Rental/Mizigo Investments vs a 10-year Treasury bond Invesment..
January 9, 2025
Yesterday, Livingstone Mukasa initiated a discussion suggesting that rentals targeting lower-income individuals can outperform the current 10-year treasury bond investment. The numbers were computed and presented as per the link
The Rental Mizigo Project in Makindye consists of 4 one-bedroom units, each generating a current income of UGX 500,000 per month. The project is situated on a 45x85 Ndagano plot of land and would look like below. (I ran the photo with him and we agreed on representation)
Assumptions for Real Estate.
All costs to be incurred in the investment total up to UGX 200 million. This includes payments to the rental owner, payments to the Buganda Land Board for title changes, and payments to the legal or broker team. This is important as it tracks the actual cash invested and will be matched to the exact amount to be invested in the bond market.
Rental growth is projected at 4% per year. From my preliminary review with a few residents in these locations, rent hasn't been increased in the last 3-4 years, especially for long-term tenants. However, considering market dynamics, let's assume a 4% annual rental increase.
Let’s also consider a full occupancy of the units with full payment of rentals by the tenants.
Tax is 12% of the total revenue per year since this would be for individual rentals, its 12%
Other costs associated with maintaining these rentals are capped at 10% per year. This includes security, repairs, and all related expenses.
After 10 years, you can sell the property for 10 times the income at that point in time, after incurring repair costs of 10 million. The exit price is estimated to be UGX 328 million.
Time value of money discounting rate of 5% based of the average inflation rate in Uganda
Having considered all that, the investment would look like this.
A 10 Year-Treasury Bond Investment.
Following yesterday's auction results, which saw interest rates in the primary market for long-term bonds reach as high as 17.5%, I reached out to my contacts in the market and obtained quotes for a 10-year bond at a 17% interest rate. The numbers below are presented for an investor with UGX 200 million ready to invest in the bond market (the same amount as that spent by someone buying the rental mizigo mentioned above).
At a 17% interest rate, the investor would acquire a bond worth UGX 228 million, and their cash flows for the next 10 years would look like this. These cash flows are exactly matched in our discounted model.
Assumption considered are
Person has also just UGX 200 million to invest.
10% Withholding tax on coupons
No compounding to match it with rental income.
Time value of money discounting rate of 5% based of the average inflation rate in Uganda
Having considered that, the results for a bond investor in the discounted cashflow model would look like the below.
Verdict
The assumptions used in the rental project are generous but subject to change. They remain as is, with an annual rent increase or a 10% increase every three years, as is market practice. If, in 10 years, the person manages to sell the rentals for over UGX 320 million, their valuable investment would have yielded a net present value of around UGX 126 million. However, if rental incomes do not increase as projected or the sale value in 10 years is not near UGX 300 million, then the total value would not be as expected.
The bond investment, however, is fixed income. The numbers presented are solid and can be locked in right now, ensuring returns for the full 10-year period. Even with that, the investor would have a net present value of UGX 131 million (UGX 5 million higher than the generous rental project) with less stress or complications.
Based on numbers alone, the treasury bond will provide a higher net present value than the rental Mizigo over a 10-year period.
Another important point to consider
However, focusing specifically on this Rental Mizigo project, such sizes of land only result in an Investor getting Ndagano agreement between the buyer and seller, allowing you to use the land but not obtain leasehold or freehold titles. This means you cannot leverage that investment to get a loan from credit institutions. On the other hand, my UGX 200 million treasury bond can be taken to the bank to secure a loan, providing an added comparative advantage that makes treasury bonds a better option
Query here, so the 228m from 200m is a bond acquired at a premium point of view right ?
Impressive analysis!