Stanbic and FNB dominate property market, ABSA to join soon…
• Stanbic and FNB dominate the market with ABSA coming soon • Nedbank expected to join in the medium term
We understand that most of the large real estate lenders have recently become quite positive on Zambia (driven by their risk departments). Consequently, we are seeing a clear interest from them in increasing their Lusaka property loan books, after only participating in the most secure deals in the period 2015-17.
The largest property lenders in Zambia are Stanbic ( part of the Standard Bank Group) and FNB Zambia, while Barclays (soon to be renamed Absa) is showing a strong interest in increasing exposure. IFC has also recently become active in the market, having funded the Novare Great North Mall, and is also looking at a few larger hotel deals.
Standard Chartered currently has no real property exposure to the market but is looking to finance prime assets in Lusaka, based on loan sizes of $15m+. Atlas Mara and Cavmont are also open to fund smaller transactions between $1m and $3m.
More funders expected in the Zambian property market
While Investec have historically provided some loans to the market, they have no major exposure currently that we are aware of. We expect that Nedbank will be active in Zambia in the short to medium term. In certain transactions local institutional investors will also provide debt funding to transactions – these are often where they also have equity exposure.
The lenders clearly prefer cash flow generating properties but are also, to some extent, able to provide loans to fund developments, although these come with rather onerous covenants and conditions precedents. Almost all large transactions are in USD, at generally fixed rates of 8.0- 12.0%, based on asset, developer/owner and tenant quality. Tenors are normally 7 to 10 years, although some banks prefer shorter tenors. The loans are generally fully amortizing over the life of the loan and the amortization profile is either based on (a) fixed % amortization, or ( b) equal monthly payments.
Low appetite for kwacha loans
There are a few loans in Kwacha, generally for smaller assets, at interest rates of 20-25%, although the Bank of Zambia is pushing the banks to do more local currency lending. The banks generally underwrite the cash-flow generating loans based on a Debt Service Cover Ratio (DSCR) of 1.2x. As amortizations and interest rates are fairly high, we rarely see Loan-to-Value (LTV) of higher than 55% from commercial banks.
Consequently, banks are in a very secure position as they have high margins (often 5.0%+) over their lending costs and no refinancing risk, as the loans fully amortize. This leads to an interesting dichotomy, where the banks make 30-35% ROE on their loan books taking almost no risk, while the developers get 16-20% IRRs taking all the risk as amortization rates are lowered.
It should be noted that the banks take almost all the cash from the rents, leaving little cash return for developers and owners for the life of the loan. We expect that over time this situation will normalize due to market pressure, as the banks will price corporate risk more keenly and take some refinancing risk.
Currency risk borne by tenants
The property industry has successfully pushed the currency risk onto the tenants as all, except for a very few, commercial leases are in USD. This is a result of the historically much lower USD financing costs, where the trade-off for the retailers have been much lower rents (would have to be at least 70% higher if in ZMW) vs. taking the currency risk. In the short to medium term we see no change in this scenario but should Zambian property funding interest rates fall to the 8.0-12.0% range, we expect a slow switch to Kwacha rents.
Zero appetite for Kwacha rentals
Almost no commercial tenants push for Kwacha rents at the moment, but if we see another market depreciation of the currency as in 2015, we expect the tenants will again try to push for it, but will be unsuccessful. The smarter landlords in 2015 gave the tenants temporary rental rebates to allow their pricing to catch up with the new exchange rates as inflation fed through. The landlords/borrower and lenders need to discuss a devaluation scenario and agree the ability for the landlords to temporarily breach the lending covenants.
Bonna Kashinga is a Property Management Senior Executive at UARE. He holds an MPA from Harvard University.