Detailed analysis of various business sectors in Uganda

Investing in property management firm in Uganda? Who is the real “kayungirizi” now?

Outside Looking In
D E Wasake Esq

About the writer:

For over 9 years I have worked with several clients in Uganda, The Bahamas and the United Kingdom in providing audit, tax, accounting and advisory services. My sector experience with clients in various sectors including property and real estate investments enables me have good understanding of this sector. To see the full depth of my experience, Please see my profile

Article summary

Alot of people reckon they can be a property broker "kayungirizi" owing to the booming construction sector. In this article we estimate the profitability of a property management company to be Shs. 59m from an initial investment of Shs 36m.Hence you get back your initial capital (Return on Investment) in about 6 months.

Achieving this profitability however requires "advanced thinking" techniques like affiliation to an International Property Firm, Entering into a Sub Contracting arrangements with local area "kayungirizis" and finding yourself a good accountant (and lawyer)!.

Foreword

Let me set the record straight, if like me you are a from “village to city” boy and your parents were not royalty or in favour with Amin's government so as to get onto the property ladder through a free departed Asian's property then your next bet perhaps is to become a “kayungirizi [middleman]”.

You probably like me don't consider it smart to take a mortgage because mortgage interest rates of 31% interest seems unviable given the rentals to be expected..

However before you go into the property management industry and invest in this business:

FIRST THE CONS (of course):
1. Legalities.

Before you consider starting this business, go find yourself two people; a good lawyer (for you are most likely going to get sued by the “big man” property investor ) and a a good accountant (before they sue you they will want to see your records, they better be in order!).

The reason I say this is partially experienced based. A client of mine instigated an investigation against their property manager. They suspected the manager of having inflated the price of some aborted property sales commissions. The case bdragged on for about 3 years. In the meantime, the property manager had not made a cent as their income was expected to come from commissions on the sale of other properties they were managing for the now irate client. A key point of our investigation focussed on the records maintained not just financial records but legal agreements/contracts. The property manager failed in both accounts and in Ugandan speak, it was “Buladdy” (bloody).

Another form of legality not tied to your dealings with the investor emerges.

Property management is closely tied to the underlying property being managed. Uganda's complicated and poor tenure system combined with lack of proper supervision and system by government however means that property is often fraught with legal difficulties. Imagine for example your client did not obtain proper planning permission and therefore constructed property in a wetland. The new KCCA director is now threatening to demolish the property. The property cannot therefore be rented or even sold resulting in loss of potential revenue for the property manager.,/p>

2. Reputation.

Property management like any other business requires a high degree of consistency and trust for clients to fully handover properties to managers. A good reputation takes time to build from consistent performance and quality work from the agent. It’s a good will and time consuming business building a brand name and reputation that can easily be destroyed with a few shady transactions for example consider my above client's reputation in that market or in Uganda consider former property masters Ltd boss Kasulu court case.

Like I said, go find yourself a good lawyer and an accountant, but then this applies to most businesses but in this sector it is critical.

3. The property market bubble.

In the UK just like many parts of the western world, the credit crisis was brought about by property markets falling. A few clients of mine have faced “going concern” problems because the properties they purchased were secured against mortgages which can not be paid because there is no demand for the properties, which therefore remain vacant. The banks then threaten to sell the property if the loan repayments are not met. The borrower as part of this will perhaps cut property management fees amongst other fees but of course in the long run if the property can still not meet its target occupancy rate, it will need to be sold. The property manager needs to therefore be aware of these market dynamics dependent on the sector he chooses to focus ie the Commercial sector and the Residential sector

In Uganda, the property bubble is not a key issue at the moment because in the commercial sector malls and shopping centres continue to spring up in Kampala and suburbs to cater for the growing middle class and the expansion of the greater Kampala catchment area.The office space sector is however partially affected because the banking sector which is the key occupier of offices is looking to downsize so rents are expected to reduce 10-15% unless this is taken up by oil boom related space (Source: 2011 Africa Report, Knight Frank)

In the retail sector this is also not a significant problem because just like many cities across sub Saharan Africa, rural-urban migration is a key cause for urban city growth and Kampala and its peripheral surroundings has experienced significant growth. Average growth of Kampala is estimated at between 3.9% and 5% per annum. Of the approximately 12% of the population of Uganda being urban, 43% of this urban population is in Kampala alone.

The migration to Kampala is primarily because approximately 80% of Uganda's industrial and services sector is based in Kampala and it is estimated to generate over 50% of Uganda's GDP.

There is however still a shortage of housing (particularly for the middle and low income earner) as is the case for the rest of sub Saharan Africa and a lot of the Ugandans cannot afford to own properties or get mortgages and as such there is a vibrant rental market both commercial and residential.

(Sources: International housing coalition: The Land market in Kampala, Uganda and its effect on settlement patterns. January 2009; http://www.mcgill.ca/mchg/pastproject/edible-landscape/kampala/info)

The property manager however needs to perhaps more likely focus on the middle income sector who are most likely able to afford the rents of the ever mushrooming properties in Uganda.

4. Competition

This should not be a main focus as a CON because virtually every sector has competition. The uniqueness of the CON for this sector is that the property manager investor needs to find a comfortable niche.

At the top end of the market are international firm affiliates like Knight Frank, ISO certified companies like Amalgamated Property Consultants (APS) or reputable companies like Crane Management services.

At the lower end of the market are the real “kayungirizis” the brokers themselves who also double as property managers for their clients as they primarily connect the landlord with the tenant. Several owners also choose to manage their own properties.

The middle market is now being targeted by online classified portals like Kampala Mart>/a> and Deal fish.

It therefore leaves the “advanced thinking” property management investor with a need to develop their niche. I reckon it should be as follows:

a) A firm that incorporates international firm affiliation. I know international property firms like CBRE, Colliers. Having the local firm/representative office affiliated to them should be a win-win as they get a foot in the local market while the Uganda firm gains the reputation affiliation in addition to access to resources like research reports. I would therefore recommend the investor affiliate themselves to these firms.

Knight Frank does this in Uganda and I can expect that this has contribute to the local franchise partner's success.

b) A firm that as part of its “sub contractors” has some “kayungirizis” on its payroll. It pays them a daily allowance say of shs. 10,000 to cater for meals/transport while the Kayungirizi shows clients properties. What this does is establish loyalty to the firm by these brokers. They have the information to connect say a property seller to the firm who will manage the advertising process. In return they will expect commission.

This model I believe will apply to the specific Ugandan situation. It is this model that I advocate and that I believe will give the modern “Kayungirizi” the significant returns. Which therefore means:

AND NOW THE PROS
1. Excellent return on capital

In my model I expect that the investment will be returned in about 6 months! The reason for this is manifold.

a) The property manager will emphasise the management of properties as their core business. This is despite the fact that the property sales commission bring in the most revenue. The property management side is what in business is called a “loss leader”. It is a loss leader because it is not as lucrative as the sales commission on sales of properties but it is absolutely crucial because it establishes the firm as a reputable leader in its sector in addition to giving the firm inside knowledge of the market.

b) A significant part of the “marketing budget” will go to the brokers rather than traditional avenues of marketing like TV and costly newspaper advertisements. The Ugandan real estate market like so many other aspects of our economy is informal and seemingly haphazard and so several proper moguls for example will not be literate or those seeking property will not necessarily revert to newspapers but will revert to the “kayungirizi” and therefore investing in them as a linkage route is critical. Whilst I appreciate that a lot of household names like Jomayi and Property Masters have been built on aggressive traditional media marketing, I believe it is more efficient for the property manager to focus on a good website armed with knowledge of SEO and Pay per click and also take advantage of the free online classified portals and then save their marketing budget for remuneration of the brokers.

Table: The Property Management model

Estimate of Profitability, Start up budget and Return on Capital

P.S Clicking the above link will take you to the Inachee Databank where the full version of this document can be dowloaded after you register.

2. consistent cash flows including from “side deals”

There is monthly and consistent inflow of money once establishment has been made. Most times money in advance is received for long periods (say 6months) thus allowing planning, control and organization of the property manager for future dealings and investment opportunities.

As Ugandans love “side deals” (and “side dishes”) the property manager should be able to make big profit returns off dealings like sell of property including at auctions, land sell, reconstruction and refurbishment of properties, et al.

It should however be noted that consistent inflow of money should be for example from the property management fee and sales commission to the property manager rather than client monies . The property manager having access to client monies should not make them lax or for example use client monies to finance “side deals” but rather it should make them more stringent with their internal controls and book keeping as to establish a good reputation the property manager will need to be able to account and reconcile client monies at any point in time as needed.

SUMMARISING AND FINAL WORD

First the numbers:

  • Capital Investment(A): Shs 35,149,155
  • Profit per year (B): 58,803,380
  • Return on Investment/Capital (years to get capital back) (A/B): 0.6 years

Now the basics you must get right before investing

  • Property management software. You must invest in good software to provide you with real time client accounts and reporting including bank and debtor reconciliations as they request. This will give the client the assurance that they can trust you to for example collect the rents and remit them on time to their account. I cannot recommend one but a google search should yield one.
  • Maintain a good contact data base. Property management requires liaison with several authorities like KCC, land authorities and utility suppliers, repairs and maintenance personel, lawyers and the famous “kayungirizis”. I expect that a good property management software system will have a robust Database Management System at its heart. I will reiterate, include a good lawyer and accountant in this contact database(most likely on some form of speed dial).
  • Establish an affiliation if you cannot afford with an international firm such as CBRE or Colliers, then do so with a locally reputable firm. APS for example is ISO certified, they may be happy to develop a “franchise” with you. The reason this is critical is that they will share information with you, for example how to ensure that you maintain a high occupancy rate, how to recharge service costs and market insights.
Final Word:

HSBC has interesting concourse adverts at airports like Gatwick. One of them boldly states:

“2/3 of the world's millionaires are self made”.

It should work to encourage you that just because you didnt inherit property or like me are "from village to town" doesn't mean you cannot own property. Who is the real “kayungirizi” now?

Otherwise, best of luck and of course if you need some help, do not hesitate to speak to us to get the ball rolling, Inachee after all represents Home Grown Energy in Motion.

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And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not solely rely on the information given here to base your investment decisions. You should seek business advice from a professional knowledgeable of your specific circumstances. I shall therefore not be held responsible for any loss you may incur when acting on this information.

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