Zimbabwe’s real estate firms are battling for survival as they continue to be weighed down by soaring inflation and rising voids, industry players have indicated.
They say persistently high inflation, which has a regressive effect on the lower income group where the majority of Zimbabweans belong, and currency devaluation have damaging consequences.
In August, Finance Minister Mthuli Ncube directed the Zimbabwe National Statistics Agency to suspend the calculation of the official annual inflation for the next six months.
The last was in June, which revealed inflation standing at 176%, the highest level in a decade.
A much higher and volatile rate of inflation has been estimated by local economists to be nearly 300%.
But by the measure of Steve Hanke, a professor of economics at John Hopkins University, USA, inflation has surged to close to 1,000%, leading to a fall in real incomes.
The situation has resulted in declining tenancy, with voids in most of the country’s buildings ballooning by about 35 percentage points, from 15% in June last year, to about 50% this month, especially in the Harare CBD.
The sector is also faced with rising operating costs and defaults, industry players say. Business Times can report that the take-up of office space has been poor as a result of the depressed economic climate.
The other flashing point is that occupiers are struggling to meet rent and services charges and the level of arrears are generally high.
Emos Mazarire, senior partner at Knight Frank, said voids have increased in most buildings to over 50%, and behind this worry is the simple truism that sound economic growth in Zimbabwe is not possible without a robust real estate market.
And it has not been robust this year. “Since June [this year], we have seen reduced transaction volumes because most have embarked on wait and see approach,” he said.
“There have been a lot of volatility, instability, and replacement cost is now higher than market prices. There have been dramatic value adjustments and sectorial value distortions among many challenges.
And that kind of thing create havoc in the market,” Mazarire said at the KPMG Zimbabwe business meeting held in Harare last week. “Voids have become an issue,” he continued.
“I can confess that in the past three to five years we would allow five years to fill them up, but now we are allowing a longer time like seven years.”
He said almost all the buildings in Harare are half full due to the country’s deteriorating economy, which has resulted in rising operating costs, defaults and voids.
“Some want to turn them into schools. But it is really a big issue,” Mazarire said. The continued macro-economic challenges has seen some businesses closing shop, something that has given the players in the real estate sector headaches.
The sector now finds itself in the middle of a perfect storm. “Increased debtors have been noted in the industry, translating into high rates of arrears,” Mazarire continued.
“Most tenants are defaulting, with the main push factor being the current economic crisis. As of now, we should forget about valuation of property until the economic situation is settled.”
Kurauone Chihota, the MD of TSL Properties MD agreed with Mazarire, saying the sector was battling not only to hold market value constant but also “consider return on investment”.
As a consequence of these factors, property yields have come down. Ironically, investors demand a more attractive return such as a higher yield commensurate with the risk of carrying an excessive debt on their portfolios.
According to property experts, the shrinking economy has stifled property development to such an extent that Zimbabwe has not had any cranes on the skyline for a very long time.
The country’s property market has shifted notably over the last 11 months as the currency crisis and low investment continue to stunt the growth of the sector.
Worse, the introduction of the interbank market rate has led to a change of property valuations from US dollars to Zim dollars. According to Mazarire, this is the time to buy property.
“If people have the money, it is the time to buy property instead of putting it in the bank,” he said. “In the long-run, if you want to lock in value, the future is very good.” Real Estate Institute of Zimbabwe vice president, Brian Kashoni, who is also a director at Homelux Group said the sector was in limbo. “The real estate sector has been impacted by major shifts in both fiscal and monetary policy issues relating to currency, taxes and exchange control regulations,” Kashoni told Business Times.
“Sellers are not considering disposals unless they can obtain hard currency, which the majority of potential purchasers are unable to raise due to its scarcity.
It is also most improbable that investors would commit large hard currency amounts in order to receive local currency returns.
The retail leasing sector is still active although there is a creeping increase in the levels of voids.” He added that the prime yield for retail investments is in the order of 7-8%.
“There is strong pressure on RTGS dollar rental rates to increase from their US$ levels of $10 -$20 per square metre in Harare, in order to reflect the fast deteriorating value of the RTGS dollar as measured against foreign currencies.
Office sector voids have increased as demand for office space is weak due to the underperforming economy,” he said.
“There is also an increase in small enterprises running businesses from informal premises. Generally, the quality of tenants is poor leading to landlords in some cases preferring to keep available space vacant.
“As is the case with retail, there is upward pressure on rentals to move from their US$ levels of $7-$12 per square metre. In Harare, the prime yield for office investments is in the order of 8-10%. The industrial sector continues to struggle against imported goods. Landlords are also pressurising for increases in rental rates.”