economy, economists believe. Ramathan Ggoobi, an economics lecturer at Makerere University Business School holds the view that this market is not ready for the kind of real estate product they are offering in dollars.

Citing numerous empty buildings in Kampala, he believes the country does not need anymore real estate, rather industries.
He emphasizes that the business community ought to be shielded against foreign exchange fluctuations in rent payment.

No foreign currencies allowed
To strengthen the shilling and reduce tenants’ woes, Uganda is opting to implement the ban of paying rent using foreign currencies. Turkey and Zimbabwe made the reforms in 2018 and early 2000 respectively.

The two countries also banned trading goods in foreign currency. The presidential decree in Turkey last year introduced a ban on foreign currency transactions between Turkish residents of any citizenship status. No vehicle lease, financial lease, real and movable property contracts among others are to be undertaken in foreign currency.

TENANTS’ WOES
Garden City is home to many business people in uptown Kampala. For 17 years, Mr Abdallah Kintu, has operated a technology business in the building. Back then, he paid rent at the exchange rate of Shs1,650 for every dollar.

Flash forward to 2019, the business man exchanges Shs3,660 for every dollar he pays to his landlord. With the annual increments in rent, accompanied by the effect of the depreciating shilling, his business suffers.

“The problem is prices of goods we sell have been going up. But you as a business cannot increase every time it goes up. Even then, the dollar itself will be more expensive, meaning the rent automatically increases,” he says.

For instance, if he paid $500 in 2002, he would have been paying Sh825,000. In 2019, at an exchange rate of Shs3,660, if all factors remained constant, he is paying Shs1.8m.

This dwarfs his profit margin. Once costing Shs60,000, a catridge has hiked in price to Shs75,000 on whole sale. To avoid a lose-lose situation, characterised by reduced customers or quantities of commodities sold, Mr Kintu’s profit margin remains Shs5,000 in the face of increasing rent and capital costs.

If not for the increasing clientele, Mr Kintu says he would be out of business by now.

The most I have paid for passport photographs is Shs5,000. But at Color Plus, this service costs you Shs10,000 for them to make a profit. But sometimes the sales fail to amount to the rent paid, forcing the entrepreneur to dip into his pocket to cover the business expense.

Business people are saying that fluctuation in rent costs arising from depreciation of the shilling against the dollar increases their expenses. The consequence of this, is the inability to service their loans, run a well-capitalised business, eventually closing shop and increasing the number of vendors in Uganda.

WHAT DO YOU THINK ABOUT PAYING RENT IN FOREIGN CURRENCIES?
We also trade in Yuan as Ugandans when we go to China. It would not be fair if we equally asked for Yuan or dollars when selling to locals. Whether they are financed in dollars, Euros or pounds, my local currency is shillings,”
MR Everest Kayondo, KACITA Chairman

The only possible solution would be if the Uganda shilling was strong enough. People do not intentionally want to charge in dollars. But they are hedging against fluctuations with an unstable currency. Some of these loans are funded by banks in foreign currency. The principle is borrow in dollars and earn in dollars,”
MS Getrude Karugaba, Partner Sebalu and Lule Advocates

This cushions tenants against a foreign exchange risk. If rent goes up because of the shilling’s depreciation that means your profit margins are going down which has a ripple effect in the economy. As the cost of credit continues to go down, we shall be able to attract more demand for shilling based loans,”
MR William Sekabembe, ED Dfcu bank

Instead of putting up arcades and shopping malls, some investors should think of manufacturing which will bring in a multiplier effect in the economy than putting up buildings which are empty then they start overcharging the few tenants they have in dollars,”
MR Ramathan Ggoobi, Makerere University Economics Lecturer

Real estate is highly liberalised. It is willing buyer, willing seller, landlord and tenant. While one will walk away from property rented in dollars, someone else will pay. Enforcement of this will be hard especially if two people have agreed,”
Ms Catherine Nanteza, CEO Association OF Real Estate agents