The Zimbabwe Independent
De-corporatisation deterring new developmental projects
MASHONALAND Holdings recently published its financial results for 2020. Business reporter Fidelity Mhlanga (FM) this week caught up with Mash Holdings managing director Gibson Mapfidza (GM, pictured) to discuss various issues which include the company’s financial results, the challenges faced by the property sector and outlook. Below are excerpts of the interview:
FM: Following the publishing of your FY 2020 results you praised measures by the monetary authorities saying it had a positive impact on the property market.
Can you shed more light on this.
GM: Broadly, Statutory Instrument (SI) 85 of 2020 (Exchange Control Regulations 2020, dual pricing) allowed the use of free funds to transact locally, which practice had been outlawed on June 24 2019 through Statutory Instrument 142 of 2019.
Essentially, SI 142 of 2019 saw the property market becoming more opaque as property sellers, in a bid to avoid losses, resorted to discrete transactions in the outlawed currency. The introduction of SI 85 of 2020, correctly so by the Reserve Bank of Zimbabwe, helped re-establish the much-needed transparency in the property market as sellers can now openly market and transact in the US dollar.
In addition, superior assets that were withdrawn from the market, following the introduction of SI 142 of 2019, are now back on market. This helps active property investors to access these for onward development, which helps the growth of the industry. The property market, like any other market, should be transparent for it to be efficient.
In the occupier submarket, SI 85 of 2020 has allowed property companies to receive rentals in foreign currency from those businesses with free funds. In a hyperinflationary environment, pegging rentals in a stable currency helps to hedge income returns against inflation. Furthermore, businesses can also plan better, increase their business operations and capacity utilisation. This, again, has a positive impact on the property market as it leads to an increase in demand for real estate space.
FM: You, however, bemoan high construction costs for property developers, how has this deterred development in the sector?
GM: Essentially, all new developments for investment purposes should lead to the growth of shareholder value. This can only happen if the market value of the completed development is higher than total cost of development.
Construction costs, generally influenced by inflation, are generally higher in Zimbabwe compared to other countries in the region. In contrast, market values are chiefly influenced by the level of economic activity in a country as seen in the GDP growth rates.
The two variables, inflation and GDP, have been moving in opposite directions as the two consecutive years of negative GDP growth has pulled with it property values.
On the other hand, the hyperinflation environment and adverse exchange rate movements have effectively increased the costs of especially the foreign supplied building materials.
In light of the above, projected returns on new developments have been reduced to the point where it is impossible to achieve required returns to justify the development. This has resulted in most projects failing at feasibility stage and delays in the completion of ongoing projects.
FM: If you are to quantify the opportunity costs for property developers, what can you say?
GM: Based on my responses to the previous question, property developers are faced with the conundrum of embarking on development projects which may, based on current appraisals, indicate returns lower than the required returns or to totally defer new development projects. In our view, property investments are long-term assets and future market corrections based on the location and future demand of the development should be calibrated in the Go or No Go decision.
FM: For Mashonaland Holdings you say you are now targeting the Charter House project for Q1 2021 following Covid-19-induced delays. What's the position given that the pandemic is not showing signs of slowing down?
GM: The tourism industry has indeed been the hardest hit by the Covid-19 pandemic, and indeed we may have to live with the virus as we have done with other viruses. There have been positive sentiments on Covid-19 vaccines that have been announced in developed countries and the expectation is that in 2021 African countries will begin to access the vaccines.
The construction industry has also proffered safety protocols on construction sites. The same measures will also be implemented when the reconfiguration works begin.
The Charter House project is a long term development and will proceed in light of the positive developments with regards to the vaccines and the control measures being put in place across the globe.
The company has been also following research on the impacts of other such viruses and outbreaks in terms of the longevity of the negative sentiment. For example the SARS virus in 2003, whose impacts and negative sentiments quickly evaporated once the virus was contained.
FM: Can you elaborate on investments into the Bluff Hill cluster housing project in relation to high construction costs earlier alluded to?
GM: The company has put in place measures to optimise construction costs on this project. Some of the measures include preand direct purchasing of building materials, effective contracting and also the civil engineering works were carried out when costs were still relatively competitive. In addition, the construction of a show house before rolling out the entire development will, hopefully, provide the project team with other value engineering opportunities.
Suffice to say, the most expensive building materials are the foreign supplied materials mainly because of the unfavourable exchange rate movements. For typical single storey house structures the imported components are minimal.
FM: What has been the impact of Zimbabwean economic challenges both on Mashonaland Holdings and the industry?
GM: Across the industry most commercial office buildings were designed for the typical corporate occupier leasing, on average, three floors in a building. However, the country has suffered significant decorporatisation in the past two decades. The nature of our investment asset is, however, lumpy in nature and one cannot reduce the size of a building to suit the obtaining business environment and nature of today’s demand. The industry now has to find ways to bleed these humongous assets across the country and ensure that reasonable returns are delivered to the investors.
FM: What are the prospects for 2021 for the company and sector at large?
GM: The property sector moves in tandem with economic activity in the country. The Zimbabwean economy is predicted to record positive GDP growth after recording negative growth in 2 successive years. Projections are that inflation will stabilise to a single digit number in 2021 on the back of a forecast improved 2020/2021 agricultural season among other expected contributors. These contributors are forecast to have a positive impact on the occupier market as demand for space, which has been sluggish, may record some marginal growth.
The optimism notwithstanding, we see a protracted downturn in the property market cycle. Any tangible improvements on the cycle should filter through in 2022 on the condition that the positive GDP and inflation forecasts realise in 2021. The property market essentially mirrors and slightly lags developments in the macro-economic market.
FM: Government last year promulgated legislation to facilitate the introduction of Real Estate Investment Trust (REITs) that invest in different types of real estate such as residential, office, retail centres and industrial parks. What is your view on this?
GM: REITs, or real estate investment trusts, were created to give small investors an opportunity to benefit from investing in income-producing real estate such as residential properties, commercial mixed-use developments, shopping centres and even infrastructure developments like energy generation and roads construction. They allow investors to indirectly invest into real estate without the hassles associated with direct ownership and management of real estate assets. REITs allow investors participation in property investment projects even with limited funds especially in the case of small pension funds.
REITs provide investors with dividendbased income, competitive market performance, transparency, liquidity through selling of share units rather than the property itself thus also easing exit opportunities, inflation protection and portfolio diversification. In other markets (EU and USA) Real estate investment trusts (REITs) have done an excellent job creating wealth for investors over the long term as they've routinely outperformed stocks. One of the key traits of the most successful REITs is consistent dividend growth as such REITS are a welcome development in the real estate sector.
However, the local framework guidelines limit participation in Income/Rent REITs of existing properties to pension funds thus driving out all other participants who can only partake in development REITs.
As alluded to earlier, appetite for new real estate developments is currently low to excite new viable developments. As such, the current REITs structure as outlined in the 2021 budget is skewed towards bigger pension funds that are able to immediately convert part of their existing buildings to portfolio income REITs.
FM: In the 2021 budget government availed tax incentive for the REITs. What are the pros in this move for you and the sector at large?
GM: Tax incentives are generally the biggest attraction for investors into REITs. However, investors are likely to remain cautious considering the government's inconsistent policies. In addition, for REITs to be successful in the Zimbabwean economy, the macro economic environment has to improve to stimulate demand for the underlying asset. Currently, the real estate market is subdued with limited demand for new space. This is likely to have a significant impact on the performance of REITs.
At corporate level the REIT Income tax is exempted on profit before tax that is distributed as dividend at the agreed pay- out period. The REIT will only be taxed on the profit remaining after dividend pay-out. The income tax is only then applied at beneficiary level or at receipt of the dividend.
The REIT security holders will only pay 1% Capital Gains Withholding Tax on disposal of their securities and the 10% withholding tax on dividend earned. As such the tax incentive encourages investors to take part in REITs due to the reduced tax burden.
However, the government has blocked out private players, other than pension funds, from utilising their existing assets to create REITs. These players can only participate through development REITs, and earn developer’s profit incomes. As explained earlier, developers’ profit margins are very depressed in the market and it will take longer to correct.