Recently, property development and investment organization Mashonaland Holdings Limited published a trading update spanning the first quarter. It established a few problems that were severely limiting the industry of real estate. These conditions have further deteriorated due to the outbreak of the pandemic of Novel Coronavirus. The organization states that the sharp and consistent fall in buying capacity is drastically pressurizing consumers’ demand to acquire real estate spaces. In contrast, the central bank’s interest rates remain negative from a real perspective and have had a worsening effect on the mortgage markets and debt financing. In the current week, (MC) Melody Chikono had an interview with MD of Mashonaland Holdings, (GM) Gibson Mapfidza, who stated that the industry’s key stakeholders would have to work much harder to improve the lucrative nature and efficiency in Real Estate. Below are a few key points gathered from the discussion:
MC: Will the real estate sector recover from these scenarios, and what kind of impact has these factors have on real estate?
GM: The sharp rise in interest boundaries during 2019 has had two major effects on the real estate industry. In the industry, the sub-market of development is tasked with creating and delivering new projects in the market from the supply front. The large capital reserves required for this specific sub-market to accomplish these hectic tasks are usually financed from the markets for capital, with banks acting as intermediaries. With the hike in interest rates in 2019, the finances required for development vanished from access, which led to postponements in projects’ completion. The interest hike direction was in total conflict with optimum yields in the property, which were already on the decline due to the fall in the country’s GDP, which has been further hindered due to the world’s pandemic outbreak.
Additionally, the hike in interest also meant that most of the tenancy businesses could not access the proper capital, which further hindered their growth. In other words, this leads to the situation where businesses, at least since the end of last year, have been unable to operate or even earn at optimum levels. This has a drastic effect on the top line of businesses and consequently restricts their ability to pay rent.
On the other hand, the recent revision of further decline in interest rates set by the Reserve Bank of Zimbabwe is speculated to be filtered through the commercial banks, and as such, is a welcomed move. However, a lot is required to be corrected to efficiently find a solution for the market’s current distortions and hopefully create some breathing room in the otherwise declining economy.
MC: What do you think will be the effects of Covid-19 on your turnover, collections, and other prospective requirements if this lockdown goes on for an indefinite period?
GM: We have entered the “Level 2” of lockdown where, although many businesses have resumed operations in strict accordance with the “standard operating procedures” dictated by the government to maintain social distancing at workplaces. This policy has provided some relief for the sub-market of occupiers. On the other hand, from a more critical perspective, the remainder market for property remains severely restricted, facing a plethora of challenges that are also being faced by Zimbabwe as an economy, just like many other sectors of the country. As the industry continually experiences the pandemic’s direct and indirect stimuli, focus on the country’s key macroeconomic issues has become imperative. There is a need to resolve them for improvement of overall performance in economic terms. The economy was already on a decline even before the pandemic’s first case was reported within borders during March 2020.
The government has taken significant measures to contain and curtail the virus. Mr. Emmerson Mnangagwa, the President, has taken bold steps to ensure this. He stated that even if the virus is contained, the country would still need to locate answers for the macroeconomic binding and structural constraints seen in the Transitioning Stabilization Programme.
MC: What have been the effects of the country’s policy inconsistencies, prioritizing the factors putting the currency into consideration?
GM: The real estate industry has also been drastically affected by these back-and-forths on the monetary and fiscal policy inconsistencies, just like any other sector. From the programs for structural adjustment started in the early ’90s, it seems our DNA has been infused such that we prefer short-term and pain subsiding decisions to evade the necessary and painful steps of reforming fundamentally.
The changes made to the currency in 2019 indicated that new developments funded by the steady currency either needed to be leased out or sold out concerning the real-time gross settlement currency. For example, in a few instances, some developers deliberately delayed the sale of residential houses or stands serviced in fear that they would incur losses due to currency value changes. However, it seems that the industry’s biggest effect was due to the departure of potential investors because of the significant fall in returns that emerged in 2019. This effectively led to our assets of real estate and infrastructure lagging behind neighboring countries as we did not have the finances that could be injected into the economy. The high risk of not being adequately compensated further worsened the conditions.
An optimal confidence level is paramount to the authorities involved in monetary policies to operate fiat currency, which efficiently attracts patient capital. It is imperative in the bulky infrastructure and real estate industries. Currently, the sector needs to rejuvenate itself and come toe-to-toe with the neighboring countries.
MC: You also notified you that this continuous fall in buying capacity generates pressure on the demand for real estate. In this perspective, what do you think will be the industry’s future, especially as we are currently facing a global pandemic that is forcing people towards home-working?
GM: The industry is still among the lucrative investments in Zimbabwe’s economy. The real estate market has not been isolated yet. The market is facing challenges from the macroeconomy mostly. Industry players are needed to change the outlook by increased efficiency and attractiveness. It is the core role of professionals in the property market to enhance pricing and informational efficiency via data collection to keenly facilitate their indirect role to regulate prices in both leaseholds and freeholds that will lead to fair transactions. Unfortunately, in the current scenario, the professionals are only worsening the inefficiencies in pricing. The human factor is a high priority in this market. Unlike other industries like stock, real estate relies heavily upon the present professionals to rightly market various interests in the trading market.
I agree that working from home is seen as having the power to distort the global office sector. And it’s uncertain whether this disruption would sustain even after the pandemic. The research house estimated by McKinsey’s name that globally, productivity will decline by more than 60% during the year because of work distortions. This should be known that work is a social and collaborative activity. Ants cannot build their colony working away in their homes! Exclusive commercial offices ensure a proper ambiance for human motivation to work. That said, property owners have to apply adequate safety and health protocols within premises. There is a need for a lowered density and congestion in workplaces as people have started redefining and defending their social distances. Also, offices will need to integrate other protocols of functionality to enhance productivity and efficiencies better. The occupiers will be keeping a keen eye on these factors moving forward. The concepts like smart building and other elements of the 4th Industrial Revolution environment also would have to be integrated into these offices to increase productivity. Currently, we see work from home, not as a non-permanent trend that enables business during the pandemic. However, there will be new designs in housing that incorporate work from home in the future.
MC: You mentioned that the group viewed the quarterly review on rentals. Is the tenant compliant, given high erosion on disposable incomes due to inflationary pressures?
GM: Quarterly reviews on rent of the market beginning from Feb of 2019 aimed to mitigate returns from the property from inflationary conditions, which stated that inflation would increase from 2,89% as of Sep 2018 to more than 675% as of March 2020. Like you mentioned earlier, accommodating the inflationary pressures, rent reviews did become sticky during the first quarter in 2020 as business activity in the economy continues to decline. So, the inflation curtailing factor for real estate cannot be actualized within the current hyperinflationary environment.
The activity has been high in the sub-market of freehold sales and skewed due to the residential side. This has also resulted in the reduction of disposable income of people, which has to be used because of the rise in expenses to survive. A majority of building societies have stated a drastic fall in sales during 2019. Many dealers have also taken off their projects from the industry to evade losses because of the currency. A recent statement that buyers can utilize free funds to buy domestic products has increased some activity, thanks to the central bank.
MC: What is the application level for free funds in the real estate industry during the pandemic?
GM: Using free funds to compensate for leasehold commitments from the occupier side of the market has lately been quite restricted in the industry of real estate. The major reason behind this lessened enthusiasm can be attributed to the set and fixed exchange rates kept to cater to these deals, which forms at US$1:ZW$25 against the parallel rate of the market, which is much higher and fluctuates following the market’s factors. Yet, those acquiring freehold interests are happier, considering otherwise they may have had to forego their earned currency to get immovable property.
A point to note is that most commercial property organizations have multiple foreign payment commitments, especially structural information technology expenses, building maintenance expenses, importing building materials, and other expenses. So, receiving these free funds may pave the way in retaining the country’s building infrastructure for global standards. Evasion concerning maintenance works is not favorable as it often leads to bad upkeep of projects and, in general, causes a worse reputation for Zimbabwe as the right platform for investment. Investors often consider the construction and quality real estate industry a good measure for a lucrative investment platform.
MC: While consultation fees amounted to up to ZW$1.1 million being spent on different projects in progress, you did spend ZW$472,000 on refurbishing your existing investment properties. What, according to you, is the future in these projects, estimating the uncertainty?
GM: Many projects are underway, following the market’s current requirements concerning both residential and commercial ones. These projects help us achieve a diverse set of accomplishments across the market and increase our geographical presence. The pandemic reminded us again about the need to diversify our portfolio.
We defined our appetite for risk with various projects by identifying all possibilities and ensuring measures to mitigate project risks. To account for cases where these measures minimize residual risks, we intend to proceed with these projects.
The scenario differs for larger projects because the risks regarding both market and economy are huge; we decided to delay commencement while continually assessing the market conditions and will start again once we are certain of timely delivery. Requirements for space change a lot, and many among our tenants, mostly international occupiers, consider sustainable and contemporary office spaces. These tenants are also considering health and safer office accommodations.
Requirements like protocols for building entry can’t be changed in existing projects. We have to remain pertinent regarding those requirements while trying to provide adequate solutions to these space requirements. We seek to close this gap above.
MC: What is your priority in completing the 25-cluster houses you are working on located in Harare’s Westgate suburb projected to start in the third quarter of 2020?
GM: Our expenses were a little under ZW$1 million for the civil engineering works installation like portable water sewer and roads during 2019. We plan to have the accumulated development cost once the construction tenders of the houses are completed.
MC: Concerning the rising inflation level, what is your prediction for the rentals?
GM: Actually, rent is considered an expense on the income statement. Businesses pay for rent from their gross revenues or total sales. Revenues are certainly in decline because of the failing economy, which was further deteriorated by the pandemic. While inflation is already brutal, growth in rentals can only be accommodated via revenue growth, which is consequently accommodated by GDP growth. Many authorities have amended their forecast of the GDP growth stating now a negative percentage. For example, the IMF has revised its stated gross domestic product growth forecast for Zimbabwe to -7.3% during 2020.
