Second blow, how a second lockdown will affect the real-estate industry.

On 18th June 2021, the president of the republic of Uganda, with advice from the ministry of health and national task force to fight COVID-19 issued a nationwide lockdown which includes restrictions like a halt of private and public transport, a mandatory curfew at 1900 hours and a continued closure of institutions of learning among others. This is the second of its kind ever since corona virus was declared a global pandemic. For an economy merely trying to get back to its feet, a second lockdown is a massive blow despite the fact that this particular lockdown isn’t as strict as the first one since the national airport remains open for movements in and out of the country. The tourism sector is also one of the few sectors still allowed to operate with adherence to COVID-19 standard operating Procedures.

Among the sectors significantly hit by the lockdown is the real-estate sector. Real-estate is at the back born of a vast majority of sectors in the economy; land is one of the four factors of production for any business venture; whether it’s manufacture, trade, or service delivery, the importance of real-estate couldn’t be stressed enough. However, in the event of a standstill of normal flow of business, it’s usually one of the sectors that suffers the most. These are some of the effects a second lockdown will have on real-estate. 

1. Reduced effective demand: This is a general reduction in real-estate demanded by the market. This effect is felt by different sectors because of different reasons:

For the retail sector; the reduced demand for real-estate is as a result of a general slowdown of business for the tenants. Among the directives following the lockdown include a closure of most retail businesses which include; shops, supermarkets, arcades among others. A closure of business means tenants won’t be making any money during the lockdown hence can’t afford to pay rent for space they’re not going to be using, with money they’re not making.

For the office sector; reduced demand is due to a decrease in staff to work at the office. One of the presidential directives include a mandatory office occupancy of 10%, with the rest of staff encouraged to work from home. This implies then that tenants will generally require lesser office space than usual. The costs incurred by tenants in office buildings is further increased in an attempt to adhere to standard operating procedures like social distancing for employees which would imply that tenants would need to pay for more space per employee. This further strains their budget, hence leaving them with less money for rent.

For the industrial sector, the reduced demand is caused by occasional disruption of cross border trade. One of the biggest contributors to the industrial sector is warehouse storage buildings for imports and exports. However, transport disruptions significantly hinder such trade hence leading to a slowdown of business in the sector. This was most profound in the previous year when cargo trucks especially from Kenya witnessed significant delays in delivery of merchandise resulting into millions of shillings in losses.

For the residential sector, the reduced demand was felt during the previous lockdown where an increase in vacancies was witnessed as foreign tenants left the country and went back to their various countries of origin. It waits to be seen whether a similar pattern may be seen this time round.

All the above factors leave tenants with less income to afford real-estate, hence lack the revenue to uphold their contractual obligations of rent payment at agreed upon prices. This generally means tenants will be pushing for higher bargains on their lease renewals and landlords will be forced to reduce their rent prices if they are to stay afloat in a market where customers are making little to no income.

2. Drop in market value: Drop in market demand and the drop in rental prices all result into a general drop in market value of real property assets. This mainly affects anyone looking to sell out their property at this particular time. Considering the current market behavior, coupled with the property of real-estate that makes it illiquid, value of property is likely to drop significantly. A vacated arcade will go for a far lower price right now due to its unlikelihood to generate income, along with other risks involved.

3. Costs of capital: Cost of capital is incurred in two ways; its either the interest paid on a loan, for debt financed, real-estate; or opportunity cost for equity financed real-estate. Debt financed real-estate is real-estate acquired using debt e.g. a bank loan. A loan comes with interest that is attached to the amount you borrowed hence you’re likely to pay more than what you borrowed. This interest accumulates regardless of whether you’re making money or not. At a time of increasing vacancies however, it’s likely that most property owners are paying interest for property they’re not utilizing, hence incurring losses. Equity financed real-estate is real-estate financed using owner’s own capital. However, just because it’s the owner’s money doesn’t mean they don’t pay a cost themselves. In this case, the concept of opportunity cost applies. Opportunity cost is the cost you forego by investing your money in a specific venture instead of another, in this case sinking millions into real-estate that’s not making money rather than some other venture that could make money. It would have been better for you to for instance put the money in the stock market or even a fixed deposit bank account and it would have earned interest. Opportunity cost is basically potential benefits lost from investing in one venture as compared to its next best alternative

4. Increased construction costs: For those still on the construction phase of real-estate development, they are likely to witness increased costs of construction as a result of standard operating procedures. This is due to presidential directives that permit the progress of construction but with conditions. Among the conditions is workers have to reside at the site that they work, which translates into increased costs in accommodation, feeding and adherence to the rest of the standard operating procedures.

Overall, the real-estate sector has received a second blow from this lockdown and needs urgent intervention. However, with the absence of a stimulus package to date, but instead an increase in the rental income tax to 25% in the coming financial year, one wonders what the future holds for the real-estate sector.