property market in Zimbabwe, which had become a refuge for investors during the hyperinflation episode, has started off on a low but assuring note after dollarisation of the economy.
Dollarisation challenges and fortunes on property market
Property Reporter
THE property market in Zimbabwe, which had become a refuge for investors during the hyperinflation episode, has started off on a low but assuring note after dollarisation of the economy.
The rental yields — themselves a function of the income levels and the pace of economic activity — have improved to around 7 percent, 6,2 percent and 5,3 percent in the middle-density, high-density and low-density segments respectively.
Considering building costs averaging about $1 200 per square metre of office space in Harare, commercial property returns, in particular prime office rental yields, have improved significantly to around 6 percent in real terms from as low as 0,5 percent during the 2007-2008.
Whilst property owners are now better off compared to their deplorable status of the past decade, the snail’s pace of income growth will continue to put off significant flows of commercial property investment from international investors as other destinations of real estate capital such as Angola, Zambia, Uganda, Tanzania and SA continue to offer sustainably high returns.
Prime office space monthly rentals per square metre in Sandton, Kampala, Dar es Salaam and Lusaka hover around US$13, US$15, US$17 and US$20 respectively, whilst in Luanda any figure under the sun can be charged.
The major players in the property market in Africa, in particular private equity funds, are targeting investment destinations offering internal rates of return above 20 percent.
Considering the current and projected slow growth of Zimbabwean incomes and the absence of a clear and tenable exit market, the majority of international players sitting on hot capital are not putting Zimbabwe on their radar for property investments.
This will, on the positive, give indigenous players enough time to take first-move advantage positions in the property market and become the torchbearers for tomorrow.
The future of the property market is likely to exhibit improving yields borne out of the bullish projections of GDP that is expected to hit only US$6 billion by 2013, according to IMF projections, which, I believe, are too cautious as the country has the potential to grow much faster than that.
The increasing disposable incomes which have seen average civil servant wages increasing from as low as US$6 per month in 2008 to just below US$200 today, a strengthening banking sector, fiscal discipline and recovering global commodity prices are all vital elements that will contribute towards the property returns firming, edging towards regional parity.
Dollarisation has brought many interesting dynamics to the property market, and it will not be as easy as it has been for the many players who built huge property portfolios over the last 15 years whilst benefiting from rising inflation.
Anyone who bought a property in Zimbabwe dollars from bank financing over the last four years got it effectively at less than 5 percent its real value, whilst those that got mortgage financing in 2008 got their property at less than 1 percent of the real values due to miraculous benefits and healing effects of hyperinflation.
Most Zimbabwe dollar borrowing costs, which became as lucrative as minus 0,99 percent in 2008, benefited anyone who cared to borrow, from beneficiaries of ASPEF and Bacossi, to those who got loans to finance or refurbish their property portfolios.
I remember presenting to more than 15 “big” corporates and some listed entities during 2007-8 in their strategic meetings, and my key message was always consistent — urging them to borrow as much as their balance sheets could stomach and spend on their wish lists as long as someone would accept their Zimbabwe dollars.
Some took the advice and made miraculous changes on their balance sheets, but as time went by, no one serious accepted Zim dollars anymore as a medium of transaction and eventually the death of the currency closed this exciting chapter in Zimbabwe’s history where a transformative credit binge made borrowers excessively wealthy whilst the lenders (banks and ordinary people with savings in banks which they couldn’t access because of the cash crisis) were condemned to extreme poverty.
The dollarisation has now brought about a sobering normalcy, whereby debt is real until it’s fully paid, and there won’t be implicit discounts associated with excessive inflation anymore.
The predictability of future incomes and costs imply, therefore, that the mortgage market reincarnation will come sooner, whilst construction projects that had stalled will be rejuvenated and more importantly, new developments will come on stream.
The only question that remains vague, however, is the “when” bit, as the rate of growth of the GDP, expected around 6-7 percent per annum for the next four years, will not be able to rejuvenate the mortgage market to desired levels as the majority of the working class may continue to fall outside the bracket that would be able to afford mortgages for much longer.
To access a 12-year Msasa Park mortgage of $50 000 at 10 percent assuming a loan to value payout of 80 percent, one would need to be earning a gross monthly salary of around US$4 000 to qualify.
Considering the income levels of the assumed middle class in Zimbabwe, and the projected growth rate of incomes, it will be 2014 when individuals earning around US$600 per month today and growing at an average of 40 percent per annum will be able to afford mortgages for Msasa Park houses.
Considering that Zimbabwean incomes missed the miraculous global commodity boom of the last five years that transformed the economies of Zambia, Angola, SA and many commodity-rich nations in the world, the feat will not be easy, more so now when facing a foul global capital market.
Amid the good prospects of the property market in Zimbabwe, there is absolute confusion in valuation of property portfolios after the dollarisation.
In its June 2009 results, Pearl Properties states US$230 million as the gross replacement value for its property portfolio offering 117 000 square metres of letable space.
This translates to “market value” per square metre at US$1 981, compared to its current market capitalisation per square metre at US$254.
Mistakenly, one can view Pearl Properties to be trading at a huge discount with an upside potential of 7,5x and consider it a hot “buy”.
How does Pearl justify building costs at around US$2 000 per square metre for its property portfolio, more so for Zimbabwe’s climatic conditions that do not require elaborate costly air conditioning as one would find in the MENA region and parts of East Africa?
Although Pearl is trading at some potential discount considering the potential of improving rentals in the market in line with growing Zimbabwean incomes, the market is, however, not so blind, and has been completely ignoring such lurid gestures of its in-house valuation.
It is no wonder Pearl’s market capitalisation remains around US$31 million, far from the showy US$230 million tag!
It’s not only Pearl Properties that seems to lie underneath a misleading veil of imaginary wealth.
Pearl is not alone in this quandary. The Zimbabwean banking sector is a close cousin of Pearl Properties after it prudently piled its capital into “investment properties” and now seems to suffer the same fate of appearing exaggeratedly rich yet being poor to change its fortunes.
Although it was an excellent strategy by Zimbabwean banks during the hyperinflation environment that decimated all capital in liquid and near-liquid assets (denominated in the now defunct ZW$), the banks today are sitting on low loan-to-deposit ratios due to many reasons.
One of them being that the greater part of their capital portions in properties cannot easily absorb risk since it’s illiquid, and therefore cannot practically act as the “last line of defence” as may be desirable.
Unlike European banks that ran on very high loan-to-deposit ratios and later collapsed as the sub-prime mortgage market crisis took its toll, most of the Zimbabwean banks are showing excessive prudence in understanding the limitations of “investment properties” miracles on their balance sheet by running on low loan-to-deposit ratios.
l Brains Muchemwa, a Group Business Strategist for a pan-African group in 15 African countries, writes in his personal capacity. |
