COVID-19 could lead to decline in real estate valuations – BOU

decline in real estate valuations
Apartment to let in Bugolobi, Kampala. BOU says value for real estate could decline in double-digits.

Kampala, Uganda | URN | Ugandans could see the value of their assets in the real estate industry, including land and houses decline as a result of the Coronavirus (COVID-19) disruption, Bank of Uganda (BOU) has warned.

This decline, the central bank says could be in double-digits meaning it could go in the highs of 10 per cent and above.

In a letter sent out this week to the chief executives of commercial banks, credit institutions, and microfinance deposit-taking institutions, BOU said “Current projection and market intelligence indicates that the COVID-19 pandemic might in the near term potentially lead to a double-digit decline in real estate valuations.”

The Coronavirus has taken away demand or made people postpone their plans to purchase or rent some of the properties.

BOU said this means banking asset quality will reduce. The assets Ugandans offer banks as collateral in order to borrow will also see a decline in value while losses to the banks on loans might increase. 

“The banking sector capitalization would be negatively affected and vulnerability of the sector increase,” said BOU. This have the potential to see some banks fall below the minimum capital requirement.

From June 1, 2020 BOU set the maximum limit of 85 per cent on the Loan Value Ratio (LVT) for the residential mortgages and loans for land purchase, wherein value means appraised market valuation. 

This means that the bank can only offer 85 per cent value of the property as a loan and you have to pay from your own money the reminder 15 per cent.

There are banks that have been offering up 100 per cent value of the property as a loan. This is not allowed now.

In a zoom discussion on Tuesday 2nd, Judy Rugasira, the Managing Director Knight Frank, said organisations and companies were asking landlords in a commercial building to allow them to reduce the space they have been renting. This is mainly to cut on the bill they pay.

Also, she said, many residential buildings had remained empty because they hardly took anyone for views or some people changed their minds about moving into new places.

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The low uptake and demand for the properties reduce their earning power and owners are likely to default on their loans. Things might not change at least for the next six months, ” said Rugasira.

On the borrowing side, reduced values of properties means borrowers will either be getting less money or expensively.