In-depth interview: ‘There is good money in informal market’ 

Source: In-depth interview: ‘There is good money in informal market’ – The Zimbabwe Independent

PROPERTY firm Mashonaland Holdings recently published FY2021 results, which reflected a number of initiatives that the company is working on. Key among the initiatives is diversification of the company’s portfolio. Our senior reporter Melody Chikono (MC) spoke to Masholdings Managing Director Gibson Mapfidza (GM), who said the company was deliberately targeting to grow its footprint within the sub-markets and geographies trading predominantly in the USD currency. Mapfidza said whilst the economy and the property market specifically are faced with perennial challenges, the property market still provides opportunities for growth and favourable returns.

MC: What are the main takeaways from your FY2021 performance to date?

GM: In inflation adjusted terms, our revenue increased by 80% from ZW$313million (US$1,969 million) in 2020 to ZW$561 million (US$3,528 million) in 2021. The improved revenue performance is due to a longer reporting period covered in our results, following our change of financial year end, as well as an improvement in our occupancy. Despite the general low demand for office space in the market, we managed to increase our occupancy level from 79% to 81%. The improved occupancy rate was achieved through implementation of a continuous building maintenance programme to support building functionality and thus tenant attraction and retention.

Our operating expenditure increased from ZW$157 million (US$987,421) to ZW$296 million (US$1,862 Million) on the back of the above referred longer reporting period. The increase in expenditure was due to maintenance works carried out as well as pricing distortions in the market, which continue to affect the pricing of goods and services depending on the currency of settlement. The increase in costs was, however, fully offset by our revenue growth resulting in a 62% increase in our operating profit from ZW$185 million (US$1,164 million) in 2020 to ZW$300 million (US$ 1,887 million)  in 2021.The inflation adjusted results show an unrealised fair value loss on investment properties of ZW$1,8 billion (US$11,321 million). The unrealised fair value loss reflects the abnormal uncertainty affecting property valuations in the country whereby valuer’s estimates are affected by macro-economic factors, which mainly include exchange rate distortions. Further, CBD property values have been impacted by urban blight being mainly in Harare hence the company’s current portfolio diversification thrust.

Thanks to the healthy operating profit delivered, the company declared a dividend to shareholders. Total dividend declarations, incorporating the interim and final dividend, attributed to the just ended financial period amount to ZW$72,6 million (US$456,604) .

MC: You had 20% US dollar revenue, what measures are you taking to increase your revenue in real terms and what have been the setbacks?

GM: As we diversify our portfolio, we deliberately target to grow our footprint within the sub-markets and geographies trading predominantly in the USD currency. Our high appetite in new developments requires us to generate more revenue in USD as building materials are being sold predominantly in that currency. Most of the businesses generating USD revenues operate in the retail sector of the economy. Our diversification thrust is meant to progressively grow our 7% current portfolio retail weighting to 30% as per our model portfolio mix. In addition, we have also delved into the SME and informal sector of the economy, mainly through space reconfiguration. This sector mainly transacts in USD and, as such, part of our strategy to increase USD revenue is through increasing our footprint in the SME market segment. We target to acquire some assets within this segment during the current financial year.

In addition, we also intend to progressively grow our residential portfolio from the current 4% to 15%. Whilst the returns are compelling and in USD currency, it is also the responsible thing to do as the country has a huge and growing housing need. Most transactions within the residential market, whether freehold or leasehold sales, are taking place in the more stable currency as well. So increasing our investments in the housing market enables us to do well whilst doing good. The tourism and hospitality industry remains one of our target investment markets, which can also generate USD revenues. You ask about setbacks? The persistent disparities between the Reserve Bank of Zimbabwe auction rate and the parallel market tempts some of our tenants to arbitrage and pay rentals in ZW$ yet they generate USD revenue. Given that we incur USD costs in our construction projects, the arbitrage negatively affects our business model.

MC: You have indicated that you are bent on diversifying your portfolio. Can you shed more light on this?

GM: Currently, our investment property portfolio is skewed towards the commercial offices sector, which constitutes 66% of the portfolio. Most of these buildings are in the CBD. At the point the company was incorporated the CBD was doing very well and the CBD sector earned the company meaningful returns. However, times have changed, the customer space needs have significantly and structurally changed and yet the value proposition of most property companies has remained static. As such and in line with modern portfolio theory, we came up with a model or target portfolio composition based on the key sectors in the property market (commercial offices, retail, industrial and logistics, residential, health and tourism) and geographical segmentation. Apart from the sectorial and geographical factors, we also considered the cash flow requirements of our shareholders, most of whom are in the insurance and pension industry, so as to align their return and cash flow expectation and the liquid properties we need to have in the company’s investment portfolio.

So our diversification work is to change our portfolio sectorial composition and geographical spread from the current one to the desired portfolio. We are very grateful to our Board for the support they have given in making the initial critical steps. The acquisition of a 4 hectare site along Harare Drive in Pomona for a retail and logistics development, a 2ha site along Borrowdale Road for a modern office park development, the construction of a day hospital in Milton Park, the disposal of the iconic Charter House among other initiatives are bold steps towards our diversification thrust.

MC: May we have an update on your property development projects?

GM: We are currently working on our 25 cluster housing units project in Bluffhill, with a target completion of Q4 2022. We are also commencing the Milton Park day hospital following the signing on an Agreement to Develop and Lease with a leading health insurance and services company. We are also working on our Lot C, Ruwa mixed use subdivision approvals. Lastly, we are putting in place a project team to start working on our Pomona development. Whilst we have a broader property development pipeline, the actual implementation is triggered by successful pre-lease or pre-sale of the developments to manage the imminent market risk.

MC: How do you see yourself in the next five years in terms of property development?

GM: Our target is to have fully diversified our portfolio mainly through new developments within the next three to five years. Our timelines were affected by the two years of the Covid-19 pandemic, but we are now back on track to move ahead with some of the key projects. The plan entails growing retail, suburban office parks, health, flexible warehousing, residential and the hospitality sector. We have secured most of the strategic land banks we have been chasing in Harare. Our focus is now on securing land in Zvishavane, Victoria Falls and the New City. We have made good progress in engagements with the authorities within these geographies.

MC: Can you shed more light on the health facility venture you have embarked on and what is the outlook?

GM: We have been looking for opportunities to grow our health sector, which is currently at 3% of our total portfolio. Whilst the health sector is so much of a defensive investment, investing in a health facility enables the organisation to positively contribute towards societal wellbeing. Most of our health infrastructure in the country needs modernisation and we are excited to play a part towards that goal. How did this opportunity come about? We participated in a tender for the securing of land and building a day hospital on spec for a leading health insurer and service provider. We have since secured the land and completed all the pre-construction processes.

The proposed hospital is a primary healthcare facility with modern diagnostic facilities under one roof. The proposed structure will be a double storey building with all the outpatient, diagnostics and i-Go on the ground floor and all the treatment.

The ground floor provides for a pharmacy, drugstore, X-ray scanning, CT Scan, radiology, ultrasound, reception, general consulting room and nine specialist consulting rooms, examination room, ambulance bay and waiting area. The first-floor houses offices, 12 observation wards, four bed pead, minor procedure rooms and the i-Go wellness centre. The total development cost budget is pegged at US$3 million. Works are set to commence on May 3, 2022 and the project should be completed by August 31, 2023.

MC: What can you say about the size of investment you have committed to land acquisition and what is the future plan in line with that?

GM: Our total budget for acquisitions for 2022 is around US$12 million. However, our acquisitions are demand driven so the eventual expenditure would largely depend on the number of corporate occupiers we sign-up with for acquisition and development of required space. Our plan is to ensure that we have an investment footprint within all the emerging property investment nodes around the country.

MC: What is your comment on the general property market performance in Zimbabwe?

GM: Whilst the economy and the property market specifically are faced with perennial challenges, the property market still provides opportunities for growth and favourable returns. The challenge for investors however has been the policy inconsistencies and yet the nature of the asset class, unlike equity portfolios, is such that it cannot be re-modelled quickly enough to re-align with the ever-changing policies. As such, a stable economy and a consistency policy framework would greatly improve performance. For instance, there is a lot of arbitrage in the property market brought about by the unsustainable gap between the RBZ auction rate and parallel market rate, which is solely used by building materials suppliers.  What it means is that the general building fabric deteriorates over time as property owners receiving rentals at the RBZ auction rate cannot keep up with building maintenance requirements priced at the parallel market rate. The short-term occupier gains through the arbitrage affect the long-term functionality and liveability of the buildings. It cannot be sustainable.

MC: What is your comment on this sector in relation to current changes in Zimbabwe?

GM: The built environment and a country’s real estate infrastructure is a barometer of a country’s progress. It is therefore important that prudent policies are put in place to support investments in the sector.

MC: What is your outlook in 2022?

GM: We see the property market remaining in a protracted downturn as it mirrors the broader economy going into 2023. Demand for commercial space will remain depressed and rental growth largely sticky as businesses battle the multitude of macro challenges.

We also see disposable incomes coming off, which will affect the freehold sales and returns in the residential sector. House prices are, however, likely to remain high as property sellers hold-out for their desired selling prices, largely emotional values, against a low supply. New commercial developments are likely to remain choked by high construction costs against falling property values. Construction activity is likely to remain in the owner-occupier and residential sub-markets through diaspora investments.