Rental Apartments vs Treasury Bond. How she plans to turn a 250 M into a 2.7 Bn.
October 29, 2023
Friends,
With the permission from one of my client, I am sharing this story and deep review 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.
While if she had bought the bond currently on the market, after the same period, she would have a cool 2.7 billion shillings. The Treasury bond, with less stress, was giving her over 1 billion shillings in value compared to the rent. She sold the house and moved in fully into investing in Treasury Bonds.
Now, the goal is to see her diversify her investments, including real estate, but with a focus on optimizing her returns rather than blindly following the long-held belief that only real estate can provide the best returns.
The ball is back in your court.
If you enjoyed this letter, please consider sharing it with your friends and families,
I hope you have a great Sunday and potentially invest in Uganda’s Capital Markets.
Alex Kakande
Thanks Alex, and the investor for willing to share your story.
While this all looks great, there is a significant angle for a diaspora who earns in dollars/pounds/euros like your client investing in UGX unstable currencies like ours.
Let me share a brief story as a Ugandan diaspora
In 2016, while based in Nigeria a fellow expat colleague invested his $100,000 in Nigerian 10 year treasury bonds at 15%. The exchange rate back then was 1$=280 Naira
Unfortunately, since 2018, the naira has steadily lost value that it is now 1$=980 Naira barely 7 years down the road.
So, while he gets the Naira, it is rather worthless that he can't even get his $100,000 equivalent back again at the current rates. The same can be said of the Ghanaian Cedi, Angolan Kwanza etc
The current political & econommic climate in our country unfortunately makes it prone to a similar situation as above though we are currently doing much better than others in the region.
From my perspective, if i have huge stash of hard currency (USD/GBP/EUR), and willing to forget it for >10 years, with very minimal stress, i would seriously consider foreign currency investment options. A 5% on USD compounded over 10 yrs in a market like ours will yield far higher returns in 2032 compared the yield in USD terms from a 10% on UGX compounded over the same period. Geoffrey
Thanks Alex. Qn for clarity for us: How did they buy a bond of 250m on the primary market, when the max u can get is 200m in non competitive rates as a person? I thought then u need to factor in that 50m was probably bought on the secondary market (if indeed in the same week), or on the re-opening, 3 months later. Either of these would mean a reduced rate bse that same bond was selling at a premium later on re-opening, and even high in the secondary market. Meanwhile are you factoring in the bond WHT?