Liquidity Crunch Bleeds Real Estate

Fidelity Mhlanga

With the Zimbabwean economy reeling from macro-economic challenges such as the current liquidity crunch and hostile investment policies, companies are shutting down with thousands of workers losing their jobs at an alarming rate.

Zimbabwe Independent business reporter Fidelity Mhlanga (FM) this week spoke to Real Estate Institute of Zimbabwe president Siza Masuku (SM) on how real estate sector is faring. Find excerpts of the interview below:

FM: To what extent has the liquidity crisis affected the viability of the real estate industry?
SM: To a large extent, the liquidity crisis has had various adverse effects on the property sector, the prominent one being the absence of major commercial property investment activity. Traditional players have withdrawn from the market due to liquidity constraints. A limited number of major commercial real estate transactions have been recorded in Zimbabwe over the last 18 months. As a result of the liquidity crisis, there is limited and expensive funding, which is mainly responsible for the subdued activity in the market.

FM:?What is the implication of more tenants evacuating the Central Business District?
SM: The high default rate on rent receipts by real estate companies is impacting negatively on their businesses as they have to spend good money chasing after bad money.

FM: What’s the percentage of voids in the CBD for most real estate companies?
SM: From research carried out among a number of the major players in the sector, the voids are in the region of around 30% while for retail space it is less than 1%. We are beginning to experience increasing voids for retail space as retail tenants grapple with poor business resulting from low disposable incomes and mushrooming of vendors in the CBD.

FM: What’s the standard rental cost per square metre in the CBD?
SM: Prime retail space is fetching between US$20 to US$25 for space less than 100sqm for sitting tenants and in new lettings. Space exceeding 100sqm is commanding lower rates. For office space in Grade A buildings which are modern, I would say the majority are achieving net rents of between US$7 to US$9/sm. In older buildings, lower rent rates are the order of the day.

FM: To what extent are real estate companies reducing their rentals to attract tenants?
SM: The percentage rates vary as some property managers and owners are negotiating rates of between five and 20% lower. However, higher percentage reductions exceeding this threshold have been noted.

FM: On estimate, how many real estate companies are registered in Zimbabwe?
SM: According to the Estate Agents Council, which is the licensing authority and plays a supervisory role for practicing real estate practitioners, there are about 234 registered firms as of December 31 2014. Harare has the largest number of registered firms consisting of 85% of the total.

FM: How many real estate companies have collapsed since dollarisation?
SM: There are a number of firms which have been closed down due to some of the above stated reasons, for example, Fox and Carney, Re Max and Ubuntu Properties, just to name a few of the popular real estate firms, while some recently opened businesses found the going too tough.
Other real estate firms have since been stopped from practising as they failed to comply with registration and renewal requirements like the need for a current compensation fund certificate, having a principal registered estate agent and paying an annual registration fee.

FM: What’s your comment on the assertion that property which was used as collateral by banks was overvalued after dollarisation?
SM: Soon after dollarisation (2009) to about 2012, the economy rebounded from the effects of hyperinflation and in tandem resulted in property values resonating to the economic dispensation at the time. This period was characterised by businesses taking positions and leveraging their immovable assets to access funding for retooling purposes from financial institutions and were buoyed by these good values. Furthermore, the properties were valued by applying the rental rates which were obtaining at the time, and therefore, the valuations were correct at that time, as the process involves using the achieved rentals and capitalising them.

FM: What should be done to address problems affecting the property sector in Zimbabwe?
SM: There are few business decisions which are concluded in the world without the involvement of real estate as collateral or a conduit to accessing finance for development or working capital needs. With the current liquidity constraints affecting the economy, the property sector is also affected since there are insignificant inflows of foreign direct investment in comparison to neighbouring countries like Mozambique and South Africa who received US$7 billion and US$$10 billion respectively in 2013, while Zambia and Botswana also received significant inflows. With the recent signing by government of multi-billion dollar power generation, lucrative mining and infrastructure development deals, Zimbabwe is poised for economic growth in line with the ZimAsset policy of economic recovery over the next five years.

FM: What other problems are affecting the real estate sector apart from the depressed economic activity?
SM: The real estate sector has its own challenges like unlicensed, unregistered, unregulated players who are causing serious problems to registered firms. These unlicensed players do not follow any professional ethics, undercut fees and do not comply with the gazetted scale of fees which all professional firms subscribe to.

FM: What is the contribution of real estate business to the country’s Gross Domestic Product (GDP)?
SM: According to the Reserve Bank of South Africa’s 2013 statistics, real estate and associated services contributed about 22% of GDP in that country. Locally, we are yet to obtain relevant data for this exercise, but it should be analysed from the contributions of various tax heads in which the real estate is exposed to ie capital gains tax in the event of a sale of a property, conveyancing, propety tax, value added tax, presumptive tax, income tax, paye. The contribution of real estate should therefore be analysed within the same framework in the absence of definitive data.

This article first appeared in the The Zimbabwe Independent