{UAH} Rentals vs manufacturing plant

By Edris Kiggundu 

A couple of weeks ago Denis Jjuuko wrote what I considered a superb article about Ugandans' preference to invest in rental apartments as opposed to investing say in small or even medium sized manufacturing plants. He said many of the manufacturing plants that were being opened by President Museveni were owned by foreigners insinuating that they are more enterprising. It attracted a big debate which I followed from the sidelines. A few years ago, I had a similar debate with my former boss James Tumusiime. I told him that there are many facets to this debate.

I told him one of the major reason many of us  would rather invest in real estate as opposed to setting up a small plant is because we generally fear to take great risks. Real estate has a low risk factor because all one does is to put up a house, look for tenants, then sit back and wait for the monthly payments. 

This makes it highly attractive to many of us who generally fear to take bigger risks. Yet like the business dictum goes, "the lower the risk, the lower the rate of return on the investment."

A friend of mine who invested Shs 1 billion in a small factory that makes disposable cups, forks and plates (the ones used at parties) in 2015, recently told me he had recouped his capital investment and was posting healthy profits, after four years. He told me he resisted the urge to construct "apartments" when everyone around him was doing so. I told him he is lucky to be prospering in a country where many factories have gone under. Very soon, he told me, he is going to start making the quality of disposables that Cafe Javas, KFC and other high end restaurants use so they will not need to go to China or Kenya. He is setting up the machinery.

If you put the same money in real estate, you are mostly likely going to recoup it in 20 years or more. The downside to setting up a plant, however small, is that it is no easy task. The mechanics and legalities involved, getting the right people, machinery, the certifications required, finding a market for the product and resources to distribute it, can be a great put off for those who have little patience. That is why many people resort to real estate despite its evidently low returns. I know of an investment club where members bought four acres of land at Shs 400 million (100 million per acre) in one of the rapidly growing city suburbs. They considered this a safer investment than say starting a medium sized mineral water plant which had been proposed by one of the members. The dissenting member decided to break off and start a small sized mineral water plant. He invested Shs 100 million in the venture and today he is reaping big. He has opened up another small plant in Eastern DRC.

Meanwhile, the investment club later sold three acres of the land and raised 380 million (after three years) are now putting up rental apartments on the remaining acre. They are building 80 houses (since they are also 80 in number). When done, members will have the option of occupying the houses, renting them out or selling them. The project has not been easy and they have to regularly make rounds of fundraising to sustain their dream. Fingers are still crossed.

Secondly, rental apartments are a reflection of the "salary mentality" that is infused into us as soon as we get our first job. "Let me put up these apartments because you never know, If I lose my job or when I retire, the money from the houses will fill the salary gap." Jobs subject us to routines which we are afraid to break. You know when to pay for utilities, for school fees, rent etc..Wherever I have worked so far, I have noticed that towards the end of the month, the paymaster's office is often the most visited as staff try to inquire whether they have paid. When the answer is negative, they curse under their breath. A positive answer elicits fits of joy. Many of us live for that job.

Many purely business-minded people that I know who go into real estate usually build houses for sale as opposed to receiving monthly income. They put up shell or finished houses look for buyers, recoup their investment and move to the next venture. They do the same. 

The exception to this rule are those who put up huge commercial buildings, office blocks and arcades in the city where return on investment is fairly much higher. Yet even many of these are now crying their way to the banks which have the titles.

Thirdly, for Uganda's case, the real estate boom correlates to the high levels of corruption especially in the public sector. Once I took a casual stroll in Mbalwa, Bweyogerere and I was stunned by the number of mansions and beautiful rental apartments that were coming up. When I made a few inquiries, I was told that many belonged to public servants many of whom must have been earning less than a million shillings. I once inspected a row of houses in Najjera which I was told by were owned by a records clerk in one of the ministries. They were awesome and had been beautifully finished. Each was going for Shs 350 million yet I kept wondering how this records clerk had amassed all this wealth. In a sense, real estate provides the safest outlet for stolen funds as opposed to setting up a medium sized manufacturing plant. 

Having said this, the choice of an investment vehicle is one of the hardest to make especially in countries like Uganda which are still developing and lack many of the fundamentals to facilitate the smooth operation of any business. You will set up a factory and then grapple with the issue of unreliable power. Where power is reliable, it will be very expensive and will constitute 80% of your production costs. Competent and skilled people are hard to find. It is Catch 22 situation.

"In tribute to the United Kingdom and the Republic of Uganda, two bastions of strength in a world filled with strife, discrimination and terrorism."

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