Nothing to Hedge Against Anymore

AT the peak of hyperinflation in the country, property was arguably the best investment class.

Brick and mortar were considered a good hedge against inflation. Investors who bought property to preserve capital during this period were not disappointed as the values increased considerably because of high demand.

Speculators, seeking to benefit from anticipated price increases, kept the market active as they literally moved from one property to another. Investors, who couldn’t raise enough funds to buy property, got the exposure through buying listed property counters. As a result, these counters were among the most sought after and were generally part of the top performers.

The introduction of stable currencies early this year brought an end to hyperinflation. All economic activities which benefited from hyperinflation were hit hard. The worst affected included car dealers, illegal currency traders, commodity traders and indeed property speculators.

Property values fell sharply soon after the switch from Zimbabwe dollars to hard currencies. Real estate experts reckon that prices fell by as much as 40% since the sector started trading in US dollars.

A townhouse that would cost US$250 000 in December 2008 is currently being offered at about US$120 000. Monthly rentals for this property type have gone down to almost US$1 000 in March 2009 from US$3 000 in December 2008.

This is hardly surprising given that property prices in the country during the Zimbabwe dollar era were much higher than in the region. Landlords were pricing their properties basing on replacement costs; which were bound to be high due to the expensive costs of construction.

Now that there is nothing to hedge against, most people who had “parked” their funds in property are all trying in vain to unwind their positions. The economy currently does not have sufficient US dollar liquidity to sustain the trading of properties. 

People no longer have as much money as they did when the Zimbabwe dollar was still a transacting currency. Most of the speculative activities which would earn people easy money cannot be done anymore.

The situation is further worsened by the absence of mortgage financing from building societies. With the economy running on a cash basis, building societies, like most financial institutions, are failing to attract savings from the public. This has also affected their ability to finance the purchase of properties.

Even when their capacity to lend improves, they will probably do it cautiously since the probability of default is still high.

Property prices are also coming off in sympathy with the decrease in the cost of building materials.

Estimates from the construction industry show that the costs of building a low density house fell by as much as 50% between December 2008 and March 2009. Since property prices were being benchmarked to the replacement cost, it also follows that market prices decrease in line with declining costs.

 While the use of the Zimbabwe dollar restricted people to buy local assets, the use of multiple currencies provides them with better alternatives outside Zimbabwe. Surely a person with US$200 000 to spend on a property will get a better asset in South Africa than in Zimbabwe.

The rental yields and the prospects of capital appreciation are much higher in SA than they are in Zimbabwe. It would take further reductions in property values and improvement in rental income for investors to start considering buying a property in Zimbabwe.  

This downbeat attitude in the property sector is clearly evident on the stock market where all four property counters are struggling. The quartet has not only underperformed the industrial index, but is also among the few that have decreased from their 19th February 2009 levels.

As of the 21st May, the industrial index had gone up 37,9% since dollarisation whilst the best performer among the property stocks was ZPI with a decline of 30% to US0.7c. The trio of Dawn, Pearl and Mash lost between 53% and 68% during the same period.

It is not mere coincidence that investors avoided the foursome as they switched from some blue chips-that had run hard-to mid tiers and penny stocks; despite evidence of the quartet lagging the market. 

The changes in fundamentals after dollarisation mean the property counters may possibly remain depressed in the interim. Substantial portions of their property portfolios might have to be impaired in line with the falling prices. Assuming that the companies will be generous with their impairments in the same manner they boosted up their fair value adjustment during hyperinflation, the property portfolio will have to lose at least 50%.

Property companies are now expected to start generating income rather than relying on revaluing their properties. Revenues and earnings will once again become crucial in the valuation of any business going forward. Companies that boast of huge assets that are not being sweated may find themselves sidelined.