DIVERSIFIED property developer Mashonaland Holdings recently released a set of financial results, which reflected resilience despite the sector remaining depressed due to various issues. Our senior business reporter Melody Chikono (MC) discussed a number of issues with the company’s managing director Gibson Mapfidza (GM), who touched on the performance of the group, as well as the sector at large. Below are the excerpts of the interview.
MC: You said the group remains focused on portfolio diversification and performance optimisation. Can you walk us through this?
GM: Our portfolio has for long been more concentrated in the Harare central business district (CBD) office sector. In addition, the space offering was designed with the yesteryear corporate occupier in mind.
Given the structural changes that have taken place over the past two decades, there was a need for us as a company to clearly understand the current and future needs of our customers in their various segments and design a Value Proposition that met those identified needs.
This largely informs our diversification strategy, which seeks to achieve our model property portfolio by 2027. Based on the understanding of the market needs, we have already acquired some strategic land banks mainly in Harare.
We have also identified strategic land banks in Victoria Falls, Bulawayo and Zvishavane. We are at different stages of acquisition in order to realise our diversification strategy.
So it is not only sectoral diversification, but also geographical distribution of our footprint across emerging property investment nodes across the country. The projects we are working on, including acquisitions and disposals we have made, are all meant to achieve our model property portfolio within the five-year period
MC: What are some of your key additions to your portfolio?
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GM: Some of the key additions to our portfolio include increasing our health segment from the current 2% to 5%, with the Milton Park day hospital practically complete. We are also geared to venture into the tourism and hospitality sector. A lot of work has already been done in the background to achieve this.
The Pomona Commercial Centre talks about increasing our retails sector investments and also supports online retailing through providing flexible warehouses closer to the consumer.
This essentially responds to the 4th and 5th Industrial Revolutions and, at the same time, future proof the company’s earnings through responding to future market needs. Secondly, our performance optimisation thrust is meant to ensure that we continuously improve the income generating capacity of our current portfolio.
This entails best practice property investments management and ensuring that our customers, mainly tenants, realise value in our long-term relationships. We also had to reconfigure space in some of our highrise buildings so that the product talks to the specific needs of the small to medium enterprise (SME) sector in terms of space size, flexibility of lease terms and structuring the relationship in a way that the tenant only pays for space and time use.
These concepts require a lot of on-site management effort, but we have to do it so as to remain in business. The performance optimisation thrust is meant to ensure that we significantly finance our new developments using internally generated resources from the current portfolio.
MC: What other projects are in the pipeline?
GM: Some of the projects we have in the pipeline include the proposed office park development along the Borrowdale road corridor, a cluster housing development in Greendale, a mixed-use development in Ruwa and a hotel development in Victoria Falls.
The office park development seeks to align with those of current tenants, who wish to operate out of the CBD. The company has also been looking for viable opportunities to diversify its portfolio into the hospitality sector.
The unfulfilled demand and the need for a modern designed hotel operated by an international brand in Victoria Falls presents a good opportunity for the company to make in-roads into the defensive sector.
MC: As part of your diversification strategy, are you in any way considering other projects outside property development?
GM: Yes, we have acquired an existing building and immediately leased it out. We would continue to consider such opportunities provided the building design and fabric are in a good functional state. Broadly and at a group level, we are also considering big infrastructure projects in partnership with the government so that we positively contribute to national infrastructure development.
The country is lagging behind in terms of bulk infrastructure like transport, sewer, water and energy. These gaps present an opportunity for us to partner, do good whilst doing well.
MC: You mention that the property market witnessed some pockets of growth in the retail and office park segment. What drove this?
GM: Whilst key fundamentals that should ordinarily trigger new developments are weak, you realise that the interplay of various factors would still lead to a viable demand for new stock.
For instance, the current building stock we have in the country is generally outdated as most buildings have gone beyond their effective economic lives and most were designed prior to the emergence of information communication technologies.
New technologies being driven by the 4th industrial revolution require certain building designs to enhance user operational efficiencies. Organisations exposed to these new developments, mainly international organisations, are demanding newly designed buildings, incorporating environmental social governance aspects, in certain locations around the city and country.
MC: Very interesting...
GM: Another key factor has been the need for shopping convenience, which has seen a demand for smallish retail centres coming closer to the consumer. Beyond this and in search for more convenience, online shopping is taking root hence the need for warehouses closer to the residential neighbourhoods.
This really is also challenging the traditional land use zoning in town planning as the consumer is now driving town planning and not vice versa. The general city morphology dynamics, most recently the re-zoning of suburban residential land uses to commercial, also create new viable opportunities.
These are some of the factors and shifts that have been creating viable property development opportunities despite the generally weak fundamentals across the property market. One of those key fundamentals that trigger demand for new stock is the relationship between construction cost per square metre versus property value per square metre. In a bullish market, value would be higher than cost, but we have seen in our market construction costs edging upwards in line with inflation and yet property values are under pressure going southwards as the country continues to experience sluggish growth.
MC: How has the exchange rate affected the sector?
GM: The primary impact of currency volatility on any investment is that it erodes the value of the investment. We have experienced this across the property market. I should state, however, that the dual currency regime has to a larger extent helped plug that value leakage.
The exchange rate volatility has seen construction projects becoming very expensive as, given the construction time lag between tendering and completion of construction works, contractors price in the inflation risk into their tenders, understandably to also hedge themselves. The secondary impacts are far reaching for the entire economy
MC: You indicated that the tourism sector is providing an attractive investment destination for diversified property investors. Can you shed more light on this?
GM: The hospitality sector is generally classified as alternative real estate as traditionally, across the globe, the hotel business owner would also own the building. In mature markets, management contracts are mainly used and the real estate and the business is owned by a typical property investor. This move, if properly structured, presents an opportunity for a typical property company to diversify its business model and revenue streams to include the hospitality sector revenues.
However, a lot of care is required to ensure the marriage with the operator is one built on firm ground.
MC: Under a constrained environment, you still managed to see a 150% increase in revenue coupled with other growth numbers signifying growth. What can you attribute your performance to?
GM: We have been lucky that our properties continue to attract tenants. Our teams have worked so hard to ensure the state of our buildings remains attractive in spite of their locations. The attempt to tweak our value proposition in order to align with the current market needs have also paid.
MC: What are you looking at in terms of occupancy levels by year end?
GM: Our target is to achieve an occupancy level of 90% across the portfolio by year end. For us to achieve and sustain this, we hope the authorities will continue to put in place measures to grow the economy.
MC: What would say have been the impact of land barons on property development?
GM: I look at land barons as a form of self-help intervention due to the formal sector failing to meet the housing demand. The impacts of these self-help developers are so severe that it calls for concerted efforts of government, both local and central, and the private sector to resolve the issue and protect property values.
Broadly, land barons impede on property rights, which is a key component of the World Economic Forum’s ease to do business index. We have seen these land barons invading freehold land and, in some instances, getting some ‘protection’ against titled land.
MC: How about unplanned settlements?
GM: We have also seen a proliferation of unplanned settlements around the major cities with no services, which over time become squatter settlements. All these unorthodox activities have disrupted and distorted the housing delivery supply chain and the property market. The land barons get land for free so they present an unfair competition to the formal housing developers, who have to pay market rates to secure the land and build all the required services to get compliance certification.
MC: What is the impact of this?
GM: This then eats into the margins of formal developers and, over time, formal developers disappear as the ‘market for lemons’ favours inferior goods at the expense of the superior ones.
The high level of information asymmetry inherent in property markets tends to work in favour of the land barons in this regard. I strongly believe that institutional investors and property companies still have a strong desire in providing affordable housing.
However, that appetite is deterred by these informality and illegal activities, which increases the investment risk.
The city councils also seem uninterested to work with formal organisations. On a number of occasions, councils invite developers to express interest to partner with councils to develop housing at certain sites.
Most formal organisations respond to these invitations, but it invariably ends there.
Next you see a nameless developer doing very rudimentary work on the site in question.
MC: What key issues do you think need redress in the sector, which can see it significantly contribute to economic growth?
GM: Indeed the real estate sector has the potential to significantly contribute to economic growth. I think there is a lot of work to be done on the infrastructure side to support the building investments. The country is in a significant bulky infrastructure deficit including roads, railway, water, sewer, energy and community facilities including stadia, hospitals, schools, etc.
With an enabling public-private-partnership investment framework, institutional funds would naturally go into bulky infrastructure development, which is currently in deficit.
However, the Joint Venture Act of 2015 does not provide for viable investment returns and, as such, this patient capital will not go there. There is a need for the government to attend to such issues and to some extent allow investors to deploy resources at terms that enable the private sector to do good to the communities they operate in whilst doing well for their investors.
