Currency Reform Slows Property Development

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Property investment firm Mashonaland Holdings Limited says Harare’s central business district (CBD) is facing further decay owing to deferment of rehabilitation works hampered by trading in the Zimbabwean dollar, which has resulted in rental incomes failing to match inflation rates.

In June this year, the government put an end to the multi-currency regime and made the Zimbabwean dollar the sole legal tender through Statutory Instrument (SI) 142 of 2019.

Official year-on-year inflation surged to 175,66% in June 2019 and is estimated to be at 230% for July. Although ZimStat says the month-on-month inflation rate slowed down to 21,04% in July from 39,26% in June, indications on the ground point to a deepening economic crisis and rising prices.

Before the introduction of the instrument some players in the property market were already trading in United States dollars.

Mashonaland Holdings MD Gibson Mapfidza told businessdigest on Wednesday that while government’s thrust to find long-term solutions to address the economic fundamentals was commendable, industry was seized with completing planned refurbishment in the short term

“Tenants looking for rental certainty given the regular rent reviews prompted by the need to hedge against the increasing inflation were requesting to revert to the US dollar rentals agreed as far back as 2014 as rentals were generally stable for the past couple of years. Inevitably, though, trading in Zimbabwe dollar will see property owners having to defer planned major refurbishment works, especially in the CBD, in the short to medium term,” Mapfidza said.

“The Harare CBD might suffer further decay due to the deferment of major rehabilitation works like replacement of lifts, installation of more efficient HVAC (heating, ventilation and air conditioning) systems, installation of modern ICT (information communication technology) infrastructure in line with modern trends and so on.”

Mapfidza said there was also loss of property value as market rentals have not been able to move in tandem with inflation to enable the inflation hedging ability of real estate as an investment asset.

“As such, property values will fall in real terms,” he said.

In its 2019 third-quarter update, Mashonaland Holdings pointed out that economic challenges had also negatively affected the construction business owing to increased costs, lack of liquidity and foreign currency while also upsetting capacity utilisation of the businesses and consequently profitability in real terms.

Mapfidza said construction projects will continue to be affected by the market developments with the costs having gone up in both US dollars and Zimdollar terms as contractors are pricing the increasing market risks in their tenders.

“Construction costs are going up, but market rentals tenants are prepared to pay are going down in real terms. Contractors are generally tendering in US dollars. They argue, and understandably so, it is the most practical thing to do to avoid regular contract sum changes which may result in contract disputes. SI 142 of 2019 has however effectively outlawed US dollar rentals,” he said

“Reduction in industry capacity utilisation, rolling load-shedding, foreign currency constraints and weakening aggregate demand are all affecting businesses’ rent-paying capacity. As such, the difference between construction cost per square metre and value per square metre continues to widen, where construction costs are being driven by inflation while value is driven by GDP growth which is pointing southwards. This has hugely affected financial viability of most projects and the logical response by property developers is to defer projects so as to avoid loss of value and impairments at project completion.”

Mashonaland Holdings posted profit-before-tax of ZW$9,4 million in the third quarter, a 623% improvement from ZW$1,3 million in the comparable period in 2018 while revenues rose 40% to ZW$4,9 million from ZW$3,5 million in 2018.

Occupancy levels also improved to 77% from 73%.