Soaring costs weigh down on housing projects

Eric Chiriga



ALTHOUGH the property market remains the best hedge against inflation, escalating construction costs spurred by gallopi

ng inflation continue to dampen home-seekers’ dreams and threaten the success of government’s housing projects.


Since January construction costs have increased three-fold.


According to a report on the performance of the Harare property market in the first quarter of 2006, produced by a leading property firm, the high building costs have become an obstacle to property development, particularly residential.


“The fact that there are only a few residential developments is largely due to the costs of construction,” said the report.


While houses in high-density suburbs cost between $10 billion and $15 billion, the report said the cost of building the same house now stood at between $50 million and $65 million per square metre.


The report said the cost of building a house in the medium-density residential areas ranged from $90 million to $110 million per square metre and constructing a house in the low-density now costs between $125 million and $130 million per square metre.


Property analysts said this development would negatively impact on government’s housing projects, particularly Operation Garikai/Hlalani Kuhle, hastily put up by the state in a vain effort to undo untold damage it had inflicted on the urban poor.


Under Operation Garikai/Hlalani Kuhle, government projected constructing 20 000 housing units nationwide by December last year.


But so far it is struggling to complete the first 2 000 units due to lack of funds. It has been compelled to hand over the houses without floors or windowpanes.


“The increase in construction costs simply means that government should budget more,” said Boysen Mutembwa, a director at Bard Real Estate.


He said government might not be able to complete the projects because of rising costs.


Mutembwa said there were now serious distortions in the property market. He said unlike in the past, costs of building a property were now equal to its value and are threatening to surpass it.


“People chose to build on their own and this was cheaper than buying a standing property. Now the values are at par,” he explained.


Mutembwa added that the Homelink housing scheme had failed to perform to expectations.


Government, through the Reserve Bank of Zimbabwe, had launched Homelink to persuade !Zimbabweans living in the diaspora to invest their foreign currency earnings in property development back home.


However, due to the poor official exchange rate, the initiative failed to bear fruit.


“Homelink will not work because of the poor exchange rate,” economic analyst John Robertson said.


He said Zimbabweans working abroad chose to send their money through other channels because of the huge disparity between the interbank and parallel market exchange rates.


Major currencies like the US dollar and British pound are trading at US$1:$450 000 £1:$700 000 respectively on the parallel market compared to US$1:$101 195 and £1:$186 000 on the official interbank market.


“Yes, Zimbabweans in the diaspora are building houses, but not through Homelink,” said Robertson.


While home-seekers have traditionally purchased or built houses through accessing mortgage loans, the gap between mortgage loans currently on offer and the prevailing property prices make it unwise to borrow.


“Sorry sir, but you only qualify for a mortgage of $2,3 billion,” an executive earning a $500 million monthly salary is told by a mortgage officer at a local building society.


At another mortgage lending institution individuals, mostly executives, earning a monthly salary of $1 billion, qualify for a $4,6 billion mortgage at an annual interest of 68%.


The loan is repayable over a 25-year period.


In the low-density suburbs house prices range from $75 billion to $100 billion and between $15 billion and $75 billion in the medium-density areas.


When asked how the mortgage lending business was performing, a mortgage officer said they had experienced a major decline in business and were now lending only to corporates.


“Corporates are now borrowing from us. They are running away from commercial banks’ exorbitant interest rates,” the officer said. Another mortgage lender gives a mortgage of $1,4 billion to an individual earning a salary of $1 billion per month with monthly repayments of $118 million.


However, a majority of ordinary workers earn far less than $50 million per month.


Robertson said it was difficult to fund property purchases through mortgages.


According to a property expert report, mortgage loan qualifications have deteriorated.


“Mortgage loan qualification has significantly diminished, especially for individual borrowers due to high prices of houses, high building costs, high interest rates and the high cost of living,” said the report.


It said that according to information from the Association of Building Societies, default on mortgage repayments averaged 5,5% of total residential mortgage accounts on a month-on-month basis in 2005.


The report said the three major building societies advanced approximately $476 billion to 1 275 residential property applicants.


It added that the high costs had become a disincentive to investment in the office market.


“Investment in the office market had been stagnant throughout the year 2005 due to the high costs.”


Building costs for properties in the office market continued to escalate rapidly, rising from $17,5 million per square metre in January 2005 to between $70 million and $100 million per square metre as by December 2005.


Apart from the threat posed by the high building costs, the property market remains sluggish due to lack of investment in new projects.


Investors are reluctant to venture into the property market, as there are no meaningful returns. This has led to serious shortage of accommodation. “It has become too risky for institutions to undertake new building projects,” property market experts say.


“In the short- to medium-term there is likely to be very few, if any, new developments in the industry due to the harsh macroeconomic environment,” the report said.


Apart from the high input costs, another major obstacle to investment in this sector has been the government controls that impose limits on rentals.


While properties like the Joina Centre have remained unfinished for more than five years, there has not been any significant investment in residential property over the same time.


Although most leases are based on the net leasing concept, where the tenant pays for all the operational costs, property owners have not been able to increase rentals at the same pace as that of inflation.

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