IT is a widely held opinion that real estate is one of the best asset classes for long term investors.
For this reason most individuals aspire to own the house they live in and, if their means allow, many also wish to own other properties to rent out.
Many even go to the extreme of concluding that once you own property you are set for life and there is little else you can want.
Of course, the world of investment is not that simple. Although property investments are considered ‘safe as houses’, they are not without pitfalls.
Challenges discussed by company management during the presentation of Zimre Property Investments’ (ZP)’s interim results last week bear testimony to this.
ZPI was carved out of Zimre Holdings in 2007. The company inherited the insurance giant’s property portfolio and has since then been active in property development, particularly the servicing of residential stands for sale.
Operations also include other services such as property sales, valuations and property management.
ZPI’s interim financial results for the period ended June 2013 showed a marked decline in revenues and profits. Revenue declined by 17% to US$2,9 million.
Management attributed the fall in revenues to a 5% decline in rental collections and a 32% dip in project sales.
As the economy continues to be plagued by a liquidity crunch, tenants are finding it much harder to meet rental payments. Many are behind in payments and rental collections stood at 86% of the total due down from 95% last year.
As at the end of June, ZPI was sitting with debtors of US$2,1 million, 76% of whom are in arrears of more than 120 days. Some are even moving out of rented properties and not being replaced, leaving the space vacant.
Management revealed at the results briefing that portfolio voids, the lettable space that lies unoccupied, rose to 20% from 12% in June 2013.
Given the dire situation with rentals, some tenants have been asking for downward review of rental rates to allow them to cope with payments. Rates for both retail and office space fell by 18% and 16% respectively.
In effect, even the space that remains occupied is now yielding less for the company. Average yields consequently deteriorated to 7,60% against 8,04% recorded in the prior year.
This situation highlights one of the most common but often ignored risks of investing in property.
One may well not find tenants who can afford to lease the property.
As it lies vacant that is an opportunity cost for the owner. Additionally the cost of maintaining the property still has to be borne even when no one is using it.
Smaller property investors like individuals end up accepting below-market rentals just to have a tenant in the property.
Another problem is that once tenants begin to default on rentals, the process of evicting them is protracted and potentially costly.
One may have to bear legal costs to effect an eviction. Many landlords complain that Zimbabwean property laws are unduly favourable for tenants even when they are in the wrong.
Fortunately for ZPI administration expenses rose by just 8% to US$1,1 million. Other operating expenses actually fell by 16%. Despite the falling costs, the drop in revenue still meant that ZPI’s operating profit margin was lower at 35% down from 46% in June 2013. After tax profits also fell to US$802,165 from US$1,1 million.
The downward trend with rentals is not at all surprising and had in fact been anticipated by most property players. As such, it explains why ZPI has been very active in property development since the dollarisation of the economy.
Development projects have been focused on servicing residential stands for sale, a relatively simpler process than going all the way to build houses. But even this has had its own pitfalls.
ZPI has got three running development projects and intend to undertake a new one soon.
Running projects are Zimre Park Masvingo, Parklands Bulawayo and Tynwald in Harare.
Stands at the Tynwald project are reportedly already sold out. Of the 288 that were initially available, 230 have been sold and the rest are being kept for a test project were ZPI will build a structure before selling.
The stands quickly sold out due to the location – close to the CBD in Harare.
Sales at the other two projects which were commissioned before the Tynwald project are much slower. Zimre Park Masvingo has sales of 191 stands out of 338. Parklands in Bulawayo has 90 out 136 sold.
The reality is that outside Harare sales are much slower.