The Economy
Although the macroeconomic prospects remain positive, the key productive sectors of the economy were largely stagnant during the course of the year. Liquidity challenges persisted as the local capital market continued to be starved of meaningful capital inflows.
In the immediate term, the revival of the productive sectors presents real prospects for meaningful growth with the real estate sector expected to benefit from the increase in derived demand for commercial and industrial space. Until the productive sector revives significantly, the real estate sector will continue to face challenges.
The Property Market
The property market remained constrained by the limited overall economic growth resulting in low demand for office and industrial space. The economic challenges have hampered the growth of the real estate sector with limited mortgage finance available to support new property acquisitions and developments.
Rental growth for Central Business District offices and office parks has been adversely affected by the continued relocation of mostly small to medium enterprises to residential areas, business closures and voluntary space surrenders. As the economy shifted towards trading activities, demand for retail space in the Central Business District, warehouse type industrial space and small high street retail outlets continued to grow, encouraging major property refurbishments and developments. The development towards small high street retail outlets could well signify a permanent move towards a trading-driven economy. In the absence of significant new investment in the manufacturing sector, the decline in the demand for large industrial properties will persist.
Financial Results
Rental income increased by 9.4% to $8.83 million (2011: $8.07 million) due to new lettings, rent reviews and the reopening of a suburban shopping mall that was under refurbishment. As a result, the average rental per square metre increased by 11.6% to $8.18 (2011: $7.33). Rental yield eased to 8.6% (2011: 9.8%) as a result of the slower growth in rentals relative to investment property values.
Property expenses grew by 40.2% to $1.63 million (2011: $1.16 million) as a result of increases in general and specific provisions for credit losses and unallocated operating expenses. In spite of cost savings achieved in group shared services, business communications and computer expenses, administration expenses increased by 5.9% (2011: 15.8%) to $3.19 million (2011: $3.01 million) due to increases in general office costs, fees and other charges, depreciation expenses and employment costs. The Group will continue to explore opportunities to enhance internal efficiencies and accelerate cost containment in order to improve operating margins.
As rental income registered higher growth relative to administration expenses, net property income increased by 4.2% to $7.20 million (2011: $6.91 million), while net property income after administration expenses increased by 2.9% to $4.01 million (2011: $3.90 million). Operating profit before tax and fair value adjustment declined by 13.2% to $4.75 million (2011: $5.47 million), due to a 78.6% decline in investment income to $0.23 million (2011: 1.08 million). The decline in investment income was because the Group continued to focus on core operations by disposing equity investments to fund planned property refurbishments and developments.
At 31 December 2012, the value of the Group’s investment properties grew by 9.6% to $120.27 million (2011: $109.74 million) underpinned by improving quality of the refurbished space and increase in rentals.
The fall in fair value gain on investment properties and investment income resulted in a 51.5% decline in profit after tax to $9.03 million (2011: $18.63 million).
Property Management
In spite of voluntary space surrender and evictions, new lettings achieved in the year resulted in the occupancy rate improving marginally to 78.9% (2011: 77.5%).
Tenant arrears fell by 20.4% to 9.0% (2011: 11.3%) as debt management strategies resulted in improved cash collection. Efforts aimed at reducing arrears to sustainable levels continue with payment plans being negotiated with defaulting tenants. The Group will also monitor the quality of tenants.
During the year, the Group committed a total of $1.46 million (2011: $1.89 million) towards property refurbishment and maintenance. These initiatives are aimed at improving the quality of lettable space in order to grow or sustain rental income and improve occupancy levels.
Property Development
The Group completed the refurbishment of the George Square Shopping Mall at Kamfinsa Shopping Centre, Greendale, Harare with the achieved entry rental yield exceeding initial targets. The shopping mall was reopened on 21 June 2012 with Pick n Pay as the anchor tenant.
The Group is negotiating competitively priced long term debt from local and international funding partners in order to acquire identified commercial prime land located in Harare for property development.
Human Capital Development
In line with the Group’s focus on quality service and superior performance, on-the-job training continues for young graduate students supported by the granting of affordable study loans to those pursuing relevant academic and professional studies. The continued investment in human capital development is premised on the need to improve individual and team productivity and efficiency.
Dividend
While the Group recorded a profit and has cash resources at its disposal, your board has deemed it prudent not to declare a dividend for the year ended 31 December 2012 in light of planned property refurbishment and development which require significant cash outlay. The board will, in future, give priority to dividend declaration whenever it is deemed prudent to declare a dividend.
Directorate
At the Annual General Meeting held on 22 May 2012, Mr. A. Mlalazi, Mrs. N. J. Mugabe, Mr. J. P. Travlos and Mr. J. K. Gibbons were elected to the board. Mr. E. K. Moyo and Dr. C. U. Hokonya were appointed to the board, effective 1 August 2012. Subsequently, Mr. E. K. Moyo was elected the Chairman. Mr. M. Dube was appointed to the board effective 5 March 2013. You will be requested to confirm the appointments of Mr. E. K. Moyo, Dr. C. U. Hokonya and Mr. M. Dube to the board in line with the provisions of the Company’s Articles.
New Strategic Initiative
In order to add new income streams and take advantage of the existing human capital skills, your Board approved a plan to commence a real estate agency business with effect from 1 January 2013. The new real estate agency business will offer a wide range of property services that include commercial property letting, sales, valuations, development and project management to third parties. Limited capital investment into the new business is projected in the first year of operations and activities will largely be carried out by the existing qualified and experienced staff.
The new business initiative will be undertaken through Oyster Real Estate, an operating division of Pearl Properties (2006) Limited. Oyster Real Estate will leverage on the Group’s relatively strong reputation, brand and utilise existing local and international strategic linkages in order to sustainably grow stakeholder value.
The new business initiative, coupled with the ongoing cost management measures, are expected to boost revenue generation, improve margins and help contain costs.
Outlook
Your board remains optimistic about Zimbabwe’s economic outlook. The country has recently held a successful constitutional referendum which your board believes is a precursor to the holding of the free and fair elections. Your board believes that post elections, the country is poised for economic growth and with such growth, opportunities for the real estate sector will increase. Your company stands ready and able to exploit such opportunities.
Acknowledgements
On behalf of your Board, I appreciate the invaluable support received from stakeholders including our tenants, employees and service providers.
God Bless,
E. K. Moyo
Chairman
5 March 2013
Related download
FMP.zw – 2012 Annual report.pdf
