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How Covid-19 affected the mortgage market
Nevertheless, some Ugandans were resilient in their resolve to invest in property. PHOTOs/Ismail Kezaala
What you need to know:
Covid-19 distorted every fabric of humanity and business. Banking, education and real estate, among other sectors went under. With many people at home for months where did this leave mortgage loans they were financing? What is the fate of 2021?
The year 2020 was for many reasons peculiar for Ugandans. Covid-19 and the restrictive measures to contain its spread made economic activity impossible. In fact, the economy grew sluggishly than expected because of slumps in major sectors including real estate. Connected sectors to real estate such as tourism, hospitality and education went out of business.
“Demand for mortgage loans is affected like any other loans because the sectors mostly hit are the ones which were targeted for mortgages such as schools, trade and commerce, agriculture, export and import and diaspora,” Abdul Kyanika, manager of housing and salary loan business at Centenary Bank says.
At household level, incomes fell following the closure of companies and job losses within the industry, services and informal sectors. A nationwide lockdown started in the last week of March 2020. Three months later, a Kampala market update in 2020 by Knight Frank showed leasing and sales activity for residential properties stopped with tenants unable to view houses. Residential units grew from 2006 units in 2019 to 2230 in 2020 but landlords were forced to offer discounts on rent.
Commercial properties
Commercial properties were not spared. Footfall in shopping malls reduced to almost nothing after stay at home campaigns. “We saw so many people work from home. Big properties such as arcades were locked for long so landlords lost a lot of income. By the time government opened up, most people could not raise arrears, so they were forced to leave and do business online. I have seen property owners offering three months free rent as incentives for people to occupy buildings,” Shirley Kongai, president of Association of Real Estate Agents Uganda, says. What Kongai describes is to the mortgage market, bad news.
Knight Frank research shows earlier inquiries by local and multinational corporate organisations for office space went on hold. Up to 82 per cent of tenants in prime office rents worked from home. Landlords turned to offering discounts and some, deferring payments.
The report predicted long-term impact on real estate debt given that the commercial segment of real estate heavily depends on debt.
Housing Finance Bank whose core lending business relies on real estate, says the mortgage market suffered severely particularly entities that depend on rental income to pay their loan instalments or even build office and business space.
“Because of the lockdown, the ability of these businesses to honour their regular payments was negatively impacted. Even for those that did not have loans, it affected their ability to build more office space,” Michael Mugabi, managing director of Housing Finance Bank (HFB) says.
With loan defaults surfacing, Bank of Uganda set up a credit relief programme and tasked commercial banks to restructure loans affected by Covid-19 from April 2020 untill March 31, 2021. Borrowers were to access loan repayment holidays, extend the tenor of loans and other forms of restructuring their debt obligations.
HFB says during this grace period, borrowers have been either exempted from paying interest together with principle or the interest alone but real estate players seem to want more.
“I remember the banks were told to give borrowers time and banks restructured for a year. But banks did not reduce on the interest so even if you get an extension, the interest continues running and it becomes worse. We see many people failing to meet their payments,” Kongai says.
On the other hand, banks bore the brunt of loan restructuring. The ratio of non-performing loans reached 5.3 per cent in June 2020 from 3 per cent in June 2019.
“That had an impact in the form of delayed income for commercial banks,” Mugabi says. Whereas government asked people to stay home, the drop in earnings of potential home owners led to a fall in application for new loans to either buy or build a home.
“The demand for mortgages is driven by income of customers to be able to service loans. If incomes fall, the ability of new home buyers drops,” Mugabi says. Without demand, construction of new homes slumped even for small developers. In 2020, home sales for developer firms reduced significantly. The sector has seen arguably the fewest housing units brought to market since the boom that started four years ago.
By July 2020, the average annual credit extended by commercial banks to mortgage, construction and real estate sectors declined to 12.7 per cent from 13.2 per cent in the previous quarter. Sector players blame difficult financial positions of various customers.
Despite falling incomes, some Ugandans were undeterred in their pursuit for housing. Statistics from HFB indicate commercial banks received 684,074 loan applications worth Shs1.424b. However, only 681,044 worth Shs711b were approved. That is just about a half of the loan amounts signifying reduced appetite by banks to advance mortgages.
“Maybe the other loans not approved were large ticket loans. This reflects the relative risk aversion towards borrowers. Banks tended to reduce appetite because once banks do not have clear visibility of where income will be generated from, eligibility is impacted,” Mugabi explains.
Mortgage market recovery
In June 2020, Bank of Uganda advised banks to limit loan to value ratio for residential mortgages and land purchase to 85 per cent. The ratio is a lending risk assessment that the financial institutions and other lenders examine before approving a mortgage to customers. This was on the back of concerns that the impact of the pandemic would affect the quality of bank assets.
“As at end of September 2020, the aggregate commercial banks’ loan-to-value ratio on residential mortgages was 51.7 percent, well below the prudential limit. This is an indication that the policy has been successful in mitigating bank losses from falling real estate prices,” acting director of communications Department at Bank of Uganda, Kelvin Kizito, says. That has been relief for mortgagees but for borrowers, it was a slight impediment. They must look for more money than before to own their dream property.
More recent information from the same bank shows commercial banks’ net lending to the mortgage sector continued to rise through the pandemic period, although at a slower pace compared to the previous period. From the start of the pandemic lockdown in April 2020 to the end of November 2020, mortgage loans grew by 2.32 percent, which was lower than 9.98 percent growth in the previous period untill March 2020.
To be more specific, the aggregate commercial banks’ credit to both commercial and residential mortgages was Shs1.38 trillion as at the end of November 2020, amounting to about 8.7 percent of banks’ total loans.
Default rates
Bank of Uganda asserts the default rates on mortgage loans have remained below the industry average. “Despite the adverse effects of the pandemic on the sector and the economy, the ratio of non-performing loans to gross loans under the building, construction and real estate sector where mortgages and land purchase loans are, was 4.72 percent as at end of September 2020, compared to the average of 5.4 per cent for all bank loans,” Kizito says.
According to Uganda Bureau of Statistics (UBOS) Residential Property Price Index released on January 5, 2021, the prices of residential properties in Greater Kampala Metropolitan Area grew at 5.8 per cent in September 2020. That figure unfortunately fell to 3.3 per cent in the second quarter that ended in December 2020.
Bright future
As 2021 enters its second month, players in this space are very optimistic the mortgage market will recover. The Uganda High Frequency Phone Survey released late December 2020 by UBOS indicates employment levels have almost fully returned to pre-Covid-19 levels in 2019/20 thanks to easing of the lockdown. In June, most people were without an income and those that did, reported declines. By October, incomes had started gradually improving but the situation is still far from full recovery.
Centenary Bank’s Kyanika says this is because real estate is perceived as a less risky sector to finance by banks. The loans are well collateralised and there is a high demand for housing due to growing population.
BoU is expected to remain monitoring the changes in economic activity and provide appropriate measures.
“The mortgage market normally follows the same trend as the overall economy. As a result, activities in the mortgage market are likely to pick up as the economic recovery from the pandemic gathers strength in the medium term, supported by the BoU accommodative monetary policy stance and other government measures,” Kizito says.
Plus, government is exploring options to make it easy for people to get mortgages. Kizito says reforms are coming including a mortgage refinance company which is expected to boost real estate lending.
For now, HFB’s Mugabi says intending property owners need not worry about extension of mortgages by banks. “The chances of getting a mortgage are quite immense,” he asserts.
Extent
The announcement of lockdown in Uganda left the fate of many tenancies for private rented accommodation in limbo
Loan application
Despite falling incomes, some Ugandans were undeterred in their pursuit for housing. Statistics from HFB indicate commercial banks received 684,074 loan applications worth Shs1.424b. However, only 681,044 worth Shs711b were approved.
