Finding opportunity in tough property sector

IT has been a year since Pearl Properties changed name to First Mutual Properties as part of the group’s rebranding strategy. It came at a time when the property sector in the country was battling the headwinds of economic turmoil characterised by low occupancy levels as a result of high rentals. Zimbabwe Independent business reporter Melody Chikono (ZI) caught up with First Mutual Properties managing director Christopher Manyowa (CM, pictured) to understand the journey so far. Below are the excerpts:

ZI: You rebranded to First Mutual Properties last year. What can you say have been the fruits of rebranding?

CM: The main reason for rebranding was to align the company with the mother brand. It has been almost 12 months since we rebranded and the main benefit we are enjoying is ability to leverage on the brand equity, strength and size of a large financial services group.

ZI: What’s your long-term plan for positioning First Mutual Properties in the market?

CM: Our vision is to be the best-performing real estate company in Zimbabwe by income return and be recognised for consistency in formulating and executing prime commercial developments and acquiring prime assets to ensure we maintain a well-diversified property portfolio, with regular distribution of earnings to our shareholders.

We have developed a 5-year strategy whose main focus is to grow the portfolio through acquisitions and developments on our prime land banks. Following an analysis of the current market conditions and need to reduce development risk, our aim is to undertake pre-let or partially pre-let developments. However, as economic fundamentals are moving in the positive direction, our appetite for developments has grown stronger and will soon embark on the expansion of one of our prime office park developments. Such development will be funded by a combination of debt and equity finance. In the process we will leverage on our balance sheet and shore up the gearing ratio, resulting in a significant jump from the current low gearing ratio.

The business is also investing into tenant retention initiatives so as to ensure that we don’t lose the existing tenants and also be able to attract new tenants in order to improve the occupancy level currently sitting at 76%. Furthermore, we also plan on increasing our investment in digital technology to enhance the experience of our customers, with recent initiatives including a system upgrade to enable our tenants to interact with property managers online and make real-time enquires and log any requests. Our client-focussed strategy will require a competent and motivated workforce and, to support our initiatives, we have put in place a comprehensive human capital development programme to improve productivity and enhance client experience.

Our growth strategy is premised on acquisitions and developments, supported by our focus to retain clients and enhance their experience in our buildings. This strategy is expected to position the company as a leading property investment company yielding competitive returns to compete and out-perform other asset classes.

ZI: What challenges have you faced since you rebranded?

CM: We have not faced any specific challenges related to rebranding. However, the challenges we are facing are industry-wide and these increase low occupancy levels especially in the central business district office sector and large industrial space and high default rates on lease obligations. These challenges are a result of a difficult operating macroeconomic environment. In addition, the property sales market is experiencing low activity due to a reduced number of sellers as most economic agents seek to migrate from monetary assets and acquire property as a value preservation strategy.

The low economic activity has also resulted in weak demand, thus limited construction is taking place in the property sector. Be that as it may, the pro-business agenda demonstrated by the leadership of the country has created confidence in the economy and the sector is now poised for recovery, which creates an opportunity for First Mutual Properties to leverage on the brand in capitalising on opportunities that will arise in the market.

ZI: What can you say about your capex investments in the past and what’s your outlook in line with that?

CM: Our strategy is to maintain quality stock within our property portfolio, and core to that is consistent reinvestment into our property portfolio while also providing corporate real estate solutions to our valuable clients whose property assets we manage. For example, we have over the last 5 years invested significantly in maintenance and refurbishment of existing properties, which is testament to our commitment to maintain the high standard of building amenities for our tenants. Going forward, our sentiment towards reinvesting into our portfolio will remain an ongoing activity, as we seek to provide a quality product offering to our tenants, enhance their experience in our properties and ensure long-term capital appreciation of the portfolio.

Thus our strategy and philosophy will be underpinned by an active asset management approach, which involves frequent review of the performance of each building return profile, focussing on occupancy levels, rental levels, rental yield and total return. Such an approach will guide us as we make strategic decisions of whether to continue to hold onto a property, sell and reinvest into the building to improve quality of the rented space, or recycle capital into new projects. Similarly, the same approach is applied in advising our clients.

ZI: What are your prospects on improving rental income in the coming year?

CM: Rental income growth will be premised on improving occupancy levels, as real growth in rentals may be difficult to achieve in the coming year. However, we envisage that going into the future there is potential upside for rentals as the macroeconomic fundamentals stabilise and become positive.

ZI: What are your main priorities in the coming year?

CM: As a property investment company we take a long-term view to our operations. To that end, stable growth of our property portfolio, focussing on the acquisition and development of prime property assets remains a priority. In the coming year, in line with our long-term strategy underpinned by a development pipeline, we expect to commence some commercial property developments on one of our prime land banks. In addition, value preservation of the existing portfolio through planned repairs and maintenance programmes remains a strategic priority to maintain competitive income returns and enhance client experience in our buildings.

ZI: What can you say about the country’s property sector? Do you think it offers a level playing field?

CM: Generally, the commercial property market is characterised by high vacancy levels and space absorption remains subdued, despite the improving general business confidence. The inherent problems of low capacity utilisation in the productive sectors, inadequate infrastructure vis-a-vis rapid urbanisation and growing informal sector, changing demographics, consumer tastes and occupier preferences, continued to affect CBD office and industrial sectors, as these sectors struggle to attract occupiers. The slow, or weak aggregate demand, is also a factor of the product on the market, which is dated and does not meet the modern needs of occupiers. Despite the low effective demand for space, retail assets are performing well, showing its inflation hedging trait compared to the other sub-sectors of the property market.

Looking at the property investment players in our market, in our opinion, the property sector offers a level playing field, with the differentiating factor being agility, quality of space and the structure and diversification of the property portfolio.

ZI: How has the country’s economic performance affected your business?

CM: New economic policies set in the prior period, geared towards improving relationships with the international community, set the tone towards improving business confidence and the general sentiment on Zimbabwe as an investment destination. Although economic policy pronouncements are set to improve the general business environment, in the short term, the challenges relating to cash shortages, foreign currency shortages and low capacity utilisation, continue, as the productive sectors of the economy are still resuscitating from the prolonged period of economic decline. Property investments rely on derived demand from the productive sectors of the economy to stimulate demand for space across the property market segments. As demand has been weak for a prolonged period, the performance of certain sub-sectors of the property market have been affected, resulting in subdued performance.

In our portfolio, the worst affected sub-sector has been the office sector with company closures, downsizing and retrenchments affecting the demand for office space, resulting in the high void levels in the office space. The prolonged subdued performance of the economy has also hindered real growth of the property portfolio; as strong economic fundamentals drive the need for commercial space. To this end, development activity has been subdued from a demand perspective.

In addition, looking at our capital and financial markets, the pricing of debt to support development initiatives has prohibited the efficient leveraging of the balance sheet, as interest rates are above property yields and the security arrangements too onerous to effectively capitalise on cashflow- generating capacity and property values to secure debt. Furthermore, property development projects are also being hindered by limited availability of foreign currency which is required to import some of the critical material required in the construction sector.

ZI: How do you see your occupancy levels by year end against that of the whole industry?

CM: We expect our year-end position on occupancy levels to be strong across all the sectors of the property portfolio except for CBD offices, which is expected to remain depressed. Our industry is crippled by information asymmetry, making benchmarking property sector wide comparison difficult, limiting the comparison to listed property companies which constitute less than 10% of the total value of real estate in Zimbabwe.