Mashonaland Holdings Limited (MASH.zw) 2022 Annual Report
I am pleased to present the Mashonaland Holdings Limited inflation adjusted financial results for the year ended 31 December 2022.
The economy recorded subdued growth in 2022 mainly due to the unstable macro-economic environment. The exogenous factors, such as the increase in international prices of oil and food continued to negatively impact the operating environment. At a local level, the combined effects of continued inflationary pressures, power supply disruptions and currency volatility continue to stifle economic recovery, Year-on-year inflation was at 60.6% at the beginning of the year, accelerated to 191.6% towards the end of the first half of the year and closed the year at a high of 243.8%. The inflation trend closely mirrors the annual growth in money supply which was estimated at 400% according to statistics released by the Reserve Bank of Zimbabwe. There are market concerns that inflation will remain on an upward trajectory in light of the expected growth in money supply during 2023.
The market continues to witness marked disparities in the pricing of goods and services depending on the currency of settlement, with an increased number of transactions being settled in foreign currency. These market dynamics present cost-push pressures which require the Group to continue to focus on increasing efficiencies while pursuing its portfolio diversification strategy.
The property market continues to evolve for survival in response to the headwinds in the mainstream economy. The incessant macro-economic challenges have seen some sectors within the property market failing to provide an automatic hedge against inflation. The retail and sub-urban office park sectors have proved a safer bet in the past year. The CBD office sector has seen rental growth significantly lagging inflation. The ability to hedge, however shifts between different subsectors as economic conditions and structural factors come into play. Whilst demand-driven inflation in the past has boded well for real estate in terms of hedging against inflation, supply side shocks, such as the increase in food and oil prices are more difficult to hedge as tenants rent paying capacity is invariably impaired.
The occupier sub-market is expected to continue endearing itself with the informal sector through, among other measures, reconfiguration of low-rise buildings in the CBD into small to medium enterprise miniaturized retail facilities as demand for such facilities remains positive. Demand for warehousing and purpose-built industrial space as well as suburban offices has been steady though there is very limited potential of rental growth in real terms.
Frequent rent reviews, indexation and charging of rentals in USD, as the economy continues to dollarise, are some of the measures the occupier submarket has adopted in order to ensure inflation hedging. This attribute has attracted more investments towards specific pockets of the property market such as small sub-urban retail sector as opposed to the traditional, large and capital intensive centrally located retail malls. In the development sub-market, construction cost remains high mirroring the inflationary trends and high interest rates. However, capital values remain under pressure. As such, new developments for investment purposes remains under pressure for viability.
Inflation adjusted financial performance
Revenue for the year increased by 98% from ZW$1.9billion to ZW$3.8billion. The revenue growth was mainly driven by revenue earned from the Mashview Gardens cluster housing development amounting to ZW$1.2billion, which contributed 30% of the revenue performance. Rental income increased by 34% to ZW$2.6billion, despite the comparative period being longer following the change in financial year end in 2021, thereby also contributing to the improved revenue performance. The increase in rental income was driven in part by periodic rent reviews to align rentals with obtaining market conditions and also improved occupancy which grew from 81% in 2021 to 87% in December 2022.
Operating profit before fair value adjustments increased by 243% from ZW$ 1billion to ZW$3.5billion. The increase in operating profit was partly due to foreign exchange gains of ZW$3billion which were realized on foreign currency balances on hand following disposal of Charter House. Consequently, the Group’s operating profit margin increased from 53% to 93% in 2022.
The Group recorded a profit for the year of ZW$17.2billion versus a loss of ZW$4.8billion recorded in 2021. The improved performance was due to the improved operating profitability and 39% capital gain recorded on investment properties.
The Group’s investment properties were valued at ZW$67billion at 31 December 2022, the valuation represents a 39% capital gain for the year. The capital gain was achieved through the Group’s periodic rent reviews to hedge against rising inflation as well as firming values for the Group’s strategically located land banks. This realignment is reflected in the growth in rental income in inflation adjusted terms. The Group’s investment properties were valued by EPG Global, an independent and professional property valuer.
New property investments and projects
Pomona Wholesale Centre development
The Group acquired a 4ha site in Pomona for the development of a wholesale centre. The pre-construction phase works including design development, Environmental Impact Assessment (EIA) approvals, building plan approvals and tendering are almost complete. Demolition of existing structure is underway with works for the new development targeted to commence in April 2023. The Group has pre-leased 85% of the proposed development thereby effectively eliminating the inherent market risk.
Acquisition of a 2ha Office Park land along Borrowdale Road
The Group acquired a 2ha site along Borrowdale Road for the development of an Office Park as part of the Group’s diversification and growth strategy. The Group intends to appoint a project team by the third quarter of the year to commence pre-construction works. The Group intends to commence site work in the second quarter of 2024 after the completion and substantial progression of some of the current projects.
Mashview Gardens cluster housing development
The Group completed construction works on the 1st phase of the project and is set to complete construction work on phases 2 and 3 in the second quarter of 2023. All the 25 units were pre-sold prior to development.
Milton Park Day Hospital project
Construction works on the development are progressing in line with the construction programme and are set to be completed in August 2023. The hospital development was borne out of the Agreement to Develop and Lease entered into with the identified medical services operator.
Charter house disposal
The Group disposed of Charter house during the financial year as part of its diversification strategy, which entails reduction of Harare Central Business District (CBD) office exposure and deployment of the sales proceeds towards development of strategic investment assets in line with emerging market needs.
The Board declared and paid an interim dividend of ZW$141,782,393 during the year. The Board has further declared a final dividend of ZW$212,404,088 payable from the Group’s profits for the year. From this final dividend, a component amounting to US$200,000 will be paid in foreign currency.
The Government of Zimbabwe has forecast that the economy will record a 3.8% growth due to the positive effects of a favourable rainy season during the 2022 to 2023 farming season. It is however noted that the resurgence of COVID-19 infections in developed countries and global supply chain disruptions emanating from geo-political tensions in Europe as well as the ensuing harmonized elections in 2023 may have a negative impact on the speed of economic recovery in the short term. The Group’s strategic focus will remain targeted at delivering on its long term strategy which is hinged on portfolio diversification and increasing operational efficiencies to ensure sustained business growth.
On behalf of the Board, I express appreciation to our valued tenants for their continued loyalty and all our other stakeholders for their support. I also thank my fellow board members, management and staff for their continued dedication.
Eng. G. Bema
16 March 2023
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