‘Policy flip-flopping crippling real estate’

PROPERTY investment and development company Mashonaland Holdings Limited recently published its first-quarter trading update in which it outlines some of the problems bedevilling the real estate market, now worsened by the Covid-19 pandemic. The firm says the continual decline in purchasing power is putting pressure on demand for real estate space while interest rates, which remain negative in real terms, have adversely affected the debt finance and mortgage markets. This week, business reporter Melody Chikono (MC) spoke to Mashonaland Holdings managing director Gibson Mapfidza (GM) who said industry players will have to do much more to improve attractiveness and efficiency. Below are excerpts of the interview:

MC: How much has the industry been affected and do you see it recovering?

GM: The hike of interest rates in 2019 affected the real estate industry twofold. Firstly, the development sub-market, on the supply side of the property market, creates and delivers new stock to the market. The huge capital outlay required for the sub-market to achieve this goal is usually supplied from the capital markets, through banks as intermediaries. Following the interest hikes, development finance became inaccessible, leading to delays in completion of projects. The interest hikes were, in fact, going in a different direction with property yields which have been going down mainly due to the sharp decline in the gross domestic product, which has now been further exacerbated by the Covid-19 pandemic.

In addition, the interest hikes meant most of the tenant businesses could not access capital to grow their businesses. Indirectly, it meant these businesses, for some time now, have not been operating at optimal levels. This affects the businesses’ top line and, indirectly, their rent-paying capacity.
The recent downward revision of interest rates by the central bank, which is expected to filter through the banks, is therefore a welcome move though a lot more still needs to be done to resolve the current market distortions and, hopefully, breathe some fresh air into the otherwise faltering economy.
MC: How do you see Covid-19 affecting your collections, turnover and other aspirations in the face of an indefinite lockdown?

GM: The so-called “Level 2” lockdown has seen most businesses resuming operations albeit at reduced levels in line with government recommendations for social distancing in workplaces. This is of much relief to the occupier sub-market. However, and more critically, the rest of the property market, just like other sectors of the economy, remains hamstrung by the myriad of challenges facing the Zimbabwean economy. Whilst the industry will continue to experience the effects of the Covid-19 pandemic, it is important not lose focus of the key macro-economic issues that the country should resolve to improve overall economic performance. One would recall that even before the pandemic’s first reported case in the country in March 2020, the economy was already on a downward spiral.
The country has made great efforts to contain the virus. The President (Emmerson Mnangagwa) took some bold steps. Even if we are to contain the virus today, the country still needs to find answers to the structural and macro-economic binding constraints laid out in the Transitional Stabilisation Programme.
MC: How much has the sector been affected by policy inconsistencies in the country, especially in relation to currency?

GM: Just like any other sector, the property sector has been significantly affected by the flip-flops on the fiscal and monetary policy inconsistencies. It has become part of our DNA, from the structural adjustment programmes in the early ’90s, to defer to pain-easing and short-termism as we seek to dodge the necessary pain of fundamental reforms. The currency changes of 2019 meant that, essentially, new developments that were funded using the stable currency were now required to either sell or be leased out in the RTGS currency. In some cases, some developers delayed sales of serviced residential stands or houses, fearing to incur currency-induced losses. Arguably, the biggest impact on the industry is the loss of prospective investors occasioned by the huge decline in returns recorded in 2019. What this means is our real estate assets and bulk infrastructure remains lagging regional peers as there’s no appetite to invest in the country. Invariably, the high risk is not compensated by the falling returns.

Operation of a fiat currency requires a high level of confidence from the monetary authorities in order to attract patient capital which is badly needed in the property and bulky infrastructure sector. The industry is in dire need of rejuvenating itself and catch-up with regional peers.
MC: You also indicate that the continual decline in purchasing power is outing pressure on demand for real estate space. In light of this, what is the future of the real estate market, especially now that we are faced with the global pandemic which has forced more people to work from home?

GM: Real estate investment remains a lucrative investment vehicle in Zimbabwe. The market does not exist in isolation. Most of the challenges facing the market are emanating from the macro economy. Industry players shall have to do much more to improve attractiveness and efficiency in the market. Paradoxically, the primary role of property professionals is to enhance informational and pricing efficiency through data collection and facilitating the surrogate role of pricing both freeholds and leaseholds to ensure fair transactions. However, professionals in the market have been seen as exacerbating the pricing inefficiencies. The human factor is very important in the market as, unlike the stock markets, property relies heavily on its professionals to efficiently price the various interests traded in the market.

Indeed, home working has been seen as having the potential to disrupt the global commercial office sector. Would this disruption sustain beyond the Covid-19 pandemic? Leading global research house McKinsey has estimated that global productivity levels will go down by over 60% in 2020 due to the fragmentation of working. It should be realised that work is a collaborative and social endeavour. Imagine ants trying to build an anthill from their respective homes! Ideally, the dedicated commercial offices provide a conducive environment for the human endeavour of work. However, property owners shall need to put in place robust health and safety protocols in buildings. De-densification and de-congestion of workplaces is also going to be a key requirement as human beings have inevitably started to re-define and defend their social spaces. In addition, office buildings will have to incorporate other functionality protocols to enhance occupier productivity and operational efficiencies. Occupiers will be more discerning of these building aspects going forward. The smart building concepts and other built environment elements of the Fourth Industrial Revolution will need to be incorporated in the commercial offices to enhance worker productivity. As such, we see homeworking as a temporary accommodation to enable business continuity during the Covid-19 pandemic. We however see new house designs incorporating “home-working” going forward.

MC: You said the group embarked on quarterly review of rentals. How compliant are the tenants, given the high erosion of disposable incomes by inflation?
GM: The market quarterly rent reviews, starting in February 2019, were meant to hedge property returns from the inflationary pressures, which saw year-on-year inflation moving from 2,89% in September 2018 to over 675% in March 2020. As you suggested, despite the unrelenting hyperinflation, rent reviews became sticky in Q1 (first quarter) 2020 as economic activity in the broader economy continues to move southwards. As such, the inflation-hedging attribute of real estate will not be realised in the current hyperinflationary environment, unfortunately.

Activity in the freehold sales sub-market, which for the past couple of years has been relatively active and mainly skewed to the residential sector, has also reduced disposable incomes which are being squeezed due to the rising cost of living. Most building societies reported a huge decline in sales in 2019. Most sellers have also withdrawn their properties from the market to avoid currency-induced losses. The recent announcement by the central bank that buyers have an option to use free funds to pay for local goods and services has however ignited some activity in the sales sub-market.

MC: How applicable is the use of free funds to the real estate sector during the Covid-19 era?
GM: The use of free funds to pay for recurrent leasehold obligations in the occupier sub-market has been very limited in the real estate sector. The major contributor to the low excitement has been the gazetted and fixed exchange rate to facilitate these transactions, which is at US$1: ZW$25 versus the parallel market rate which is significantly higher and tends to fluctuate in line with market forces. However, those purchasing freehold interests are more amenable, and understandably so, to sacrifice their hard-earned hard currency in exchange for immovable property.

It should be noted that most commercial property companies have considerable foreign payment obligations, mainly in terms of building maintenance costs, information technology system costs, imported building materials and other ad-hoc costs. As such, receipting of free funds will go a long way in keeping our building infrastructure in line with global standards. The recurrent deference of critical maintenance works is undesirable as it leads to poor upkeep of properties and the general unattractiveness of Zimbabwe as an investment destination. Investors often look at the construction activity and quality of real estate as quick measures of investment destination attractiveness.

MC: You have spent ZW$472 000 on the refurbishment of your existing investment properties while consultancy fees amounting to ZW$1,1 million were spent on various projects that are currently underway. How do you see the future of these projects, given the uncertain future we are facing?
GM: At a company level, we do have a pipeline of projects which talk to the current market requirements in terms of both commercial and residential needs. At a portfolio level, these projects essentially help us achieve a diversified portfolio across the market sectors and geographical spread. The Covid-19 pandemic has reminded us once again on the benefits of portfolio diversification.

We have defined our risk appetite for the various projects through identifying the risks and coming up with measures to manage the project risks. In instances where the management risk responses lead to minimal residual risks, we intend to proceed with the projects.

However, for bigger projects, where the market and economic risks are extensive, we have decided to defer commencement as we continuously assess the market and will commence those projects once we certain of viable delivery. What is clear is that space requirements are very dynamic and some of our tenants, especially international occupiers, are looking for contemporary and sustainable office spaces. They are also now looking for health and safe office accommodation.
Some of the requirements like building entry protocols cannot be retrofitted in existing buildings. We need to remain relevant to their requirements through providing suitable solutions to their space requirements. Our project pipeline seeks to bridge this gap.

MC: How much are you putting into the construction of your 25-cluster houses in Harare’s Westgate suburb which is set to commence in the third quarter of 2020?
GM: We spent just below ZW$1 million on the installation of civil engineering works (roads, sewer and portable water) in 2019. We will only know the total development cost after the house construction tenders the project team is currently working on.

MC: Where do you see rentals going, in view of the high inflation level?
GM: Essentially, rent is an income statement expense. Businesses pay rent out of their top line. What is certain is revenues have been coming off due to the faltering economy and this has been worsened by the Covid-19 pandemic. Whilst inflation seems unrelenting, rental growth can only be sustained by revenue growth which, in turn, is sustained by GDP growth. Various authorities have since revised their GDP growth forecast into the negative territory. For instance, the IMF revised their Zimbabwe GDP growth forecast to -7,4% for 2020.