Property sector struggles with high rent defaults

THE country’s property market in the first half of the year was characterised by high rent default levels and also low absorption rates of rental space, despite the improving general business confidence, a listed company in the sector has said.

According to a statement which accompanied its financial results for the half year ended June 30, 2018, First Mutual Property (FMP) said the inherent problems of low productivity in the productive sectors, inadequate infrastructure, changing structure of the economy and tenant preferences, continued to affect CBD office and industrial sectors, as these sectors continue to have low demand for rental space.

“The low demand is also a factor of the quality of space on the market, some of which is no longer suitable for emerging businesses and small to medium enterprises,” said FMP board chairman Elisha Moyo.

Mr Moyo, however, said demand for office park and retail space remains relatively strong, with voids slowly declining in spite of increasing competition from new developments on the market.

He said in the medium term, planned developments are expected to increase competition for quality space, driven by changing tenant preferences and technology trends.

“Despite the improving eco- nomic fundamentals, strong GDP growth is still required to significantly increase effective demand for space.

“The socio-economic dynamics of the economy are seeing property investors adapt the product offering, to meet the needs of the informal sector,” said Mr Moyo.

He added that due to increasing inflation risk, investors are actively seeking assets to acquire and also increasing allocation of capital to refurbishments and maintenance programmes to preserve value, “as few quality assets are available to acquire on the market.”

Meanwhile FMP reported a seven percent increase in rental income to $3,9 million from $3,7 million achieved prior year comparative.

Mr Moyo attributed the growth in rental income to new lettings in high value space, increased turnover based rentals in retail properties and new rental income from recent acquisitions.

The occupancy level for the period improved to 74,84 percent during the period, up from 73,54 percent at 30 June 2017 and an increase from the 2017-year end position of 70,94 percent.

Mr Moyo said the improved occupancy levels is testimony to significant leasing efforts during the period.

“The rental yield expanded to 6,76 percent from 6,34 percent, while the average rental per square metre for the portfolio was $7,61 up from $6,94 prior year comparative.

The income returns for the property portfolio at 4,35 percent improved from prior period (FY2017: 3,59 percent) driven by improved net operating income resulting from rising rental income.

“This solid performance translated to a nine percent increase in operating profitability, showing the benefits of creating and maintaining a diversified property portfolio and active asset management strategies to sustain performance in the challenging operating environment,” said Mr Moyo.

Going forward, FMP expects the short term in the sector to be characterised by continued pressure on occupancy levels.

“Developments going forward are very much dependent on post-election issues such as international engagement, stability, peace and a national focus on development.

“These will determine the trajectory of the economy and consequently the property sector performance.

“The market is expected to remain an occupiers market in the short term due to the excessive supply of space, and the lack of quality assets to absorb either expanding businesses or new entrants,” said Mr Moyo.

He however said the general outlook appears positive in the long term.