Managing Director at Knight Frank Uganda
The economy in general and the real estate sector specifically, remained subdued over the past one and a half years due to the lockdown restrictions that affected different sectors of the economy. In the previous property market report (H2-2020), the outlook for 2021 pointed to GDP remaining below expected levels, as per the Bank of Uganda State of the Economy Report for December 2020, coupled with continued subdued performance of the real estate sector, with investors adopting a wait and see approach to the outcome of the February 2021 general election.
Hope for improvement in performance was hinged on several factors among which included; vaccine acquisition and rollout, monetary and fiscal policy stimuli, relaxation of curfew and other restrictions, and increase in return of expatriate numbers.
The debate as to whether 2021 would be a year of recovery from the total disruption and destabilization faced in 2020 has been put to sleep with the current lock down which has dampened any hope of recovery and stifled the little momentum that had been gained.
Office Market
The start of 2021 came with optimism not just for the general economy but the office property market in particular. With slow performance recorded in 2020, projections indicated a slow but steady recovery, especially with a pick-up in leasing activity after the ease of lockdown restrictions in June 2020.
Q1 2021 started off at a rather slow pace as compared to Q1 2020, with a reduction in the number of inquiries and interest in office space for rent, until March when the sector started to slowly pick up. The signing of the Shareholder’s agreement of EACOP and the Tariff and Transportation Agreement which opened the way for the development of the Lake Albert development project in Q2 2021 resulted in a marked increase in inquiries across asset classes (office, residential and industrial space), largely driven by the oil and gas sector and private consultancy firms with space requirements in the range of 150 -1,500 square meters.
Downsizing, merging and relocation to owner occupied premises was a major aspect that carried on in H1-2021. A return to relative normalcy in terms of inquiries which had been observed in Q2-2021 was affected by the 42-day national lockdown announced on 18th June 2021.
This came at a time when several organisations were still reconfiguring their workplace layout and strategies to incorporate the SOP’s and social distancing requirements. Flexible working in terms of working in shifts had been largely adopted in several organizations due to the inability to contain all staff members at once while adhering to set SOPs.
Knight Frank registered a 3% drop in occupancy of Grade A/AB office buildings from 84% in H1 2020 to 81% in H1 2021. This decline was attributed to downsizing of space requirements, relocation, increased supply of prime office space and working from home.
The addition of approximately 6,000 sqm. of Grade A lettable space onto the market in H1 2021 increased the amount of stock hence occupancy rates in the first half of the year, on the backdrop of demand that had been negatively affected by the effects of the pandemic. Whereas some Grade A office buildings experienced upward movement in take up over the last 6 months, vacancies were registered for lower grade offices, especially where tenants opted to relocate and upgrade to newer or more modern office buildings and in some cases owner-occupied premises.
However, following the signing of the key oil and gas agreements in April 2021 which paved the way for the construction of a 1,440 km crude oil pipeline from Uganda’s Albertine region to the Tanzanian seaport of Tanga, opportunities for a revitalisation in office activity are envisaged which should stimulate demand for office space and boost confidence in the future of the office market performance.
Despite the decline in occupancy, office rents remained relatively stable for Grade A and AB Offices, albeit grade A office average rents registered a slight reduction of 3% in H1 2021 as compared to H1 2020 as a result of rent reductions that were enforced in some buildings in the period after the May 2020 lockdown. Prime office yields averaged between 8% and 9% in the period under review.
General market sentiment indicated that landlords continued to face increasing requests for rent reductions and delay in escalations from prospective and existing tenants. These however did not materialise for many, considering several landlords had already offered discounts to their tenants during and after the March 2020 lockdown. However, in a bid to prevent a further drop in occupancy, some considerations were made by a few landlords.
All things taken into consideration, current lockdown situation inclusive, our outlook is that prime rents will remain stable depending on the bargaining strength of each tenant, as landlords strive to maintain their occupancies resulting from relocations and downsizing. This will be further supported by the increase in oil and gas activity which is slowly reviving activity in the various asset classes and sectors of the economy.
With the development pipeline consisting of projects such as the Pension Towers, Twed Heights, IGG Building, NDA Laboratory Tower and the The Pearl Business Park, we estimate that approximately 130,000 square meters of lettable office space will come in to the market over the next 24 – 36 months. Some of the upcoming developments are for owner-occupation ranging between 1,500- 5,000sq.m while the bigger developments are for investment purposes.
Projected supply will be concentrated in areas of Nakasero, Kololo and Bugolobi.
Residential Market
The residential property sector performance registered increased activity in H1 2021. Initially, there was a slowdown in acquisition and lettings in the time leading up to the general elections, with expats choosing to leave the country until the electoral process was complete. An increasing number of expats returned, after the rollout of the COVID-19 vaccine, in their respective countries and the positive reception it received in various parts of the world. This provided reassurance to many especially with regards to health and wellbeing and a quicker return to normalcy.
With the signing of key oil agreements in April 2021, Knight Frank registered an uptick in development activity among the property developers with landlords hoping for increased take up and improved rental offers for prime, private rented accommodation.
An increase in sales inquiries was recorded in H1 2021, despite delayed conclusion of transactions due to the pandemic and its impact on earnings and travel. Landlords maintained discounted asking rents that were put in effect
Knight Frank recorded a 6% increase in the supply of prime apartment units, especially in the areas of Kololo, Bukoto and Naguru . The increase in stock vs low demand forced some landlords to discount their rents in order to be more competitive in the market. It is expected that over 161 apartment units will be added to the market over the next 18 months in Kampala’s prime residential suburbs.
Demand drivers in occupancy for high end residential apartments were amenities such as gyms and swimming pools, proximity to supermarkets, shops, green spaces, and large indoor living spaces. Due to the lockdown that necessitated working from home in Q2 2020, Knight Frank observed an increase in the requirement for a home office in residential houses in H1-2021.
Industrial Market
H1 2021 registered an increase in demand for showroom and industrial spaces within the city center with most demand coming from sub-sectors like furniture, agriculture-based firms, food and beverages and automotive affiliated companies.
Demand was mainly from companies seeking proximity to clients, those seeking to diversify their nature of business, new automotive entrants into the market, chemical companies looking to expand, international companies looking to set up local franchises and companies looking for short term storage space.
There was a noticeable relocation of large industrial firms out of industrial areas within Kampala i.e. Luzira, 1st to 8th Street, Ntinda Industrial area to the Namanve Industrial Business Park, with majority moving to owner occupied premises. This resulted in increased availability of space in the traditional industrial areas of Kampala which fortunately was also taken up by other occupiers in the agriculture, food and beverages market, automobiles, and furniture markets.
Movement of industries to the KIBP was attributed to, among other reasons, the incentives offered by UIA to different local and international investors, some of which include; tax holidays, exemption from payment of stamp duty for land owned by the Authority, unrestricted remittance of profit after tax, rent free land for a specified period, etc.
Retail Market
The period under review saw subdued trade within the retail sector, as the world struggled to deal with the extended pandemic, stringent operating procedures to limit human to human transmissions, impacts on supply chains, dwindling consumer confidence and spending. This was further exacerbated by the general election in Uganda which saw significant down time in general trade and internet services being disconnected, further impacting on the ability to trade. Bars and nightclubs remained closed from the 20th March 2020. The leisure and lifestyle sector has been the most impacted due to curfew and well-founded consumer fear of socializing.
Enforcement of Covid-19 restrictions following a spike in the number of cases saw public and private transport prohibited with retail only permitted to trade until 7:00pm, thus negating a force majeure event.
As a result, increased activity was recorded around neighbourhood convenience centres. These are developments that are within close proximity to suburban residential nodes, making them easily accessible to households and those that work from home. These developments are generally tenant mixed, with essential daily requirements and services. On the other hand, regional malls were greatly impacted by the restrictions enforced, recording lower footfall levels compared to the pre pandemic levels.
Occupancy levels in Knight Frank managed malls increased by 1.63% in June 2021 to an average occupancy level of 86.72%, which was 0.42% above the same period in 2019. This increase was attributed to increased retailer activity as highlighted in the subsequent paragraphs, and stimulus measures introduced by landlords in a bid to attract and retain tenants. We anticipate that occupancy levels will remain subdued throughout the year with the current lockdown already impacting on tenants as landlords are unable to issue any further concessions.
Metroplex Mall’s phased opening commenced during the period under review with Carrefour opening their new store and Woolworths opening their refurbished store therein. Arena Mall in Nsambya which is due to open on the 29th July 2021, has gained traction on pre-opening letting, with retailers such as LC Waikiki, Cafesserie and Frango, Great Burger set to debut in the mall. Further, retailers’ expansion continued to be recorded in the market with Woolworths also set to make entry into Village Mall and Hi-sense into Victoria Mall.
Average footfall figures across Knight Frank managed malls contracted by 28% growth in 2021 as compared to a similar period in 2019. These were however approximately 50% above the 2020 average footfall figures recorded in the same period, attributed to the extended lockdown in March to June 2020 which saw only essential services trade.
Turnover rents recorded varied results, with service and fashion retailers showing single digit growth in 2021 as compared to 2019 numbers. General food and grocery traders were still approximately 12% below 2019 numbers due to depressed spending by consumers and the restaurant sector still showing negative growth of some 38% due to curfew. Average supermarkets turnover recorded a 3% decline y-o-y during the period under review and a further 20% decline compared to a similar period in 2019.
Valuation & Advisory
When the pandemic was declared by the World Health Organization (WHO), it culminated in an unprecedented set of circumstances and the absence of sufficient market evidence. The Royal Institution of Chartered Surveyors (RICS) alerted its regulated members to consider whether valuations with effective dates following March 11, 2020 should be declared subject to “material valuation uncertainty”. This was to ensure transparency with clients and emphasize the importance of the ‘valuation date’, against the backdrop of rapidly changing market conditions due to the pandemic. However, with resumption of transaction activity in some sectors, it is now within the discretion of each member to include a material valuation uncertainty clause having regard to the specific attributes and the performance of the individual asset and its market.
In a June 2021 interview on the State of property valuations in Uganda, Herbert Okello, Knight Frank Uganda’s Head of Valuation and Advisory stated that, “the COVID-19 pandemic impacted valuations in various ways, from inspection of property to availability of reliable comparable information. In view of this, it is prudent that we act in a transparent and professional manner. Any limitation on information or ability to investigate has to be made clear and reported. Where a valuation relies on information such as rental income, it is vital that such evidence be accurate and up to date because this has a bearing on the outcome of the valuation. Not to be overlooked is the importance of maintaining confidentiality of any data relied upon”
Source: Knight Frank