MASHONALAND Holding Limited recently unveiled the latest addition to its portfolio, Mashview Gardens, a 25-unit cluster housing development in Harare’s Bluffhill suburb.
The company is working on a number of projects in line with a business diversification strategy. It is also finalising design approvals for the ambitious project to convert Charter House, an iconic building in central Harare, to a boutique hotel.
The NewsHawks’ Jonathan Mbiriyamveka (JM) speaks to Mashonaland Holdings Limited MD Gibson Mapfidza (GM) on these issues and how hyper-inflation, currency uncertaintiwa and policy flip-flops all negatively affect new and existing real estate investments. Read the excerpts:
JM: You have launched your cluster house project. May you kindly take us through this project?
GM: The project, a modern cluster housing development, sits on a total of 2.3 hectares in the heart of the affluent Bluffhill neighbourhood and has a total of 25 stands. The stands sizes range from 600 – 900 square metres and the actual house floor area under roof is 190m².
Installation of bulk infrastructure consisting of roads, potable water and sewer reticulation was completed in 2019. We have just completed a model show house as proof of concept to enable our prospective customers to experience the house, input into the design concept to accommodate different tastes and preferences, especially on the final finishes. The construction of the house also enabled the entire project team to identify ways to optimise our construction efficiencies and deliver value, and only value, to our customers.
JM: Of what significance is it to you and the property sector?
GM: As an organisation, we have been mainly focusing on commercial developments for onward leasing. However, the key principles of Socially Responsible Property Investments (SRPI), which the organisation subscribes to, calls for us as a leading property investment company to deploy our investment resources where there is a greatest social impact.
The over two million housing waiting list calls for organisations like ours to creatively play a part towards satisfying that demand. We anticipate to embark on bigger social housing projects as the economy improves, effective demands firms up and prices of building materials stabilise as inflation recedes. The lessons we are learning on the Mashview Gardens development will be very handy as we embark on bigger affordable housing projects in the medium to long term.
As for the property market, we believe if we can deliver the project successfully and viably, it would induce other investors to actively play a part in housing projects. The supply of new housing stock with title deeds has been depressed lately owing to a myriad of challenges in the property market’s development sub-market and the investor unfriendly residential rent regulations. There is therefore a need to increase new housing stock incorporating modern house designs.
JM: The property has faced a myriad of challenges relating to construction. What is your comment on this?
GM: Our construction value chain in Zimbabwe is, in many ways, highly inefficient. This, in part, has been caused by lack of activity for a long time and causing our construction practices and legislation to lag behind. The industry at a global level has significantly improved in terms of deployment of technology to improve construction efficiencies, quality and project risk management practices.
The other challenge that has been affecting property development is around viability. Our construction costs are generally high in the region. We import a lot of materials including reinforcement steel, tiles, aluminium, roof sheets, plumbing and electrical goods, etc. As long as our local industry is not producing these materials, we will remain uncompetitive.
The high costs, mainly driven by inflation and foreign exchange movements is, on the other hand, met by falling property values as effective demand is pulled down by the deteriorating disposable incomes. In the end it means construction costs are higher than the market value of the completed development.
All these challenges call for creative ways of navigating, especially the supply side of these developments as the demand side is affected by macro-economic environment factors beyond the control of any developer. The expected improvement in performance of the economy seen through the GDP forecasts for 2021/2022 will, with no doubt, resolve some of these inherent challenges.
JM: What other projects do you have in the pipeline?
GM: Mashonaland Holdings Limited is working on a number of projects in pursuit of its portfolio geographical and sectorial diversification strategy. The organisation is finalising design approvals for the Charter House revitalisation project to a boutique hotel.
The project got delayed by the Covid-19 pandemic following the approvals granted by the local planning authority in December 2019. The organisation is also working on a 42-hectare mixed use development in Ruwa.
The development permit was secured in 2020 and now the company is working on securing the sub-division permit. The office park project in Belgravia is also on the cards, having been affected by viability challenges. The organisation partnered with a health insurer and service provider to develop a bespoke hospital for the operator. The project is still at pre-construction stage. Selling of stands in Ruwa’s Windsor Park is ongoing.
JM: What have been the major obstacles in your dream projects?
GM: The Covid-19 pandemic significantly affected the implementation plan for most of our projects in two ways.
Firstly, we were forced to defer commencement of the projects following the lockdowns. The proposed Charter House boutique hotel, for instance, is through a partnership with a Chinese-based operator.
The operator hasn’t been able to get approval from its government to come and commence works on site due to Covid-19 restrictions. Secondly, the Covid-19 pandemic has lowered economic activity marked by a negative GDP growth in 2020. What it means is the value of our completed developments have gone down against a static cost of development. Essentially, projects that were forecasted to be viable in 2019 are now unviable thanks to the Covid-19 pandemic.
In addition to the Covid-19 effects, the general economic challenges the country has been facing before the Covid-19 pandemic also affected our projects. The hyper-inflation, currency uncertainties and policy flip-flops all negatively affect new and existing real estate investments.
There have been challenges as well in accessing long terms and competitively priced international funding from your IFC (International Finance Corporation), Shelter Afrique, Swedfund and other long-term international infrastructure financing institutions. These organisations are actively financing real estate developments in the region. Real estate development by its very nature is capital intensive and it needs competitively priced, long-term and patient funding. There is a general dearth of such funding in the local capital market.
JM: How much have you committed to your capex investment in the past five years?
GM: The numbers fluctuate depending with the projects coming out of our pipeline and also major rehabilitations to our existing investments. The property cycle has also been going through a downturn with demand of space decline, thereby reducing demand of new stock. We however are looking forward to the economic rebound which should see us churning more projects out of our pipeline as there would more takers of the new developments.
JM: What can you say about the return on your investments so far?
GM: Generally, our property returns in Zimbabwe are lagging behind the region, which mirrors the low economic activity in the local market. We are however encouraged by the stabilising economy and expectant that the authorities will continue on its thrust on disciplined monetary and fiscal measures.
Most importantly, we need to keep restoring confidence in the market. This should see our property returns as a country leapfrog the regional returns. Locally, we are fairly happy that we continue to deliver reasonable capital and income returns to our shareholders. The organisation will keep scavenging for opportunities to further enhance its returns to shareholders and value to all our other stakeholders.
JM: What’s your comment on the implication of currency changes on rentals and the sector at large?
GM: The ushering in of the dual pricing regime through Statutory Instrument 185 of 2020 was greatly welcomed by the property market in various ways. Firstly, for the investment sub-market, which deals with valuation of the various interests that are traded in the property market, SI 185 of 2020 helped improve access to market information.
Before the SI, most freehold and leasehold sales transactions were taking place clandestinely as SI 142 of 2019 had outlawed transactions in any currency other than the Zimbabwean dollar, which has been highly unstable. However, no rational property owner would sell, even if they have to, an inflation-hedging asset in a currency that would result in them losing value in real terms as the transaction is taking place. The dual pricing regime therefore led to property sellers openly marketing their assets in a stable currency. Most superior assets which were withdrawn from the open market following SI 142 of 2019 were taken back to the market by their owners following the dual pricing regime. The property market thrives on transactions.
Secondly, for the occupier sub-market charging rentals in a stable currency helped preserve value for investors, which, in turns, helps refurbishing the assets and also deploy revenues towards new developments. As a result, property market returns significantly improved and, to an extent, narrowed the gap with regional peers.
Thirdly, in the development sub-market, the charging of rentals in a stable currency in the occupier sub-market led to improvement in project viability. What has also been clear is that construction materials continued to be sold at US dollar-benchmarked prices even during operation of SI 142 of 2019.
So when appraising new developments you have a scenario where your construction costs is US dollar based against rental income that is Zimdollar based. As such, you end up with a situation where most projects in the market are not viable as cost is higher than market value. This resulted in a situation where perhaps only projects that were motivated by other primary reasons other than purely investment would see the light of day. For instance, owner-occupiers would have a dual motivation of satisfying own utility through use and partly investment. This explains why construction activity in Zimbabwe is currently dominated by house construction as the motivation to use the completed house is greater than the investment motivation.
In summary, SI 127 of 2021 and the broader intention behind it, which the market greatly fears, reverses all these gains in the property market. The SI unfortunately provides a fertile ground for arbitrage in the property market where, for example, a tenant receiving 100% of their revenue in US dollars opts to now pay in Zimdollars.
Over time, the landlord is unable to keep up with enhancing functionality of the property through regular rehabilitations. This, in turn, might affect the tenant’s operational efficiencies and capacity to generate revenue. It is therefore important for both landlord and tenants to exercise fair, ethical and mutually beneficial and enduring business practices in light of the policy flip-flops. The inherent problem of arbitrage practices in a long term business relationship is the real danger of killing the goose that lays the golden eggs.
JM: Do you have any regulatory challenges in the sector? Kindly share.
GM: In addition to the currency issues, the industry also has to contend with archaic town planning regulations and building bye-laws which need review. For instance, whilst the government has been encouraging vertical development as a way of containing urban sprawl and invasion of the green belt urban land by human settlement, very little has been done in terms of reviewing the various local plans dictating the bulk factors or permissible building height across the city zones.
There is an urgent need for the key city stakeholders to come together and have a working forum to share thoughts and come up with a holistic and shared vision for our cities going forward. At the moment the various city stakeholders have no one vision for all our cities across the country. It is not enough to say ‘Sunshine City by 2025’ without a working and shared implementation plan by all stakeholders to realise the vision.
JM: What’s your outlook for the rest of 2021?
GM: Whilst the economic fundamentals are all seemingly pointing northwards, the Covid-19 pandemic looks set to dominate economic themes, at least for the remainder of 2021. We also hope that the authorities, in resolving certain unfair market ‘monetary’ practices, will keep up the good work so far on the monetary and fiscal fronts. Otherwise, the economy is showing early signs of recovery amid inherent macro-economic fragilities.
