Pensioners deserve better in property market

The latest strike against pension funds and their pensioners, who lost a significant fraction of the assets funding their pensions during hyperinflation, is the dramatic fall in the assessed value of the property assets over the last six or seven years.

These property assets were seen as at the very least an inflation-proof asset with the more general belief being that they would grow in value in real terms.

But at the recent meeting of the Zimbabwe Association of Pension Funds, the bad news was that the value of property assets held in the insurance and pension sectors has dropped almost half from US$1,5 billion in 2014 to US$785 million by September last year, with no sign of a new boom in sight.

Even more worrying, the value of these property assets in the two sectors is just 82 percent of the 2009 value, when insurance companies and pension funds started counting what had survived the meltdown in hyperinflation, when the large holdings of bonds they had been told to buy were worth precisely zero, and had in fact been paid off at well under a trillionth of their purchase price.

What was left to fund pensions were the property and equity assets. Everyone knew that in the last days of hyperinflation equities had been overpriced, simply because people with cash were so desperate to preserve something from the meltdown, but after the correction they were stable for some years and even now they appear, in the long run and if you chose the right shares, to be at least tracking inflation.

But those huge property assets defied what now seems to be a naïve expectation that property values would automatically rise.

One problem highlighted at the seminar was that holders of property for investment were doing very little with that property, that is they were not adding value.

Some pension funds were complaining about valuation methods, but the reality check comes when you want to sell an asset. How much will buyers pay, and sometimes you need to figure out if there is a buyer to start with.

With equities this is easy. You simply look at the latest price. And to avoid the distortions of bull and bear runs you can examine a bit of historical data to establish trend lines and you get a fairly accurate picture.

For property there are many other factors, starting with market prices for the particular sort of property, then feeding in replacement values, land values, costs of rehabilitation for many buildings, costs of conversion perhaps.

The message that arises from the observation that too many property investors have done little to add value suggests that passive investment is no longer good enough. Property now needs to be managed actively.

There are many other factors. The first is the old warning that the three most important facts in property values are location, location and location. This is perhaps somewhat extreme, but it matters.

If your investments were property with commercial rights near Borrowdale shopping centre, for example, then your land values are rising and commercial building investment is not a bad bet.

But one major problem facing many property holders is that some of the big stuff is in Harare city centre, and even a fair amount of flat property in the Avenues is not growing in value that fast, since rental incomes are constrained and most of those with big incomes are looking in other areas when they rent.

Some modern buildings in Harare city centre, especially on the eastern fringe and along Samora Machel Avenue, that are well maintained and have a lot of on-site parking still produce reasonable rents, but probably do not have sale values close to replacement value.

But there are a lot of buildings from the 1950s onwards that now need major rehabilitation, starting with new lifts and wiring, but possibly are not worth the effort as they have no on-site parking.

Many that are almost full of tenants rely on the informal sector, with regular, but fairly low rents. There is cash-flow of a sort, but little long-term growth and no incentive to upgrade.

Some more innovative investors are looking at conversions along with rehabilitation, with student accommodation being one bright suggestion where there is high demand and the lack of parking is not a factor. At least these investors are thinking and their pensioners might get some monthly payments.

Pension funds were never much involved in the smaller single storey and double storey buildings that dominate the south and west of the city centre, although private investors are obviously making money from these, and are putting in a lot of work to make them attractive to the booming SME commercial sector.

Again the huge boom in office conversions in the inner ring of suburbs has been to the advantage of private investors, buying an old railway-worker’s house in Eastlea for example, or rundown premises in old Avondale, and then extending and drastically modernising these and converting them to professional offices, although many of these conversions are the professional partnership doing the buying.

Residential property tends to hold value better, as there is a shortage, so something close to replacement costs can be used, although minus any deficiency in maintenance, but again location is important.

The shortages of commercial property are largely around the sort of premises that a company can use for sole occupancy. Office parks in the right area are still holding value, but less obviously.

But the funds were never big on residential property, with those that did balance portfolios hit by rent freezes in inflationary eras, now seen as a mistake as that killed much residential investment, and private landlords charging more than the investors would have gone for, so no one won.

The advice that property investors cannot just sit on holdings, but must add value makes sense. The complication is what sort of value, and further calculations on the pay-back time for those additions of value. This needs new thinking.

Sighing for the good old days is not really an option, and praying for a property boom is not going to help everyone. Even if there is a boom there is still a significant block of property that will not reach its old values, unless there is an accompanying dramatic change in use, and someone making the right guess as to what will be the profitable change in use.

Meanwhile, as usual, the pensioners get the short end of the stick because people guessed wrong.

They put in money over 40 to 50 years to have a comfortable retirement, and now find this is not an option and that Genesis had it right all along: “In the sweat of thy face shalt thou eat bread until thou return unto the ground.”-Herald.cl.zw