Uganda Market Assessment

Draft—Phase I

January 2005

Prepared for

Housing Finance Company of Uganda, Limited

Table of Contents

INTRODUCTION 2

Demand 2

Demand for Housing 2

Demand for Mortgage Finance 2

Competition 2

Implications 2

HOUSING STOCK 2

Housing Stock Characteristics 2

Housing Needs 2

Housing Construction Industry 2

Areas of Opportunity 2

Implications 2

CONCLUSIONS 2

Appendix A: Housing Market Research and Focus Group Survey 2

Introduction 2

Background 2

Objectives and Purpose 2

Time Frame of the Study 2

Methodology and Approach 2

Focus Group Discussions (FGDs) 2

Challenges and Constraints 2

Findings of the Study 2

Summary of Information Gathered and Classification 2

Housing Market Overview 2

Conclusion and Recommendations 2

Appendices 2

Section 1: Demand Factors 2

Section 2: HFCU Product Knowledge And Evaluation 2

Section 3 2

Section 1: Demand Factors 2

Section 2: HFCU Product Knowledge And Evaluation 2

Section 3 2

FOCUSED GROUP DISCUSSIONS 2

Kampala -Group 1 2

Kampala - Group 2 2

Kampala - Group 3 2

JINJA 2

Jinja – Group 1 2

Jinja – Group 2 2

Jinja – Group 3 2

MBARARA 2

Mbarara –Group 1 2

Mbarara –Group 2 2

Mbarara –Group 3 2

LIRA 2

Lira – Group 1 2

Ojok Benson 2

Otile Moses 2

Otim Douglas 2

Ogwal David 2

Locken Ojungu 2

Lira – Group 2 2

Alani Peter 2

Olwit Moses 2

Oyuko O. Emanuel 2

Dennis C. Ogwal 2

Mrs. Esther Akara 2

Lira – Group 3 2

Dr. A.K. Oteng 2

Bonny Ogongson 2

Bosco O. Edola 2

Martin O. Oyuko 2

COMMERCIAL 2

Commercial - 2 2

General Criteria for Groups 2

Residential 2

DOCUMENTS AND KEY INFORMATION REVIEWED 2

Appendix B: List of Documents Reviewed 2

Appendix C: List of Persons and Organizations Contacted 2

ShoreBank Advisory Services iv

INTRODUCTION

In September 2004, ShoreBank Advisory Services (SAS) entered into a contract for consultancy services with the Housing Finance Company of Uganda Limited (HFCU). Phase I of the Terms of Reference calls for SAS to carry out a Market Assessment to identify and quantify the supply and demand for the mortgage services offered by HFCU. This report describes our work from September to mid-November and summarizes findings stemming from SAS’ interviews and document reviews, as well as from the work of UNISIS, SAS’ Uganda-based subcontractor.

We also describe some of the key implications of these findings for HFCU as it seeks to access more capital and to reposition itself to retain its long-held position as Uganda’s primary home mortgage lender, and to become more competitive in the market. The Report focuses on Uganda’s residential market, consisting of owner-occupied and investor-owned one- and two-unit properties. HFCU does finance the purchase and construction of commercial properties, but these investments were not emphasized in the Terms of Reference, nor are they a core product now or for the near term. We have, however, summarized the results of a survey of Kampala-based commercial business owners conducted by the National Housing and Construction Corporation (NHCC) and the learnings from our commercial focus group, held in Kampala.

This report does not address the substantial issues surrounding capital, mortgage product, or organizational development, as these are deemed to be part of Phase III work. SAS has, however, concluded that these arenas are central to the value to HFCU of any market information, and has therefore met with senior staff while in-country and shared initial results, implications, and possible strategies. Secondly, we have concluded some capital survey work, which is appended to this report. Finally, we are sharing highlights of key organizational and operational messages in a separate memo, which is being submitted at this time.

In carrying out this portion of the assignment, SAS’ goal was to acquire an understanding of the Ugandan mortgage loan market (supply and demand, existing and potential) as a first step in evaluating HFCU’s existing products, identifying opportunities for new product development, and assessing HFCU’s competitive advantages in the market. To that end, SAS undertook the following tasks:

n  Compiled, reviewed, and analyzed numerous reports, studies, and other documents both before and during the study visit. Sources of these documents included various government agencies, donor organizations, and private for-profit and nonprofit organizations. These are listed in Appendix C.

n  Selected and contracted with Universal Institute for Securities and Investments (UNISIS) for collection of current information, including the conduct of focus groups. The UNISIS study included five focus group discussions, desk research and discussions with key informants. Focus groups were held in Kampala, Jinja, Mbarara and Lira; participants included existing HFCU and potential borrowers representative of the Ugandan population. One focus group focused on commercial finance. SAS incorporated many of the UNISIS findings in the body of this report. A copy of the UNISIS report is included as Appendix A.

n  Conducted an initial team meeting with key HFCU staff to introduce the SAS team members and review comments on the Inception Report.

n  Met with and interviewed numerous representatives of government agencies, donor organizations, and lending institutions (including commercial bankers and microfinance institutions, housing developers, realtors, and capital markets). A list of these contacts is included as Appendix B.

n  Met with and interviewed key members of HFCU staff.

n  Analyzed HFCU’s internally produced reports, as well as program-related policy and marketing documents.

n  Visited NHCC development to obtain better understanding of the types and quality of the both the lower-cost and market-rate housing stock produced.

n  Through telephone calls and meetings, interviewed several HFCU board members.

The following sections of the report present SAS’ findings, along with the implications of these findings as they relate to HFCU’s future direction.

Demand

Demand for Housing

Commercial lenders, non-bank lenders, donor representatives, and developers indicate a strong demand for housing. This demand is evidenced by the number of loan applications currently awaiting capital; the current and proposed entry of new lending institutions in the mortgage arena; the interest in construction financing; and the increasing use of salary-based loans to meet housing needs. Uganda’s demographics drive much of the housing demand. The 2002 Population and Housing Census estimates that Uganda’s population increased an average of 3.4% per year between 1991 and 2003, to almost 25.6 million. Of this total, 22.0 million (86%) lived in rural areas and 3.5 million lived in urban areas (1.25 million in Kampala). Urban populations are growing faster, at a rate of approximately 4% per year. By 2020, the national population is expected to exceed 45 million people. The vast majority (38.6 million) will continue to live in rural areas, while 6.4 million will reside in urban areas. Kampala will remain the principal urban center, but smaller urban areas are growing faster, and new urban areas are expected to develop. Uganda’s growing population and rate of urbanization will fuel significant demand for years to come.

The Brief Status Report on the Housing Sub-Sector 1986–2003 (Housing Sub-Sector Report), prepared by the Department of Human Settlements within the Ministry of Works, Housing, and Communications in May 2004, indicates significant demand for housing across the income spectrum. Demand for owner-occupied housing in the high-income segment will focus on housing located in well-planned and secure areas. Middle-income and low-income households will seek affordable ownership opportunities, as well as decent rental units. In most cases, however, the lack of affordable mortgage financing and the lack of housing in the price range affordable to this income group will prevent many urban (particularly middle-income) renters from purchasing a home.

Renters as Potential Owners

In February 2000, NHCC published the results of its survey of the Kampala residential and commercial property market. Based on the data reported, 26% of the 566 renters surveyed (147 renters) paid monthly rents of Ush 250,000 or more. About 14% or 76 renters paid monthly rents of Ush 350,000 or more. If we assume that ability or willingness to pay rent is an indicator of ability or willingness to pay for ownership of a house, we can calculate the approximate mortgage value and house value affordable by this segment of the population.

Affordable monthly payment: Ush 250,000

Estimated monthly salary at 33% PTI: Ush 757,575

Terms: 16% interest, 20 years

Mortgage amount: Ush 17,969,376

Purchase price (with a 30% down payment): Ush 25,670,537

Affordable monthly payment: Ush 350,000

Estimated monthly salary at 33% PTI: Ush 1,060,606

Terms: 16% interest, 20 years

Mortgage amount: Ush 25,157,126

Purchase price (with a 30% down payment): Ush 35,938,751

The above calculations indicate a potential mortgage market fueled by demand from renters who have the capacity to become owners.

Market Choices

In Table 1 below, SAS notes the characteristics of Uganda’s housing market today. We divided the market place into three major income-based categories and further defined each of them by occupation, type of housing stock, location and existing sources of financing. These three categories represent the broad market choices available to HFCU.

Table 1: Characteristics of Uganda’s Housing Market

Income Category / Occupations / Type of Housing Stock / Location / Existing Sources of Finance
Top 20 % / High: CEO/Board/MPs
Upper Middle: Senior level managers/Large business owners/Professionals / High end stock
Build to order
Buy
Best standard / Seven hills of Kampala
New suburbs
New developments / Mortgage
Savings and income
Diaspora
Remittances
Inheritance
Middle 30% / Lower Middle: Mid-level managers/
Technical
Upper Lower:
Entry level/ Technical / Build to order
Buy
Incremental building / Peri-Urban
Dense urban areas
Valleys of Kampala / Salaried loans
Income
Savings
Inheritance
Lower 50% / $1 per day / Self-built
Hut / Rural
Urban slums / None

HFCU’s current market is the top 20% of the income spectrum. We believe this current market could be further tapped and expanded to reach down into the middle 30% income category by using a combination of HFCU’s current underwriting criteria and mortgage loan terms, by modifying these to make them more flexible (e.g., permitting a lower downpayment would increase affordability to borrowers), or reached by modifying HFCU’s salary-based loan product (Swift Loans). This of course includes increased access to capital. Expanded market opportunities (middle to moderate income) can also be met through partnerships with existing lenders or by adapting current product and process or both.

However, it is important to note that based on our conversations with other lenders in the market, such demand may be contingent on an adequate supply of units in the Ush 25 million to 40 million price range.

Decisions to Invest: As part of the focus group process, we sought to understand the reasons to invest, or not invest, in housing. Regardless of location, focus group respondents cited the desire to own a family home as the major reason for investment in a residential property. Owning ones home is considered both an investment and a component of a healthy family life. Those residing in Kampala also cited the potential for rental income and savings on their rent expenses as reasons. For respondents outside Kampala, affordability and social pressure were important. Of particular importance to potential owners were the type and security of tenure, location, and future marketability of the property being considered.

Reasons to undertake renovations varied for owners inside and outside Kampala. Respondents outside Kampala cited family expansion, social pressure or upcoming events as precipitating reasons. Kampala respondents cited business income, pressure from tenants and competitors in the neighborhood, improvement of security (such as adding a fence) and family expansion as major reasons.

Reasons for not investing were varied, but respondents most often cited lack of knowledge, lack of funds due to such things as school fee obligations, poor location, and fear of fraud.

Implications

Market demand for financing far outstrips available financial products, resulting in an increased interest by others in moving into the market.

  1. Population growth and continued urbanization will fuel demand for years to come, switching the focus from demand to availability of stock and financing capital.
  1. The middle-income rental market in Kampala and other urban areas could easily offer HFCU a new source of borrowers. Many such renters will already qualify for financing using HFCU’s existing underwriting requirements but will require targeted outreach that addresses the benefits of ownership. Other renters can be reached through newly modified mortgage products or partnerships priced to reflect additional risk. This will require changed systems as well as product modifications.
  1. A strong rental market will lead to opportunities for the financing of decent and affordable rental housing. We would expect that the provision of financing to investor-owners of rental properties could be a growing portion of HFCU’s portfolio.

Demand for Mortgage Finance

Housing consumers access a variety of funding sources in an effort to secure homes. In addition to mortgage loans, focus group respondents cited savings; salary-based loans from employers, banks and non-bank institutions (including microfinance institutions); supplier’s credit; side income from other businesses; corruption proceeds; and, to a lesser extent, donations from family and friends. In general, relatively little is known about mortgages—what they are, how they work, how to get them, and their benefits. But while little is known, the perception among most of the respondents in our focus groups was negative. Respondents perceive mortgage finance as very risky and very expensive, due to unfavorable terms and the long-term nature of debt. We also heard comments about long processing times and “too much” documentation, as well as the preference for other forms of finance because “they are easier to understand.” Predominantly, owners do not like giving up their security; they fear loss of their homes due to income or job loss or other repayment problems. Among respondents who already have mortgage loans or have favorable impressions of mortgage finance, most cited the savings in time to complete a house and manageable installments as reasons for taking a mortgage loan.

(Based on SAS’ experience working in other developing countries, lower income borrowers perceive downpayment and term requirements as more important to their decisions to borrow than interest rate levels and are much more willing to borrow money at higher rates in order to access needed funds. In calculating affordability, the term of the loan, not interest rate, has a greater impact on affordability.)