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Property value under pressure from inflation

BY TATIRA ZWINOIRA

PROPERTY investment firm Mashonaland Holdings Limited (MHL) says the depreciating exchange rate and soaring inflation pressures have negatively affected property income as well as values.

In a statement accompanying its results for the year ended September 30, 2019 MHL chairman Ronald Mutandagayi said property owners had now resorted to shortening the rent review period in order to salvage value.

“Despite the frequent reviews, the rent reviews have generally not been able to fully compensate for effects of inflation. Construction and maintenance costs surged as service providers continued to index their prices against the USD. Occupancy levels across the property sector remain under pressure,” he said.

“A marked reduction in arrears has been recorded as tenants take advantage of the exchange rate losses as well as rising inflation. Monetary policy changes and market volatility resulted in a slowed-down property sales market. Sellers either withdrew their good grade properties from the market or continued to peg property prices against the USD.”

He said this led to generally overpriced properties that were unaffordable for prospective buyers with the mortgages literally frozen out.

“Property yields continue to weaken as the property market cycle continues to trudge an extended trough and we forecast a sluggish market in the short to medium term,” Mutandagayi said.

During the period under review, the inflationary challenges only translated to a 1% growth in occupancy levels; to 77% from the comparative 76% recorded in 2018.

Further, the portfolio value of MHL shed-off 6% reflecting the increasing property investment risks impacting on the income earning capacity of the investment assets for the group.

“The CBD offices were the most affected, with notable resilience in land holdings and upmarket residential properties,” Mutandagayi said.

Property expenses were up to $3,7 million in the period under review due to a marginal increase in staff and void-related costs, this from a 2018 comparative of $3,5 million.

The inflationary environment also saw MHL recording an 83% increase in administrative costs to $5,7 million, from a 2018 comparative of $3,3 million, as the firm cushioned its workers against the rising cost of living.

Despite the negative effects of the devaluing local currency, MHL recorded a 28% increase in revenue to $17,6 million from a 2018 comparative of $13,8 million.

The growth was as a result of the 1% increase in occupancies and the group embarking on shorter-term rent reviews to hedge against the erosion of rental values.

The group also benefited from a revaluation of investment property that saw fair value adjustments gains of $979,1 million from a 2018 comparative of $417 162.
This saw MHL record a profit after tax of $939,12 million in the period under review from $6,94 million in the comparative 2018 period, though the huge change was inflationary.

Further, the fair value adjustment gains helped boost MHL’s assets to $1,27 billion from a 2018 comparative of $301,37 million.

Mutandagayi said management had developed a strong leasing pipeline for future development and existing vacant space and would continue implementing measures to attract tenants into the portfolio that has seen arrears decline to 9,4% versus 2018’s 30%.

“Management will continue to pursue targeted collection strategies to manage credit risk. In line with the portfolio diversification and value preservation strategies, the company acquired an additional suburban land bank during the year earmarked for the development of a pre-leased health facility,” he said.

He said the company had also set in motion its income diversification strategy that saw it obtain an estate agency licence.

MHL is currently working on several projects including the development of a 26-housing cluster facility, an office park and the revitalisation of Charter House to a five-star boutique hotel.

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