UNDERSTANDING RISK IN UGANDA’S REAL ESTATE INVESTMENTS

When it comes to investing, people barely understand the associated risks of an investment and how these risks manifesting could impact their capital. The reality is that loss of funds could happen for various reasons. When it happens, in retrospect, we think about all the possible things we could have done to prevent this loss. Unfortunately, it is usually too late at this point.

Real estate carries a significant level of risk, higher than some other types of investments. These can be classified into two broad categories. They include systematic and unsystematic risks.

Systematic risks

Systematic risks are those that affect the entire economy when they occur. Think about events like political upheavals, economic downturns, and hyperinflation. When these happen, all industries suffer, although some may be impacted more than others depending on how the events unfold. If a war breaks out, there will not be a stock market, companies will cease operations, capital markets will close and real estate demand will certainly go down. With these types of risks, loss may only be prevented through hedging.

A hedge works like an insurance policy that compensates you when a risk event happens. It involves you spending money on some sort of protective measure that restores you to your original position in case your investment loses value. It is important to note that the cost of hedging might wipe out your potential returns on investment if it is not done right.

Unsystematic risks

Unsystematic risks are industry-specific. They affect a specific investment type. For example, a trend of people working from home could affect the demand for office real estate. These types of risks can be mitigated in two ways. The first is through hedging, as explained above in the case of systematic risks. The other way is through diversification. An investor could choose a mix of property types in their portfolio. It could include commercial properties, residential apartments, and industrial properties like warehouses. This mix protects your overall portfolio from total ruin in case one of the property types is affected.

Risks can also be categorized into financial, physical, and market risks.

Financial Risks

Financial risks involve a monetary aspect in case they are to occur. If funds were borrowed to finance the investment, this money has to be repaid to the lenders over certain conditions. Failure to make these payments could lead to the loss of property. Changing interest rates can also lead to increased unpredictability, often resulting in unplanned expenses for the investor. In Uganda, there have been several cases of buildings being repossessed by banks because the owners defaulted on mortgage payments.  

Liquidity risk is another form of financial risk that can affect an investor. Here a person runs out of cash to sustain business endeavors. You often see unfinished buildings along the road. A lot of liquidity can be tied up in such unfinished properties, neither generating income nor creating capital gains for the investor. People who find themselves in such a situation experience a lot of frustration from their investments.  

Physical Risks

Physical risks include risks that are directly related to the physical property. Potential threats such as property damage due to fire or extreme weather conditions like flooding and landslides could ruin an investor’s portfolio. Development risks like construction delays can affect investment performance because they lead to idle capital, which in turn leads to losses. The location of the property can also be a risk factor that influences the performance of a real estate asset. If the neighborhood deteriorates, the value of the property will also be impacted.

Market Risks

This refers to the possibility of rental income and property values falling due to overall economic conditions. During times of economic turmoil, the real estate industry gets impacted because people are not able to afford the rent or property costs. This results in low demand and therefore prices fall. Such events lead to losses by investors.

Before committing resources, investors should start by understanding the risk in Uganda’s Real Estate Investments. It is important to make assessments and come up with plans on how to protect your investments. Seek the help of professionals to guide you on the different strategies you can employ.

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 on +256742140251 or info@barosgroupltd.com