Property prices to remain high: OMSEC

PRICES of property materials are expected to remain high during the third quarter due to high financing cost, financial service company Old Mutual has said.
In its portfolio manager’s report for the second quarter, Old Mutual Securities (OMSEC) said the property sector was facing low demand in the housing market and property-related fixed assets due to high rentals and building costs.
While returns on properties exceed inflation and other investment vehicles, few in Zimbabwe consider buying a property as an investment beyond securing a family home due to the costs.
There is also a small mortgage market in Zimbabwe, resulting in stunted growth in the construction industry as many do not qualify for loans. The high costs to return ratio, rising inflation, lack of alternative investments and low real incomes has resulted in the property sector developing slowly.
“The short term should prove difficult for property companies but improved economic activity in the medium to long term should benefit the sector,” said OMSEC.
The country’s economic environment is characterised by suppressed Gross Domestic Product growth rates, company closures and a liquidity crisis. At sector level, the property market is characterised by declining occupancy levels, increased tenant evictions and space surrenders.
Under such circumstances, one would expect property companies to under-perform. “We maintain that comparatively higher financing costs as well as the high cost of building materials for new property developments will see property prices remaining high compared to regional peers,” it said.
OMSEC said the property sector is not expected to grow significantly in the short term.
Significant investment is needed in the sector to reignite growth. The sector is used as one of the barometers to measure economic development in any country.
Zimbabwe Stock Exchange-listed property counters have been experiencing mixed trading this year as investors appear to favour short-term investment counters.
Analysts cited the persistent liquidity crisis as the reason why investors were not attracted to property counters, which are usually long term investment options. Common investment strategies suggest that in any environment, investors hedge against negative real returns by seeking refuge in non-interest bearing assets such as equities, the property market and the currency market.
OMSEC said it maintained that notwithstanding the foreign currency bottlenecks, if the continued optimism and pro-business policy direction was maintained by government, the equity market should recover with upside pockets of opportunity in companies that produce competitive products as well as commodity based companies that can reign in their costs.
“The increased use of plastic money is expected to continue to benefit financial services companies with the accompanying earnings growth from fee income expected to be sustained with the on-going cash shortages,” said OMSEC.
The research unit further indicated that money market interest rate spreads are expected to improve for players that on-lend to primary government issuances.
“We do, however, expect that the overall cost of local borrowings will continue to trend lower given the Reserve Bank of Zimbabwe’s interest rate ceilings, moreso for borrowers that are of a better credit worthiness,” they said
Going forward, OMSEC said the equity sector remains attractive in the short to intermediate term while money market yields are expected to improve for entities that can invest directly in government and quasi government paper.
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