Ugandans slow to adopt Real Estate Investment Trusts

The Ugandan real estate sector is facing a significant demand-supply gap, with Finance Minister Henry Musasizi highlighting the need for private investment and affordable financing options. One such option is Real Estate Investment Trusts (REITs), which allow investors to pool resources for property investments regulated by the Capital Markets Authority. However, despite being provided for under the Collective Investments Schemes Act and regulations made in 2017, no developer has applied to list their assets in a REIT.

According to Marc du Toit, Head of Retail at Knight Frank Uganda, the Ugandan real estate market is ready for REITs, with interest from corporate companies, individuals, and Ugandans in the diaspora. He cites warehouses, malls, apartments, and residential estates as potential investment opportunities. However, du Toit notes that the sector needs more capital, and available sources, especially banks, are too expensive. He also points to a discouraging tax regime, alternative investment options with higher returns, and informality in the sector as reasons for the slow adoption of REITs.

Ronald Kasolo, Vice President of the Find Managers Association of Uganda and CEO at Kura Asset Management, agrees that fund managers prefer to invest in areas with predictable returns, credible corporate governance, and proper exit strategies. He notes that fund managers are not willing to invest in real estate with returns capped at 13%, especially when government 10-year bonds offer 15.2% net of taxes. Kasolo has been engaging anchor investors to consider REITs for diversification benefits.

The Association of Real Estate Agents of Uganda cites taxation as a major hindrance to growth, with Shirley Konga mentioning various taxes and fees, including Stamp Duty, Capital Gains Tax, VAT, and rental income tax. She notes that interest paid on acquiring funds for development is not an allowable deduction. Dickson Ssembuya, CMA Director for Research and Market Development, agrees that outstanding issues, including taxation, need to be addressed for REITs to take off in Uganda.

Ssembuya highlights the need for a proper and credible governance terrain, public awareness, and proof of concept in the market. He notes that this is an opportune time to make the market operational, especially as commercial bank credit becomes more expensive and scarce. In Kenya, for example, the real estate sector under REITs regulations is exempt from Capital Gains Tax and Stamp Duty to encourage developers to participate.

Du Toit notes that Uganda is not alone in its slow adoption of REITs, citing similar experiences in developed markets like Kenya and South Africa, and even the US, which took almost 30 years to develop its REITs market. He emphasizes that the Ugandan market is ready for REITs, but regulatory and taxation issues need to be addressed.

The Capital Markets Authority and industry stakeholders must work together to address the outstanding issues hindering the growth of REITs in Uganda. With the current demand for housing and infrastructure, REITs offer a cheap and easy financing option for developers and investors. If implemented, REITs can help bridge the demand-supply gap in the Ugandan real estate sector and provide affordable financing options for developers.

Key points

• Regulatory and taxation issues are major hindrances to the growth of REITs in Uganda.
• The Ugandan real estate market is ready for REITs, but needs a credible governance terrain and public awareness.
• Tax exemptions, like those in Kenya, could encourage developers to participate in REITs.