AT the time of writing, we are cautious about the near-term fortunes of Zimbabwe’s property market. It is very likely that current macro-economic challenges will remain for the foreseeable future.
Although government plans to spend ZW$1 trillion (about US$1 billion) on infrastructure in 2023 look promising, economic stability is likely to materialise in five to 10 years, the interim being years of policy consolidation by government and anchoring regulators. Meanwhile, the greatest hurdles to our property market are hyperinflation, currency depreciation and a dearth of long term financing. Most landlords are grappling with high debtor balances as many businesses have failed to consistently pay their rentals over the last few years.
The retail market has been hard hit by current economic challenges, worsened by Covid-19 lockdowns over the last two years. There also seems to have been a noticeable shift to online shopping by consumers, undermining the business model employed by a large majority of landlords across the market. Again, a growing number of informal traders and vendors in cities and towns are driving traditional formal tenants out of business. In a bid to manage cost and fight competition, tenants are being forced to downsize or close, leading to excessive supply of space in the commercial lease market. With the yield ranging between 5 and 7%, Zimbabwe ranks as the lowest in Sadc.
Unavailability of mortgages and high cost of borrowing in Zimbabwe has left many landlords stuck with unattractive old warehouses on the other side of the segment, driving commercial tenants to switch to owner-occupied warehouses and spaces.
Arguably, this has also been an incentive to local property investors to promote REITs to generate some liquidity from underperforming assets.
Office space market
This segment is also still nursing wounds from its fall-out with Covid-19 induced lockdowns as remote working patterns are becoming increasingly popular.
The ongoing shift to suburban areas like Newlands, Eastlea and Milton Park is dampening the office space market in the Harare business centre for instance, and the same can be observed in other cities. Operators are converting their houses into offices to cut expenses and maintain profitability. At an average of 7%, the yield is marginally lower, translating to low cash flows relative to neighbouring countries that are yielding over 9% per annum. Meanwhile many suburban shopping malls across the country have struggled to retain the traffic they typically attract in their first few months of launch.
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Residential property market
Most sellers prefer to get paid only in foreign currency due to continuous currency depreciation right at the time when the country is faced with serious foreign currency shortages. Hope for residential property sellers is now pinned on Zimbabweans in the diaspora and those that are working in executive roles. The majority of domestic buyers are locked out of the market. This situation will remain as is until a vibrant mortgage market is restored in the country.
How listed companies performed in the last 10 years? Rental incomes from commercial property have been falling every year in USD terms over the last decade. Below are some key takeaways. In our brief analysis, we included rental income growth, yields and return on invested capital from two notable property investment companies, First Mutual Properties (FML) and Mashonaland Properties, to see how the changes have affected shareholder va lue over time.
The results achieved by FML in H1 2022 results are good given the operating environment. However, there is a marked deterioration in overall performance when reviewing the companies’ results over the past decade.
Over 80% of First Mutual Properties’ income is derived from office and retail segments. Between 2013 and 2017, despite maintaining an occupancy rate of 80%, rental income was 5% annually on a compounded basis. Accounting for currency instability, we have estimated revenue of US$6 million for FY 2021, 20% down from US$7,4 million in FY2017. Over the period, rental income to invested capital averaged 7%. Return on invested capital and dividend yield both averaged 2%. While prior results are not necessarily indicative of future results, returns to shareholders are likely to disappoint over the near term. Historical financials in hand suggest that Mashonaland Holdings is struggling to drive revenue performance. Rental income fell at an annual rate of 12% between 2013 and 2017, faster than FML. Over 90% of Mashonaland Holdings’ rental revenue comes from office, retail and industrial segments.
The company closed FY2021 with a revenue figure in the region of US$5,6 million, 27% lower than the US$7,7 million reported in FY2013. Return on invested capital averaged 6% for the period 2013 to 2021, 1% lower than both First Mutual Properties and the industry’s 10-year average.
Conclusion
The Zimbabwean property market is a mixed bag as returns are strongly influenced by macroeconomic factors. The economy still faces significant endogenous and exogenous inflationary pressures with material and direct effect on the local currency.
This will negatively affect consumer disposable incomes, business profitability, and result in lower demand for commercial renting space.
Consequently, returns from office, retail and industrial space markets will remain lower than regional peer markets like Zambia, Mozambique and South Africa. This heightened uncertainty means there is potential for further downside in rental incomes in both the medium- and long-term periods.- Bard Santner Investors is licensed and registered by the Securities and Exchange Commission of Zimbabwe (SecZim) as an Investment Manager.
