Rental revenue devaluation tightly squeezes developers

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PROPERTY investment company Mashonaland Holdings Limited (MHL) recently published a third-quarter (Q3) report, which painted a gloomy picture of the real estate sector’s outlook on the backdrop of volatile economic conditions that the property companies are operating under. However, despite the economic challenges, Mash Holdings’ revenue increased by 40% to ZW$4,9 million. Zimbabwe Independent business reporter Melody Chikono (MC) spoke to Mash Holdings managing director Gibson Mapfidza (GM) to understand how the company and the industry at large are sailing through the turbulent waters. Below are excerpts of the interview:

MC: You indicated in your Q3 update that economic challenges negatively affected capacity utilisation of the businesses and, consequently, the profitability, while construction projects were generally affected owing to increases in construction costs, lack of liquidity and foreign currency. The situation is not getting better. What’s your outlook on the construction projects in the prevailing environment?

GM: Construction projects will continue to be affected by the market developments. Construction costs have gone up both in United States dollar and Zimbabwean dollar terms, as contractors are pricing-in the increasing market risks in their tenders. To make it worse, construction costs are going up, but the market rentals tenants are prepared to pay are going down in real terms.

Contractors are generally tendering in US dollars (they argue, and understandably so, it is the most practical thing to do to avoid regular contract sum changes, which may result in contract disputes), while Statutory Instrument 142 of 2019 has effectively outlawed US dollar rentals.

Reduction in industry capacity utilisation, rolling load-shedding, foreign currency constraints and weakening aggregate demand are all affecting businesses’ rent -paying capacity. As such, the difference between construction cost per square metre and value per square metre continues to widen, where construction costs are being driven by inflation, while value is driven by gross domestic product (GDP) growth, which is pointing southwards. This has hugely affected the financial viability of most projects and the logical response by property developers is to defer projects so at to avoid loss of value and impairments at project completion.

As an organisation, we will proceed with projects that have commenced as we have put in place strategies to ensure that the projects are delivered within budget cost. We are, however, positive that as per indication from the Finance minister Mthuli Ncube, the economy will stabilise in the medium term and push the property market out of the current trough. What is clear is that the local property market is lagging behind the region in terms of building infrastructure and a stable economy will create a lot of activity in the development sub-market of the property market in the medium to long term.

Despite the development challenges in the major cities, markets like Victoria Falls remain viable mainly because of the increasing demand, as new and strong lease covenant hospitality players aggressively seek to enter the buoyant market and the ability by investors to earn hard currency returns in the resort town.

MC: You also mention the foreign currency crisis. How much do you require for your projects and hasn’t the interbank market come in handy to solve this crisis for you?

GM: Indeed, the interbank market has generally gone a long way in availing foreign currency for the procurement of foreign-supplied building materials.
However, it goes beyond that. The real issue is that the devaluation of rental revenue means developers now require more finance to secure the foreign currency against revenues that have devalued in real terms.

Again, invariably, this leads to projects becoming unviable. The two key variables — construction costs and rental revenue are not moving in sync, as these are being influenced by different factors, inflation and GDP growth respectively.

MC: What do you think is going to be the overall impact of these challenges on your profitability at the end of the financial year?

GM: We recorded a profit growth of 623% as at June 30, 2019 ahead of our year-end of September 30, 2019. We believe that the optimisation of internal processes is paying off as we continue to improve our efficiencies across our value chain. Testament to this, the company delivered the highest return on turnover as per the listed companies survey conducted by the Zimbabwe Independent, 2019. The idea is always to ensure that we improve our operational efficiencies and cushion our tenants from paying unnecessary costs — no one is willing to pay for waste. Our key metrics on occupancies, collections and rent per square metre have marginally improved over the reporting period.

We are certain we will deliver a healthy profit come year-end. The thrust however is on ensuring that we preserve value through primarily acquisition of strategic land banks and also carrying out essential building maintenance to ensure that our buildings are not only future-fit, but also help optimise operational efficiencies for our current tenants. The business also delivered value to its shareholders through the half-year dividend payment.

MC: What has been the effect of trading in Zimbabwe dollars on your business following the scrapping of the multicurrency regime? Is it sustainable going forward?

GM: Before the introduction of Statutory Instrument 142, some players in the property market were beginning to trade in US dollars. Tenants as well — looking for rental certainty given the regular rent reviews prompted by the need to hedge against the increasing inflation — were requesting to revert to the US dollar rentals agreed as far back as 2014, as rentals were generally stable for the past couple of years. The government’s thrust to find long-term solutions through addressing the key economic fundamental is commendable. Inevitably, though, trading in Zimbabwe dollars will see property owners having to defer planned major refurbishment works, especially in the central business district, in the short to medium term.

The Harare CBD might suffer further decay due to the deferment of major rehabilitation works like replacement of lifts, installation of more efficient HVAC systems [heating, ventilation and air conditioning], installation of modern information communication technology infrastructure in line with modern trends, etc. The other challenge of trading in Zimbabwe dollars is loss of property values as market rentals have not been able to move in tandem with inflation to enable the inflation-hedging ability of real estate as an investment asset. As such, property values will fall in real terms.

MC: What does Mash Holdings have in store to shore up its business?

GM: We have a number of initiatives which include acquisition of a strategic land bank; Charter House conversion to a five-star boutique hotel; Westgate cluster housing, as well as offering flexible leasing. I will explain in detail.

*Acquisition of a strategic land bank in Milton Park for onward development of a bespoke building offering for an identified corporate occupier. We are continuing scouting for strategic land banks in the emerging development corridors around the country in line with our portfolio diversification thrust;

*Charter House conversion to a five-star boutique hotel. This is in line with our strategic pillar on performance optimisation and generally Mashonaland Holdings’ contribution towards the broader inner city revitalisation thrust. We have completed the rigorous town planning processes and, thankfully, the City of Harare published the Proposed Change of Use in The Herald of July 17, 2019 following all our technical investigations on building suitability and the general compatibility of the proposed use with its neighbourhood. We anticipate to get our Change of Use Development permit from the City of Harare by September 30, 2019. Our Chinese partners, architect and engineers, were in the country for a week in July 2019 for a design seminar with our local consultant team. The Chinese team is now working on the final designs, which should be completed, as per our programme of work, by end of August 2019;

*Flexible Leasing. Our Research Team is currently investigating setting up an upmarket a high quality co-working offering at one of our prime CBD buildings, fully equipped with all the office accessories. The concept will provide high quality office working space with very flexible leasing terms targeting business start-ups and SMEs, entrepreneurs and young professionals, international professionals or investors, travelling NGO personnel, freelancers or self-employed independent workers, travelling hotel guests, corporates meetings, conferences and staff training equipped facilities. We believe the current long-term leasing regimes, where tenants are expected to sign at least three-year lease agreements and after submitting a bundle of company documents prohibits access to high quality office facilities to a buoyant and growing segment of our business community.

Thus the offering provides convenience to the users, affording them 24/7 access, high tech digital facilities, coupled with the flexibility to upscale or downscale operations according to individual or corporate needs; otherwise lost in more stringent traditional leases. The modern co-working floor will be supported by roof access, providing its customers with unparalleled views of the greater Harare. The company is engaging international partners to ensure a success on the two initiatives.

*Westgate cluster housing. We have just completed servicing and we are working on modern housing designs and pre-purchasing of building materials. The 24 houses will be delivered in phases to manage the market risk.

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