Friends,
With the permission from one of my client, I am sharing this story and deep of investments in Uganda. Real Estate Apartments for Rent vs Treasury Bonds.
My client is based in the United Kingdom, and like many diaspora people, their primary investment strategy when they think of Uganda is to buy land, construct apartments, or buy ready-made apartments and bungalows. They are some of the reasons the cost of Real Estate in this country is extremely high because developers are deliberating inflating things and targeting them.
In March of this year, my client had saved over 270 million Uganda shillings and reached out to one of the best and most trusted developers she knew. She was able to acquire a brand new construction house in Kira for an estimated total of 340 million Uganda shillings, with the balance of 70 million shillings to be paid in one year. She later rented out the house for a monthly cost of 2 million Uganda shillings.
In July of this year, we began talking and her first desire was to learn about Treasury bonds and other alternative investments like stocks. She lives and works in the UK, which gives her prime access to the best companies in the world to invest in.
My client is 36 years old, meaning she has over 24 years to go before retirement. Her investments in Uganda were for the long term. She had time on her side, and all she wanted was something that would bring her the highest return for the longest time possible, over 20 years. Like many of us, she was told that real estate was the answer, which is why she invested over 270 million shillings in the house.
Our review of her investment led to these two realistic answers:
- Real estate: This house, which we can categorize as an investment property, was projected to bring in around 24 million Uganda shillings per year. We factored in rent growth at an annual rate of 6% and estimated that this particular house in Kira, with the land, might be worth around 1 billion Uganda shillings after 15 years. We also factored in rental income tax of 12% and other costs after tax of only 5% per year to have a realistic comparison.
- Treasury bonds: We then reviewed the option of selling the house right now, at a forced sale, and calling her losses. We estimated that she would potentially get around 240 million shillings. We did an iteration of how much this money would bring to her annually if she were to compound the investments by investing them in long-term bonds. Her goal was to ultimately invest where she believed she could get the safest return in 15 to 20 years from now. (She sold the house back to the developer at 250 million shillings in August and managed to purchase the 15-year treasury bond from Bank of Uganda in the September 6, 2023 auction.)
We used a comparative bond of 15 years currently giving a 16% coupon rate for this assessment. We also estimated that she would have to reinvest the coupons every single year for a minimum return of 12%. (The assumption made here is that coupon rates might still be this high in the long term, otherwise she would have to buy this particular bond on the secondary market to guarantee her the 16% annual return.) In the computation we capped the rate for Coupon Reinvestments to 12%
The results were astonishing. The real estate rental house would bring in a total value of around 1.4 billion shillings net after the estimated 15 years,
Rental Computation for the 15 year period resulting into a 1.6 billion value.
