Real Estate 2023 in perspective?

  • 12 months ago
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In 2023, I certainly have not turned into a fortune teller. Prophet or crystal gazer in my efforts to give you insights on the real estate industry in 2023. The past and present always have a way of telling us what the future holds. Having made a decision to unravel the obvious, I will use the key frequently asked questions
method to enhance our understanding of Zimbabwe’s real estate in 2023.


Is the property market going to crash in 2023? This question comes from assuming our property market is overpriced and should self-correct under some pressure. Before tackling that question, we need to go to the basics and ask, what are the fundamentals that support the property market? There is an incredible number of factors that affect the property market and it will be worth our while to focus on the big issues such as changes in the size of the population, state of the economy, interest rates, real income, and infrastructure development projects.


Demographic Issues
The demand for real estate largely emanates from the population (demography) and its capacity to pay (Economic issues) and currently Zimbabwe’s population is estimated to be slightly over fifteen million people with an annual growth rate of 4.38%. Of that, 5.7 million are believed to be urbanites with an annual population growth of 2%. Harare, the capital city has a population of more than 1.5 million. In
accordance with the National Statistical Office, the number of households reached 4.07 mil in 2020 in Zimbabwe which was 3.20% more than the previous year. In 2005 Zimbabwe’s population density was similar to that of Africa’s average at 31 people per square kilometre and now it is 38.6 people per square kilometre, which is slightly lower than the continental average of 45.8 people per square kilometre. A rise in the population density has a direct impact on house prices. Relating to the Zimbabwean situation, property prices have recently been seen firming up.

The age structure population distribution in Zimbabwe is as
follows,
0-14 years: 38.32% (male 2,759,155/female 2,814,462)
15-24 years: 20.16% (male 1,436,710/female 1,495,440)
25-54 years: 32.94% (male 2,456,392/female 2,334,973)
55-64 years: 4.07% (male 227,506/female 363,824)
65 years and over: 4.52% (2020 est.) (male 261,456/female 396,396)

An analysis of the Zimbabwean population age structure shows that the 20 to 45 years age group, assumed to be the property buying age group, with an estimated population of above 4 million and an annual growth factor of 2%, an estimated annual injection of 60,000 new housing units is inevitable. This would be loaded onto the existing gap of 1.5 million on the national housing backlog. There is a huge
opportunity for real estate players to provide housing solutions to this under-served market. With the largest population group being 0 – 14 years, Zimbabwe’s young and growing population will help create a sustainable demand for real estate.


One may ask about the impact of unemployment on the demand for housing, but the key question is what sustains the economy? The overlooked answer is the informalsector. World Economics estimates the size of Zimbabwe’s informalsector to be 64.1%, and that is a vote of confidence on the future of the real estate industry.


It is thus safe to conclude that going forward, there will be an increasing demand for residential accommodation and inevitably supporting services and infrastructure. Come the year 2023, the gap in housing between supply and demand looks set to widen, making the prices inelastic, particularly for first-time buyers who lack both alternatives and bargaining power.


Geopolitical and Economic Issues
“Continued geopolitical uncertainty provides significant headwinds to the economy. The longer it takes to moderate, the greater the negative implications for real estate.” Constantine Korologos. Quantification of the direct implications of geopolitical risks on real estate can be challenging. What is clear is that every risk, be it a geo-political war, global pandemics, rent regulation inconsistencies, or sustainability and renovation protocols will affect supply chains, production schedules, market activities, product demand, and disposable incomes, to mention a few. With properties being long-term investments, real estate stakeholders largely base their decisions on future economic factors. An anticipated revenue boon in a functional economy with affordable mortgage finance models is every realtor’s dream. In our case, unless addressed, a liquidity crunch, imported inflation, high-interest rates, and an inhibitive mortgage financing framework stand
in the way of realtors in 2023. The inflation situation is worsened by the fact that
the world is in the midst of a global energy crisis, with impacts that will be felt for
years to come. As such, as is the case across the globe, Zimbabwe’s real estate
industry faces transformational shifts as supply chains are yet to align to the impact
of global shocks on how buildings will be used, valued, and transacted in 2023 and
beyond. Globally, terms like “dual sourcing”, “near-shoring”, and “friend shoring”
are being used to describe collaborative efforts to manage the supply chain
challenges in real estate.


Consequently, the potential for a regional or global recession or stagnation looms—
and these impacts would be felt across the sectors. The IMF estimated the Global
GDP for 2022 to be 3.2% which will slow down to 2.7% in 2023. The analysis is found
inconsistent with the Zimbabwe scenario where, based on the World Bank
projections and analysis, in 2021 Zimbabwe’s GDP was 5.8% and projected to slow
to 3.7% in 2022 and projected to settle at 3.6% in 2023 and 2024. The good news
is that the projected marginal shrinkage of the GDP from 2022 to 2023 infers
stability in the property market considering that the real estate industry is generally
not sensitive to minor economic shifts and changes.
Coming down to mother earth, based on the real estate fundamentals, cost of
capital, capital availability, property prices, vacancy levels, leasing activity,

transaction activity, and rental rates, the general expectation is improved or stable
conditions for 2023. Key points drawing reservations include the 200% interest rate
regime that if not drastically reduced will see the property market remaining
stagnant and reliant on cash transactions which are not palatable with real estate
development. As alluded to earlier, mortgage finance currently has no impact on
the development or sales of real estate in Zimbabwe. The latest Reserve Bank of
Zimbabwe report on Private Sector Credit indicated the construction sector got the
least amount grossing only 1.39% of the total disbursed. Practical, reasonable
property finance options need to be created to enable the growth of the real estate
sector, which is an anchor sector for both industry and commerce.


Unlike in other economies, Zimbabwe’s property investment fundamentals are
bent on hedging instead of on economic growth and income generation.
Ultimately, the Zimbabwe property market is the biggest beneficiary of monetary
and financial policy proclamations and a general lack of alternative investment
instruments that can act as inflation hedges.


The role of institutional investors particularly in the pension industry has to be
accepted because of their significant contribution. However, they pose a serious
risk to the property market. For perspective, the backbone of the pension industry
is the monthly pension contributions. These monthly contributions are fast
shrinking in response to inflation, in the process creating a sudden glut of
properties on the market as pension funders struggle to meet pension obligations.
This is happening at a time when commercial offices in CBDs, Harare and Bulawayo
included, and industrial properties have become empty nests, or at the very least,
attractive under-priced rental fees, which is another risk to property owners,
including pension funders. Most of these properties are reluctantly withheld from
the market for hedging purposes. This has led to the influx of institutional investors
into the residential sector, adding market participants to close the supply gap as
they tap into the growing demand for residential properties. As a result, suburban
offices, shopping malls, and residential properties have emerged as the most
attractive risk-adjusted opportunities among property types over the next 12 to 18
months.

Regulatory Issues
The regulatory environment will have to level up in line with global trends. Real
estate firms should also voluntarily focus more on global best practices as
Environmental Social Governance (ESG) disclosure requirements become
mandatory and elaborate. EY Global was recently quoted as saying that “companies
failing to meet investor expectations on ESG factors risk losing access to capital
markets”.


The real estate sector has largely been trailing behind other sectors in terms of
managing their ESG compliance requirements. In 2023, real estate players should
anticipate potential regulatory changes, and adopt reporting compliance practices.


The commitment of the government towards environmental sustainability,
buttressed by the recent accreditation of the Green Building Council of Zimbabwe
to the World Green Building Council, and the UN’s launch of the US$45 million
sustainability fund in Zimbabwe present a perfect launchpad for sustainable
practices in Zimbabwe, particularly in the built environment which single-handedly
generates almost 40% of the world’s carbon footprint. In this case, a stakeholderdriven actualization of green building standards will not only address our
environmental and economic goals but will also create an attractive real estate
industry for local and foreign investors. An economic case in point is the positive
impact of progressive standards towards commercial and residential solar lighting
on our national, corporate and personal energy costs. Quoting Maureen
Ehrenberg, “Some of the practical consequences of what building owners and
business owners are facing and need to consider in their business continuity and
resiliency planning include rising insurance costs and increased investment in onsite energy resilience.” In 2023, sustainable valuation will take off, and the value of
green elements in buildings will be given significant value.


Among the goals of a commercial real estate owner, developer, or financial partner
is a clear, stable, durable, and predictable regulatory environment. Real estate
owners and operators seek to plan, develop, and operate real estate assets in a
regulatory environment that is largely free from rapidly changing regulatory
compliance requirements and development standards.


The best global property markets enjoy clarity, stability, durability, and
predictability. The source of regulatory uncertainty in the market is not only a
function of the changing administration politics, policies, and priorities but also
reflects the continued expansion of the breadth and depth at the administrative
level of the continued proliferation of statutory regulations addressing all manner
of real estate, land use, construction methodologies, and environmental priorities.


In this SDG era, the sustainable development of Zimbabwe’s real estate industry
now requirestransformative regulations that address water quality and availability,
GHG reductions and “net-zero” emissions mandates, wetlands regulation, clean
energy mandates and fossil fuel regulation, rapid transportation legislation, and the
production of much-needed market-rate and affordable housing.


Real estate service providers must therefore continually evolve and adapt to new
world order and client expectations including changes in the overall market as the
services offered are expected to expand.


2023 is the year, despite global economic contraction, chances of a housing market
crash are slim, demand will continue to grow, the market will move a step up in
embracing global best practices, and regulators will become more active to change
the fortunes of the market. Commercial office buildings are at risk just as much as
those in the industrial sector. Retail and residential real estate remain attractive
investment havens.


Article compiled by Mike E. Juru, the CEO of Integrated Properties. The views
expressed in this column are his own and in no way reflect the thinking of the
various professional bodies and associations that he works with. Mike can be
contacted at mejuru@intpro.co.zw or by cell at +263 773 805 000

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