Zimre Property Investments (ZPI) says it made a provision for doubtful debts of $285 000 in the first six months to cover rent defaults after noting that most of its tenants, including banks, were struggling to pay rent and had no capacity to liquidate accrued arrears.
“The number of defaulting clients is increasing,” Edson Muvingi, ZPI managing director, said during the company’s analysts briefing after the presentation of financial results for six months ending June 30 on Friday.
“We’ve realised that tenants who default for two-three months are telling you they want to move. Giving these tenants eviction orders is helpless because by the time the order comes, there will only be a few chairs left to move out.
“We’re going to allow voids (unoccupied space) to increase to about 15% before we get worried. We’re keeping some space void to capitalise on potential large tenants that may be coming. The cost of occupancy is also high.”
The property company now plans to use its 107-hectare land bank acquired with funds raised from its initial public offering (IPO) in 2007 to diversify to property development, away from dependence on rent income, which has proved unsustainable.
“We committed everything from our IPO towards property development,” Muvingi said. “Rental is not moving; in fact, it is coming down. We have had to renegotiate rentals downwards with some of our tenants. The capacity to pay is not there.”
The IPO issued in July 2007 raised Z$554 billion or about $2 million.
The business development strategy follows realisation that business debtors remain significant as tenants face challenges in paying rentals while on the other hand most service providers demanded payment upfront.
This is despite simulations showing that rentals in the country are lower than regional averages, yet occupancy costs are highest in the country.
Muvingi said ZPI’s business portfolio diversification had already gone some way as the company has lined up a number of pipeline projects, which are at various stages of development.
These include the Rhodene Extension Project in Masvingo, involving the servicing of 372 low-density stands averaging 2 000 square metres by reticulating the stands with sewer and water.
The completion of the first phase of the project involving the servicing of 52 stands is expected to be completed at the end of this month at a cost of $620 000. Expected disposal value is projected at $800 000.
The second phase to develop 72 units would then follow soon after. The whole project is expected to be completed by December 2011 at a cost of $4,1 million.
Estimate disposal value after completion is S$5,6million.
In Bulawayo, the Parklands project of 132 stands has been completed and the stands are already on sale.
Proceeds from the disposal have provided initial funding for the first phase of the Rhodene Masvingo project.
Proceeds from the sale are estimated at $1,6 million.
The property company is also developing properties in Victoria Falls, Harare and Zvishavane.
According to a recent trading update to shareholders, ZPI chairman Buzwani Mothobi said property developers and investors eagerly await the turnaround of the financial sector as it will bring much needed financing for real estate developments as well as provide onward mortgage lending to beneficiaries.
“The economy is desperately starved of financing options with most of the finance available too little with very short term tenure and extremely expensive for projects,” Mothobi said.
ZPI cited uncertainty over the form and implementation of the Indigenisation Act and Regulations as having scuttled opportunities for direct funding and credit lines from foreign institutions.
The surge in inflation to an average year on-year- rate of 5,3% as of June 2010 from a deflation in December has resulted in an increase in property maintenance costs slowing down the undertaking of planned maintenance on properties.
During the period under review rental rates are said to have stabilised at $5 per square metre for offices and an average of $9 for the CBD.
Collection levels were up to an average of 74% up from 65% the previous year. Zimre posted a profit after tax of $318 000 compared to $12 700 for the comparative period last year and a loss of $4 217 for the year ended December 2009.