Creative property investment needed

People with money should be investing rather than just keeping cash stacked up in a bank, or even with a lot more risk in a safe or trunk, and even playing the stock markets without seeing new flotations does not really add wealth, just moves it around.

In the past property was considered a first class investment, largely preserving value while generating an income from rents, and to a certain extent this is still the case, but mainly from those who already have investments made years ago, or those who buy something built years ago. What is missing is a lot more new building.

There has been some, and the start of the real estate investment trusts, the REITs, has started making a small difference by bringing in new money from mid-sized investors.

But the preferred investment is still the shopping mall and complex in a good location in an up-market suburb.

This is fine, as these do provide a good return on investment, although probably reducing the volumes at older shopping complexes nearby.

But keeping the competition going and making sure that those who built 40 years or more ago stay in the picture is not a bad idea. But it does create limits.

The older shopping centres tend to have limited parking, and more importantly tend to have vendors and hawkers who can be difficult although efforts have been made in some by groups of shopkeepers to teach vendors not to be too pushy, not always successfully. Newer investments have guarded parking and zero vendors, and that does attract more affluent shoppers.

But the market is limited and while it is growing as residential densities rise with the growth of cluster housing, and the now total retreat of affluent suburbanites from the city centre, the battle between shopping complexes is largely over market share, rather than increasing the markets.

So we do get some older shopping centres that have largely become just a few small down-market stores, or have managed to hang on as providing a home of sorts for service industries next to the bottle store.

While new property is very rare in the city centre, many property owners, and these include those who have bought up older buildings recently, have found ways of making money by sensible sub-divisions into small shops and take-aways.

And of course we have the descendants of Thomas Meikle who have converted some of their old department stores into modern supermarkets and converted other property into small business centres.

Old Mutual, with the Eastgate Market, even managed to create a brand new very large complex as a worthwhile investment. But that is rare, as was the major building investment by the late Mohamed Musa down Guy Clutton-Brock Avenue a decade ago.

There has been some investment in industrial areas, building complexes of small industrial units or converting a near abandoned factory into such units.

There is demand and there are very few “to let” signs, so presumably these investors are getting a return and the new industrial companies might be small but there are a lot of them, so between them they are doing a lot of business.

On commercial and industrial rents, the system used by supermarkets could be expanded. Most supermarkets renting their space pay a fixed percentage of their turnover as rent.

This requires trust, and the opening of respectable accounts for examination, but it has worked. It might be possible to move this to smaller businesses.

On the residential side there is almost nothing on new property for long-term rent. Developers are not idle and have been building cluster complexes, and even blocks of flats, but these are mostly for sale on sectional title.

The business appears to be good, but the profit is on the capital gain when the units are sold, rather than on creating a stream of rents.

Many of the units are bought by smaller investors, who are buying to rent out, but there is that perennial problem for small investors in property of concentrated risk.

They are reliant on other owners in a complex agreeing to proper maintenance and improvements, and even to paying rates.

Zimre and the Mining Industry Pension Fund in the 1990s led a major revival in building blocks of flats for rent, sometimes very large complexes. They were keen on diversifying their property portfolios to have a decent mix of commercial and residential development under good management.

They used architects who were able to create low-maintenance finishes and applied the good management, all the way down to no laundry on balconies.

But in the end they were finished in the earlier years of hyperinflationary era by the then Rent Board, which refused to allow maintenance of the value of rents, which would have required frequent increases.

The board concentrated on affordability of rents to sitting tenants, not an evil position but one that did wipe out the value of the investment.

The result was, just as the rent freezes did in the early 1980s on the many Avenues and Avondale older blocks, to force owners to create sectional title and sell off the units.

Rents actually then rocketed as new unit owners individually shoved them up, so the tenants never won, but all that happened was a conversion from large well-managed investors to small investors who did not have the time and resources for tight management.

Dollarisation created the new order of rents denominated in US dollars, and often tenants forced to pay in US dollars or, in exceptional circumstances at the black market exchange rate. But there are still no new major investments in rent residential property.

Here there appears to be an opening in the more pro-business environment of the Second Republic.

The Government is still keen on home-ownership, but is also open to business proposals that are fair and meet demand, and it should be possible now to build new residential complexes for rent but with the rents maintained in value. This is an opening for larger pension funds, insurers and the new REITs.

Generally speaking a complex under a single owner is better managed and maintained; at the very least there are no deadbeat unit owners who will not pay levies and care only for their monthly rents with zero new investment. All owner associations have these members and they are a major nuisance.

The other interesting point is that single-owner complexes end to have lower rents than those with each unit under a single owner. The big investors, while not wanting to minimise rents, are usually better able to manage costs and in any case are looking at a fixed percentage return on their investment, so offer no special deals but on the other hand are unwilling to gouge tenants.

The problem of security of that investment has to be addressed, and trust built up that there will not be sudden irresistible pressure to sell to sitting tenants or convert the property to some sort of scheme of rent-to-buy.

Those have their place but we need both. By now everyone should have realised that rent controls are not very effective, simply slashing investment, and the way to keep rents rational is not to have shortages, or severe shortages, of property for rent.

This brings in the proposals occasionally circulated of converting some of the nearly empty city centre office blocks to accommodation.

The lack of parking makes that difficult, but proposals that an office block could be converted to a student hostel, with students rarely having a car, does open possibilities. Harare has three universities and several large technical colleges, and student accommodation on campus is far below demand.

Respectable, secure accommodation, even if the rooms are tiny, just big enough for a bed and desk, could be profitable at rents affordable by a student. Certainly planners should be open to such conversions.

The ground, and possibly first floors, would remain commercial although some of the businesses would cater for student tenants up above using a communal bathroom and kitchen on each floor.

Even new building of student residences near universities and colleges could be profitable, if suitable land could be found.

Management would have to be tight, as some young people are a bit careless and robust in their experimentation of alcohol and freedom, but sums need to be done to see if this would work out.

In other words, the markets have already created opportunities for some investors with those city centre shop conversions, the odd new market-style complex, the industrial units and the upmarket suburban shopping centres. But these are limited.

More property investment, particular for residential, or combined commercial and residential, could be an option once again in the new environment.-ebusinessweekly