Economic woes hit real estate

via Economic woes hit real estate – The Zimbabwe Independent February 19, 2016

Real estate companies are grappling with a myriad of challenges stemming from economic problems which have left businesses battling for survival and struggling to pay rentals. This has resulted in growing defaults and property voids reaching 60%, an industry expert said.

Fidelity Mhlanga

The sector has been forced to adopt survival tactics such as offering rent holidays to new tenants, reducing rentals and offering free internet services in the face of de-industrialisation that is threatening viability of Zimbabwe’s real estate industry. Real Estate Institute of Zimbabwe (REIZ) president Siza Masuku told businessdigest this week that in most real estate companies operating costs now outweigh rental income.

“This is not based on academic or thorough research, but informal enquiries indicate that the industrial sector is the hardest hit, with voids reaching 60%, followed by the office sector, especially in the CBD with voids of up to 40%,” he said.

“The industrial sector has been affected mostly as a result of low production and the influx of cheap imports, which makes our products uncompetitive.”

Masuku said although there was no unanimous agreement to reduce rates, most property companies, owners and managers are offering discounts of between 10-20% of the prevailing market rates.

He said reducing rentals was a business decision by the real estate players with a view to retain occupancies in their property portfolios.

With consumer demand declining, tenants are demanding higher percentage reductions in order to balance their costs with generally declining turnovers across industry.

The REIZ president said a high rate of tenant evictions was obtaining adding that the amounts realised from the auction of properties attached was, in most cases, far less than the amounts owed by the tenants. As a result, property owners are losing millions.

Masuku said the sector was being affected by postponement and rescheduling of planned maintenance, capital expenditure like lift repairs, which consequently leads to a decline in the quality of service offered, and rental fees across the broad.

The REIZ president said properties generally lost 10-20% in value in 2015, apparently indicating Zimbabwe was experiencing a subprime market similar to the one experienced in developed countriessuch as United States during the height of the global financial crisis of 2008. The crisis stemmed from loans which were secured by properties that went down in value, exposing the financial institutions to serious default risks.

Masuku recommended property owners and managers should set up a tenant credit check bureau, whose role is mainly to screen prospective tenants based on their historical credit problems, financial problems, evictions and criminal records.

“Such a process minimises the risk for a tenant to default on rentals as it ensures estate agents let properties to reputable people or institutions,” he said.

“The bureau should to some extent reduce the exposure that property managers face in the execution of their duties for example failure to collect rentals from non-performing tenants.”

Unlike normal or traditional credit check bureaux, which are mainly restricted to historical financial aspects of individuals or institutions, Masuku said property owners, managers and estate agents would periodically be required to submit information on bad tenants to the bureau.

He said it was critical that property players engage with the local authorities as well as various arms of government with a view to finding strategies to deal with high property rates.

He said the unsustainable high local authority taxes have ultimately contributed to the high operating costs for properties.

“There is also need to advocate to the government for the urgent review of the current town planning statutes so that they incorporate modern town planning concepts like three dimensional planning in the CBD, which will permit uses like residential activities in the central business district for the upper levels of high rise buildings as such land use is not currently permitted by the town planning provisions,” Masuku said.

“Such provisions will greatly reduce the void rates in the CBD of Harare, especially for the high rise office towers which are 30 to 40% vacant.

“This is against the background that such conversions to residential use require significant investments. Demand for such facilities is likely to be high, since these properties are in the central business district of Harare.”

Problems in the property sector took a toll on the performance of players with listed Pearl Properties last year reporting a 3,85 % drop in revenue to US$5,6 million for the eight months which ended August 31, 2015.

The company’s rental income declined to US$4,258 million from US$4,431 million in 2014.

Pearl Properties said occupancy levels declined to 77,37% from 79,93% due to evictions and voluntary vacation while rental per square metre declined to 7,51% from 7,78% in 2014.

Zimre Property Investments in 2015 indicated it was mulling the disposal of its properties in the CBD saying it had good buildings in the wrong place.

Reflecting on the sector’s performance in 2015, property expert Gilbert Gumpo said financial results for listed property companies show that there has been a decline in basic rentals ranging between -2% to -7%.

“Rental increases have been few and far between, limited to sectors that can afford these increases,” said Gumpo.