Land & Real Estate vs Treasury Bonds Investments. Pt 1.

January 28, 2025

Yesterday, the Capital Markets Authority of Uganda hosted a space to discuss one of the most pertinent topics we have explored over the past few weeks or months: the comparison between land and real estate investments versus the emerging capital market products, particularly unit trusts and treasury bonds.

Although I was not invited to the space, despite my long-standing push and promotion for one side of the discussion on Twitter, I felt it was important to share my perspective on what was discussed by the panelists.

First, let me address the most significant point that raised further questions during the conversation about defaults by sovereign nations.

One of the panelists mentioned that there were bond defaults in Zambia and Ghana, using these examples to caution investors in treasury bonds to pay attention to the history of payments. I wish the panelist had elaborated on this point, explaining that there are two types of government bonds or borrowing from the public: treasury bonds and Eurobonds and or got challenged as this was a specific discussion to Ugandan context with majority of listeners expanding on their knowledge.

Treasury bonds are standard for many countries and are issued in the local currency, which the government has control over, whether through supply or printing. In contrast, Eurobonds are issued in a foreign currency, typically dollars. For a country to meet its obligations on Eurobonds, it must earn dollars through exports or other means. In the case of local currency treasury bonds, the government can manage its obligations more flexibly, as it can print money or extend the maturity of existing bonds to cover expiring ones.

In terms of default risk, treasury bonds are issued more frequently, allowing for the matching of maturing bonds with newly issued treasury bonds. This practice significantly reduces the risk of default to low levels. In contrast, eurobonds carry additional risks, such as currency fluctuations and the country's ability to generate dollar revenue. Unlike the United States, which can print dollars, other countries must earn dollars through exports or other means to meet their obligations.

In Uganda's case, we only have treasury bonds denominated in the local Ugandan currency; we do not issue Eurobonds. This distinction is crucial. Zambia has local treasury bonds and Eurobonds, but it has never defaulted on its local treasury bonds. Key here is, Zambia has never defaulted on its matching Treasury bond (the kind of product we have in Uganda currently).

The default occurred on its Eurobonds due to insufficient dollar reserves to meet its obligations. However, Zambia has since renegotiated its debts, positioning itself to pay off creditors up to a total of $3 billion and significant payments have been made and investors recovered their investments.

It is essential to compare like with like. Uganda has no Eurobonds, while Zambia has local treasury bonds, which they have consistently honored. The default on Eurobonds was due to limited dollar availability, creating pressure on the country. These are two different scenarios.

When investing in Ugandan bonds, it is important to understand that you are investing in local currency bonds, for which the government has a maximum degree of control. While issuing longer-term bonds can be expensive from a macroeconomic perspective, the risk of default remains limited as long as the government can continue to issue and reissue bonds through the redemption system.

Comparing and assessing Ugandan treasury bonds and the government's capacity to pay by inferring from the riskier Zambian Eurobonds is akin to comparing oranges to mangoes.

Ghana.

The panelist also mentioned Ghana as another example of a country that has defaulted on its bond obligations in the recent past.

Ghana also has local currency treasury bonds in the cedi and euro-denominated bonds. Ghana struggled to raise enough dollars to meet its Eurobond obligations and subsequently defaulted.

On the local Treasury bonds,

Due to liquidity challenges, Ghana initially restructured its local currency treasury bonds, where the majority of bonds maturing within one year were involved. Bondholders were offered longer-term treasury bonds with maturities of 10 to 15 years. This approach is similar to what we often see with bond switches, a practice that has occurred in Uganda as well. In such cases, instead of the government repaying the bondholders their money for bonds that are about to mature, they offer to switch these bonds for new ones with longer maturities. This standard structure of redemption allows the government to address short-term liquidity needs by extending the repayment period, effectively postponing the immediate payment obligations.

Point home

If you are investing in treasury bonds and your first concern is the potential for default, it is crucial to compare like with like. You must ask what type of bonds the other countries defaulted on. While all of them may have "bond" in their names, they are fundamentally different products.

The control that a government or country has over its local currency treasury bonds differs significantly from its control over euro-denominated bonds. The capacity and willingness to repay local currency treasury bonds are distinct from those associated with Eurobonds which should give you confidence that the Government’s capacity to repay is significant high.

However, in the process of discussing risks of loss, don't investors lose money in land and real estate transactions, particularly due to fraud?

While discussing the impact and risks of default associated with investing in treasury bonds, it is interesting to note that none of the panelists who supported the real estate side addressed the risks of losses of investments related to Real Estate.

We have seen numerous instances in Kampala where individuals purchase land, receive a title, and then, a year later, discover that someone else has a competing claim to that title. In some cases, individuals face eviction from their land, or they may end up purchasing "air" — land that is essentially worthless. These scenarios highlight significant risks associated with land and real estate investments something that wasn’t explored.

In fact, there may be a greater risk of loss tied to land and real estate compared to treasury bonds, regardless of the risk premium discussed. Yet, this concern was not raised during the conversation. If we are going to address the risks of loss in any investment, including the potential for government default on treasury bonds, we must also consider the risks associated with land ownership.

These risks include issues such as duplicate land titles, purchasing land that does not belong to the seller, encroachment, and misdirected land use — all of which are common and well-documented problems in Kampala and throughout Uganda. It is essential to have a balanced discussion that acknowledges the complexities and risks inherent in both land and treasury bond investments.

These are going to be a series of write up as I reply and comment on different points raised by the different panelists. Stay tuned.

Happy Investing Everyone.

Alex Kakande