The property market in Zimbabwe, which had become a refuge for investors during the hyper-inflation episode, has started off on a low, but assuring note after the dollarisation. The rental yields, themselves a function of the income levels and the pace of economic activity, have improved to around 7%, 6.2% and 5.3% in the middle density, high density and low density segments respectively. Considering building costs averaging about $1200 per square meter of office space in Harare, commercial property returns, in particular prime office rental yields, have improved significantly to around 6% in real terms from as low as 0.5% during the 2007-2008. Whilst property owners are now better off compared to their deplorable status of the past decade, the snail 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 in Sandton, Kampala, Dar es Salaam and Lusaka hover around $13, $15, $17 and $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%. 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 torch bearers 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 $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 a $6 per month in 2008 to just below $200 presently, a strengthening banking sector, fiscal discipline and recovering global commodity prices are all vital elements that will contribute towards the property returns firming, edging towards regional parity.
Dollarisation has brought many interesting dynamics to the property market, and it will not be as easy as it has been for the many players who built huge property portfolios over the last 15% whilst benefiting from rising inflation. Anyone who bought a property in ZW$ from bank financing over the last 4 years got it effectively at less than 5% its real value, whilst those that got mortgage financing in 2008 got their property at less than 1% of the real values due to miraculous benefits and healing effects of hyperinflation. Most ZW$ borrowing costs, which became as lucrative as minus 0.99% 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 ZW$. Some took the advice and made miraculous changes on their balance sheets, but as time went by, no one serious accepted ZW$ anymore as 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 into extremities of 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% per annum for the next 4 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% assuming a loan to value payout of 80%, one would need to be earning a gross monthly salary of around $4000 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 $600 per month today and growing at an average of 40% 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 5 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 it June 2009 results, Pearl Properties states $230 million as the gross replacement value for its property portfolio offering 117 000 square meters of letable space. This translates to ‘market value’ per square meter at $1981, compared to its current market capitalization per square meter at $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 $2000 per square meter 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 cap remains around $31 million, far from the showy $230 million tag!
It’s not only Pearl Properties that seem to lie underneath a misleading veil of imaginary wealth. Pearl is not alone in the squanddery. The Zimbabwean banking sector is a close cousin of Pearl Properties after it prudently piled its capital into ‘investment properties’ and now seems to suffer the same fate of appearing exaggeratedly rich yet being poor to change its fortunes. Although it was an excellent strategy by Zimbabwean banks during the hyper-inflation environment that decimated all capital in liquid and near-liquid assets (denominated in the now defunct ZW$), 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 its illiquid, and therefore cannot practically act as the ‘last line of defense’ 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.
