Strategic Real Estate Investment in Uganda: A Case Study

Sept 24, 2024

Friends,

I have been pondering a question:

How many of us have accumulated a significant amount of good and promising land parcels around Kampala but are unable to develop it for cash flow generation, yet at the same time, we do not want to sell? leaving the land to be unproductive for years.

If you fall into that category, please read on.

Courtesy photo.

In the year 2022, a friend of mine, whose family is among the old moneyed but with a dwindling empire of struggling businesses, sought my advice. His father possessed a substantial portfolio, including prime real estate in around Kampala and it’s outskirts he had bought over the years. They approached me for a portfolio assessment to optimize their land management strategies.

During our consultation, we explored numerous decisions, many of which they later implemented. I recall suggesting they leverage their extensive land holdings rather than selling them and find a way to turn many of these parcels into a cashflow generating units.

The family, at the time was a very asset-rich family but cash-poor, a common predicament for many of us if we don’t take some decisions. They were facing a liquidity crisis due to struggling businesses, but at the same time were having many good and prime plots of land and selling was off the table for the family.

To address this, I proposed the creation of a holding company.

The idea was to attract investors (people with Cash/liquidity looking to invest in real estate but with no land of their own. There is a growing number of people in this category), each contributing significant capital, in exchange for an equity stake in the company. This would allow the family to retain equity ownership in their land while generating income from the development of standard apartments on the different parcels.

I drafted a proposal, publicized it on Twitter, and garnered interest from potential investors. The plan required the family to transfer their assets into the newly formed company. This concept, while innovative and would work perfectly well, raised some concerns.

The major risks associated with this kind of arrangement were primarily concerned with the exit strategy. Specifically, how do the three to four different partners—where one has contributed land and the others have contributed capital—navigate a situation where one wishes to sell their portion? Do they sell internally, or can they sell externally, and what would be the implications for the other shareholders? Introducing a new investor might disrupt the strategic direction initially set by the group.

The second risk or challenge was the valuation of the land. In Uganda, it is common knowledge that land is often valued at a premium. If the land is overvalued, does it result in the land-contributing partner receiving a disproportionately higher equity stake in the company compared to those who are bringing in capital? For instance, if you are valuing land at UGX 100 million and I also contribute UGX 100 million, then all of us would have a 50% stake in the holding company. But what if the land was indeed only worth UGX 80 million? This discrepancy was one of the biggest challenges: determining how best to value the land to ensure that it is fair and that those who contribute capital can see there is an equitable distribution of the company's equity stakes.

Nevertheless, I am convinced that the future of real estate development lies in such collaborations. It is a more viable alternative to traditional bank loans for asset-rich, cash-poor landowners. By pooling resources and expertise, land can be developed without the need to sell, preserving the owner's legacy and providing a steady income.

In developed economies, real estate is recognized as a capital-intensive asset class, often beyond the reach of individual investors. This has led to the rise of companies specializing in property development, with individuals participating through mortgages or equity investments. Maybe its time we start to think of a model that might be the best for us as Uganda.

Embracing innovative investment strategies and collaborative development can help landowners capitalize on their assets while adapting to the changing economic landscape.

Happy Investing Everyone

Alex Kakande