The Sunday Mail
THE property sector is on the brink of a major implosion spawned by high tenant default rates, high void rates and punitive mortgage rates that continue to plague consumers and prospective home buyers.
Information gathered by The Sunday Mail Business indicates that the property giants are currently sneezing as high default rates take a toll on revenue growth.
Notwithstanding the fact that Zimbabwe has the lowest rentals in the Southern African Development Community (SADC), tenants, most of who are being choked by the obtaining liquidity crunch, are struggling to meet their obligations.
Last week, Estate Agent Council of Zimbabwe chairman Mr Oswald Nyakunika said defaults in the property sector have dramatically climbed to 60 percent this year compared to rates of between 10 percent and 20 percent last year. He also noted that the quality of tenants in properties across the country has markedly dropped, prompting the current wave of evictions.
“We do not talk of occupancy ratios but void rates. It is assumed properties are always fully let. Void rates of up to six percent are acceptable (it covers tenant movements between premises).
“However, anything above that is unacceptable. At present, we have void rates of up to 10 percent as regards commercial properties. This is a result of high rental default rates and subsequent evictions,” said Mr Nyakunika.
A recent report compiled by Knight Frank on rental fees indicate that while regional averages for office space range between US$16-US$40 per square metre, the same space attracts an estimated US$10 per square metre on the local market. Also, rental fees for local retail space attracts charges of US$15 per square metre while most countries in the region peg prices for the same space at between US$35 and US$55 per square metre.
A snap survey in the capital’s central business district (CBD) shows that most office and industrial space has become vacant.
Analysts believe that the local property market has gradually evolved from a seller’s market, where there was a scramble for properties and office space, particularly in the post 2009 period, to a buyer’s market, where in some instances prices are currently being reviewed downwards.
“We are going through a serious cash and liquidity crisis. That has put a squeeze on the economy in general.
“The demand for residential space is high but lack of mortgage finance means people are renting rather than buying. There are plenty office voids and many tenants are defaulting on rentals.“Rental and rates per square metre are depended on location. Residential properties in upmarket locations in Bulawayo can be as high as US$1 000 and much more in Harare. Commercial properties in Bulawayo CBD can fetch up to US$20 per square metre and perhaps double that in Harare.
“In good times it is normal to have defaults rates of 10 to 15 percent. In other words, rent collection above 85 percent is considered good. At present it is common to have default rates of 40 to 50 percent and therefore collection above 60 percent is considered good.
“The property market like other investments is going through a difficult patch. However, property as an investment has fared well in relation to money and equity market.” said Mr Nyakunika.
With a dislocation in the money and equity market, most individual and institutional investors have been pouring their investments into the property sector because of its inherent ability of storing value and generating a fair return on investments.
Unsurprisingly, insurance companies have been funnelling a significant portion of their portfolio into properties.
Fidelity Life Assurance, which reported a three percent drop in premiums in the year to December 2013, is currently betting on the Southview Park low-cost high density housing development scheme to boost its fortunes.
The project has about 5 950 stands available for sale and by March 2014, an estimated US$4,5 million had been generated from pre-sold stands.
Similarly, First Mutual Holdings Limited (FML) is trying to leverage on Pearl Properties, its subsidiary, to develop a low-cost residential property scheme.
Property giants Old Mutual and Zimre Property Investments (ZPI) said the obtaining cash crunch has a direct bearing on revenue growth. Last year, ZPI reported that it had increased the provision for doubtful debtors from US$556 000 in 2012 to US$1,2 million while the void rate at its properties jumped from 10,9 percent in the comparative period a year earlier to 14 percent in December 2013.
Office and industrial space had also become vacant. Old Mutual Properties’ general manager Ms Grace Mukahanana said last week the occupancy ratio ranged from 70 percent to 90 percent for most of its properties while default rates were between eight and 20 percent.
“The reasons being cited include the tight liquidity conditions which have adversely affected performance of many sectors of the economy.
“Old Mutual offers arguably the most competitive rates on the market. We have in place a flexible pricing policy that takes into consideration the various aspects including location, space size and the prevailing economic conditions
“Rentals in the property market are determined by comparable rentals within the same sector of the property market and property companies compare rentals within the same sector in determining a rental to charge.“The occupancy ratio for the property market in Zimbabwe has been ranging between 70 percent to 90 percent depending on the sector of the property market,” said Ms Mukahanana.
So grave are the conditions in the sector such that Mashonaland Holdings-a lessor of most of the hotels to Africa Sun is considering reviewing rentals for its properties downwards in response to the high default and void rates.
Presenting a paper on the recently held Imara Edwards Securities investment conference, Mashonaland Holdings senior property manager Mr David Mutemachani said the rental market was characterised by high rates of vacancies, defaults as well as lack of long-term mortgage finance.
“The rental market is depressed with downward rent reviews for the first time since the economy dollarised giving our tenants a rent break so that we can retain the good tenants,” he said.
He added that vacancy levels were also high, with the office sector having the highest levels of vacancies as most companies have been downsizing. Experts say demand for industrial space has mainly been driven by small enterprises instead of the traditional industrial giants, with much of the evolving patterns in the property sector mimicking the current economic trends. As a result, there has been more demand for warehousing instead of manufacturing, an indication of the rising dependency on imported goods.
Vacancies have also been relatively lower for small retail units and for retail space on office towers located within the CBD.
However, even tenants in these premises are increasingly under pressure.
Local research firm MMC Capital believes that rental collections have become difficult as income levels have remained constrained.
“Our view is that pressure will continue mounting on the local property sector for as long as funding in the economy remains an issue.
“Access to cheaper long- term debt finance will continue presenting challenges to the property sector with most of the available lines of credit having too short repayment periods and prohibitively high interest rates for long-term property developments. “This will likely result in subdued property price growth and with no close indication of an improvement in income growth for the tenants either, the prospects for improved rental yields in the short term remains bleak. “As the pressure on occupancies mount, the rentals trajectory is expected to be stagnant to downward,” said a research note from MMC Capital.
Punitive mortgage rates affect prospective home owners
LOCAL mortgages remain priced beyond the reach of even the supposed middle-income earners, blighting prospects that they could meaningfully help workers who desperately need to own properties. Most deposit and interest rates attracted by properties that are offered by most building societies are considered as prohibitive.
The volatile local job market also make mortgages unattractive as chances of foreclosure are highly likely.
Building societies offering houses on mortgages include FBC Building Society, Cabs Building Society, ZB Building Society and CBZ. Private companies such as Madokero and Dawn Property consultancy have also entered the fray.
FBC Building Society is currently offering Greendale and Waterfalls houses on mortgages.
The Greendale cluster houses are being sold for US$200 000. To meet the conditions of the mortgage, a 30 percent deposit US$60 000 is required upfront; thereafter, monthly installments of US$2 400 over a 10-year period will take effect.
It is estimated that the salary requirement for a client to qualify for the scheme is about US$10 000 per month. However, the Waterfalls houses, which are priced at US$137 000 per unit, attract a deposit of US$36 500. One will have to earn an estimated US$5 000 on average to qualify for the facility.
Land prices in dramatic 50 percent leap
LAND prices, particularly in Harare, have made a huge leap ranging between 30 and 50 percent in the past 12 months, raising the spectre that desperate home-seekers will not be able to afford decent properties.
A snap survey conducted by The Sunday Mail Business indicates that an unserviced high density residential stand, typically measuring between 200 and 300 square metres, is now selling for $6 000 or more, up from $4 000 at the beginning of 2013.
At Fidelity Life Assurance’s Southview Park, a model high density development plan, prices for an undeveloped residential stand measuring 240 square metres have since climbed 33 percent in the past year from $9 000 to $12 000.
The stands are however currently being serviced following a ground-breaking ceremony two months ago.
