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

Zambian Business Times - - FRONT PAGE -

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.

Gar­den city mall in Lusaka...

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