Investing in Affordable Housing in Uganda

Statistics show that Uganda is faced with a housing crisis. The shortage of 2.4 million housing units indicates a need for further investment in the sector. The majority of this shortfall is in the affordable housing market sub-sector. This presents a huge opportunity for real estate investors to provide a much-needed product that could yield high returns on investment.

What is affordable housing?

Some countries define affordable housing as that where the total expense on rent (Including utilities) is less than 30% of an occupant’s total income. With reports of only 1% of working Ugandans earning more than 1 million Uganda shillings (approx. 250 USD), the majority of the population cannot afford to stay in upscale residential properties. However, these people still need a roof over their heads.

As the real estate industry has grown, there has been an influx of investors, both local and foreign, in the market. They have mainly focused on providing high-end accommodation in the form of luxury condominium units in upper-class neighborhoods. This has led to an oversupply of products in that submarket, and consequently steep competition for customers. This has affected the long-term profitability of the ventures.

Investors who would like to benefit from a steady demand should focus on providing housing solutions for middle and lower-class residents.  That would necessitate seeking opportunities to provide housing for less than 100 USD in monthly rent. A lot of innovation is required to achieve this, but whoever can bring it to reality stands to reap massive returns.

What are the advantages of investing in affordable housing?

1.      High Profit margins

Even though affordable housing targets low-income individuals who may have trouble paying monthly rent, it still provides some of the highest profit margins. This is because of the low capital requirements for the investment. It is possible to achieve 20% annual returns on investment if done right.

Investors can examine ways of minimizing expenses to ensure that profit margins are worth the risk undertaken on these projects. The advantage is that the tenants do not come with a lot of expectations from the property, so an investor doesn’t have to worry about spending on extra amenities. All the tenant wants is a roof over their head. With proper planning, a developer can minimize the overall cost of the project to ensure healthy returns on investment.

2.      Steady supply of tenants

An investor can be sure that they are unlikely to suffer from low occupancy rates because there will always be someone looking for that particular price range for accommodation. Even when one tenant moves out, it doesn’t take too long before someone else signs up for the property, unlike in high-end accommodation where replacing a tenant can take some time.

3.      Low barrier of entry

Affordable housing requires a minimalist approach to construction, and therefore investors would not be looking to spend a lot of money on the structures. There is an opportunity for people with a limited amount of capital to get started in the business. The risk of loss is minimized since you only get to invest a small amount of money per property. Starting investors should look into the possibility of launching their careers through investing in affordable housing.

4.      Great way to have a social impact

For investors looking not only for profit but also avenues of making a difference in society, affordable housing is a great way to go about achieving this goal. Given that housing is a basic need, and there is a big deficit in Uganda, investors have an opportunity to significantly impact the lives of others through exploring this solution. By offering affordable accommodation with decent facilities, one can uplift the livelihood of many. This would fulfill the ultimate purpose of business, which is to improve the conditions of others.

What are some of the disadvantages of investing in affordable housing?

1.      Maintenance costs are usually high.

This is because less care is taken during the construction phase in terms of quality. The materials used may have a shorter life span that requires more frequent replacement. Property management is also usually minimized to save costs. All this leads to faster deterioration of the property. Additionally, the cost of a simple repair has a huge impact on returns. This is because compared to the original investment amount and the monthly rent collection, each extra expense on repairs is significant. It wipes out a big percentage of the returns. For example, replacing one sink can wipe out a whole month’s rental income.

2.      Undesirable tenant profiles

Because affordable housing targets low-income individuals, it is easy to end up with disagreeable tenants. Criminals are drawn to such housing facilities. Property damage is also common because the end users may not appreciate the value of looking after the premises, given their backgrounds. This problem can be addressed by doing thorough background checks on tenants before they take up the property. Those who do not satisfy the tenant screening criteria should be rejected.

3.      Tedious to manage

Looking after units in the affordable housing sector can take a toll on the investor. The need to self-manage the properties to keep costs at a minimum may lead to the owner getting overworked. Beyond a certain scale, the task becomes impossible for the investor and they will need to outsource management. This will eat into their profits.

Because housing is among the basic human rights stated by the United Nations, the government has an incentive to support investing in affordable housing in Uganda. This support is geared towards improving the conditions of the urban poor and those living in rural areas, who face the greatest risk of failing to access proper shelter.  

There are plans to increase the supply of housing units by partnering and intensifying investors using tax breaks, infrastructure support, and other avenues. Investors should research how they can tap into these opportunities.

Whereas opportunities are abundant in Uganda’s real estate industry, solutions targeted to affordable housing have the highest potential for maximizing return on investment.

To learn more about investing in Uganda’s Real Estate industry, visit https://www.barosgroupltd.com/

About the author;

Benard Sonko is a real estate investment manager and founder of Baros Group Limited. For comments and inquiries, you can reach him at +256742140251 or info@barosgroupltd.com