CHAIRMAN’S STATEMENT

Economic overview

The economic and operating environment continued to evolve during the period under review, with various policy pronouncements designed to stabilise the economy. The introduction of the foreign currency auction system on 23 June 2020 led to relative currency stability. This has had a significant pass-through effect on annual inflation which declined from 838% in June 2020 to 348% in December 2020. The slowdown in inflation was also driven by restricted money supply growth, limited government spending and wage compression.

In addition, the introduction of Statutory Instrument 185 of 2020, allowing businesses to price goods and services in hard currency also provided short term stability and improved business confidence. However, rising inflationary and exchange rate pressures negatively affected real rental yields cost of doing business, property development and maintenance costs, and overall macroeconomic stability, particularly in the first half of the year.

The outbreak of the COVID-19 pandemic that disrupted the level of economic activity across the globe and global supply chains led to the imposition of national lockdowns, travel restrictions and temporary company closures. In response, this accelerated the use of digital platforms for people to work, communicate and collaborate during the lockdown period. It is also noteworthy that the COVID-19 pandemic negatively affected tourism and downstream industries, the informal as well as the SME economy.

The above developments had important implications for overall economic activity and the property market. At the macroeconomic level, real Gross Domestic Product (“GDP”) is estimated to have contracted by between 4.1% and 10.4%.

The Group continued to adapt its strategies to the evolving external business environment to deliver sustainable performance for the benefit of all its stakeholders.

Property market overview

The property market remained largely depressed with limited sales transactional activity, developments and demand for space. Opportunities to develop new products and lease existing products, especially the CBD office sector, remained constrained. Nevertheless, the retail and industrial segments remained resilient. The Office Park sector was stable with steady demand for space driven by product quality, location and supporting infrastructure.

The market experienced episodes of price discovery given the changes in the macroeconomic environment as well as demand and supply imbalances. Consequently, the search for a sustainable and economic rental pricing framework remained a key activity during the year.

Developments and property sales were strong in the residential sector. However, commercial transaction activity and leasing opportunities were low due to the decline in the service industry, particularly the corporates. The market has responded to the rising demand for space from the informal and SME sector by repurposing, adapting and developing spaces to cater for the special needs of this market segment.

The construction sector was also affected by the pandemic due to the need to comply with non-pharmaceutical health and safety protocols as guided by the World Health Organisation and national lockdown conditions to remain operational, while supply chain disturbances affected project timelines. The industry, nevertheless, remains wary of the high property development risk due to the oversupply of commercial real estate, limited project financing options and supply chain uncertainties. The few commercial developments on the market during the year have largely been equity-financed. Despite the shift towards remote working by corporates, experience to date has shown that this may not be sustained given power outages in residential areas and data connectivity challenges facing Zimbabwe. The preference for physical offices remains high, although the existing product needs to be adapted to become relevant to the emerging occupier needs.

Business performance overview

The Group’s inflation adjusted profit before tax grew by 50% to ZWL 3.288 billion (FY 2019: ZWL 2.189 billion) driven by growth in inflation adjusted revenue of 2% to ZWL 265.74 million (FY 2019: ZWL 260.67 million) and fair value adjustments on investment properties. The growth in revenue was driven by rental income generated from foreign currency denominated leases, increase in turnover rentals and rise in occupancy levels during the year. The overall occupancy level averaged 88.67% in FY2020 compared to 85.70% in the previous year, mainly due to new lettings in the CBD office sector.

COVID-19 response

The welfare of our employees, their families, and our community remains a top priority for the Group. The Group has introduced various measures to protect its employees from the negative effects of high cost of living, anxiety and stress caused by the COVID-19 pandemic. The Group undertook continuous review of the conditions of service for our staff, provision of protective personal equipment (PPE), psychological support and accelerated the use of digital platforms to enhance remote working and collaboration to sustain productivity.

In addition, the Group prioritised the safety of the tenants, with ZWL 32.99 million spent, targeting the maintenance and upgrading of space for new and existing tenants. This investment ensured that our properties remain safe for occupation.

The Group remains alive to the economic conditions facing its business partners including tenants. Against this, the Group suspended rental reviews in the second quarter of the year to allow its partners to absorb and manage the pressures caused by economic volatility and COVID-19 induced shocks in the first half of the year. Rentals were, however, reviewed in the second half of the year to protect the business and enable the Group to continue offering a quality product to its tenants.

Property valuations

An independent property valuation conducted by Knight Frank Zimbabwe as at 31 December 2020 valued the property portfolio at ZWL 9.40 billion, being a 50% gain on the prior year on inflation adjusted terms and 575% in historical terms on a market value basis. The gain was driven by fair value gains realised across the sectors with the highest gains realised in the land bank, retail and industrial sectors. The gains realised on the land bank are driven by re-zoning of a land bank from residential to commercial, while value appreciation in the industrial and retail sectors are due to improved rental potential and demand.

Developments

The Group is at pre-construction stage of the Arundel Office Park extension. The design development of the architectural plans has since been completed. The tender will be floated in the first half of 2021.

Sustainability

The effects of the COVID-19 pandemic created an extremely challenging environment for businesses and communities around the world. In such trying times, the Group has been able to rely on its long-term oriented approaches which we have nurtured through adopting sustainability. This year saw health and safety become a significant priority for the business as we sought to eliminate exposure to the COVID-19 virus and preserve life, paying attention to both physical and mental health. The business remains determined to generate positive impacts on the issues that matter most for our business and stakeholders. We have an unwavering commitment to managing the property portfolio with minimal negative social, environmental and economic impacts.

The Group remains dedicated to operating sustainably by adopting eco-friendly practices and managing the property portfolio with minimal negative social, environmental and economic impacts. This initiative was started during the year beginning with the introduction of waste separation infrastructure at selected buildings. This measure will be rolled out to all buildings in the short to medium term. Furthermore, efforts to reduce carbon emissions using renewable energy solutions are currently underway, starting with a 150KwH renewable energy system at First Mutual Park. Going forward, renewable energy solutions will be initiated across the property portfolio.

Dividend

At a Meeting held on 5 May 2021, the Board resolved that a final dividend of ZWL 14,229,408 being ZWL 1.1505 cents per share be declared from the profits for the quarter ended 31 December 2020. The dividend will be payable on or about 25 June 2021 to all shareholders of the Group registered at close of business on 18 June 2021. The shares of the Group will be traded cum-dividend on the Zimbabwe Stock Exchange up to 15 June 2021 and ex-dividend as from 16 June 2021.

This final dividend represents a dividend per share of ZWL 2.0332 cents per share bringing the total dividend for the year ended 31 December 2020 to ZWL 25,146,742.

Outlook

The Group maintains a positive view of the economic, sectoral and business outlook.

Positive Real GDP growth is expected in 2021 due to the anticipated good agricultural production, firming commodity prices as well as inflation and currency stability. Curtailing the further spread of the COVID-19 pandemic and re-opening of the global and national economies is vital to stimulating economic recovery in the short term. This is particularly so, given the strategic importance of natural resources and the SME sector to the economy.

The commercial real estate segment is expected to remain an occupier’s market due to excess supply of space. Rental yields are expected to remain weak due to the slow nature of rental price discovery, coupled with limited upside on rentals due to excess supply of space. The recent revaluations of properties will further apply pressure to any growth in yields and rentals should grow gradually. However, rental yields for prime assets are expected to remain competitive due to limited supply of quality prime commercial real estate.

Capital preservation with growth into selected sectors will remain top priority to ensure long term sustainable earnings and distribution to shareholders. The introduction of Real Estate Investment Trust (“REITs”) legislation presents an opportunity to access wider funding options to undertake new developments and enhancing transparency in the property market, while also creating further diversification opportunities. These are emerging opportunities that the Group seeks to explore.

The Group remains focused on further strengthening its competitive advantage by differentiating its existing products and enhancing tenant experience. The Group will continue to place emphasis on repositioning its property assets through planned maintenance and refurbishments, while the addition of new product through developments remains the key driver to optimising the property portfolio mix and ensuring regular and predictable distribution of earnings.

E K Moyo
Chairman
5 May 2021

Download full Abridged Financial Results

FMP 2020 Abridged financial results.pdf

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Directors: E K Moyo (Chairman), A M Chidakwa, D Hoto, S Jogi, C K Manyowa*, W M Marere, E Mkondo, T Ruvingo, S Wekwete (* Executive Director)
First Mutual Properties, First Mutual Park, First Floor, 100 Borrowdale Road, Borrowdale, Harare, Zimbabwe | P O Box MP 373, Mt Pleasant, Harare | Tel: +263 (242) 886 121 – 4 | Email: [email protected] | Website: www.firstmutual.co.zw | Whatsapp: +263 778 917 309