Real Estate Investments Zambia PLC ( 2019 Annual Report

We have extracted the Chairman’s Statement from the 2019 Annual Report for Real Estate Investments Zambia PLC ( , listed on the Lusaka Securities Exchange:


During the year, the country faced fundamental macroeconomic vulnerabilities which had pass- through effects on the rest of the economy. Key among them was the impact of climate change on electricity generation and agricultural production which led to spill-over effects on various sectors of the economy. The real estate sector was particularly not immune to these challenges. Economic growth was also affected by a decline in copper output, coupled with lower copper prices caused by a reduction in global demand.

The property industry in 2019 was generally challenging with market forces having an adverse impact on the financial performance of the Group. The industry was characterized with continued stagnation or downward rental rates reviews, slow collection of past due receivables and escalating vacancy rates or low uptake of vacant spaces due to increased release of new stock on the market without matching increase in demand. The industry experienced loss of value across most property sectors owing to the impact of a weak economy and an oversupply.

Economic challenges adversely impacted some tenants leading to accounts settlement defaults and accumulation of rental arrears. The arrears were aggressively and prudently impaired although efforts are underway to make optimal recoveries.

The Group’s operational focus in 2019 was primarily to consolidate performance of the current property portfolio to attain competitive yields. The current strategic window that seeks gross lettable space growth through expansion, developments and acquisitions was decisively suspended as the Group continues to approach the growth strategy with prudence under current subdued industry prospects.

REIZ remains resolutely focused on pursuing prudent approaches to driving the Group’s strategic agenda of maximizing returns and protecting shareholders value.

Financial results

With the above stated background, the Group achieved a net profit after tax of K19.8 million and earnings per share of K0.35, compared to a net profit after tax of K2.8 million and earnings per share of K0.05 in 2018. Detailed analysis of these results is tabulated on pages 22 to 27. Rental revenue of K67.4 million during the year (2018: K50.6 million) represents an increase of 33.2% and profit from operations achieved of K37.8 million (2018: K27.7 million) represents an increase of 36%. Overall, the net profit after tax at K19.8 million (2018: K2.8 million) was 607% higher. Earnings per share increased to K0.35 per share in 2019 from K0.05 per share in 2018. Consequent to increase in profits from operations as described above, headline earnings per share increased to K0.67 per share in 2019 from K0.49 per share in 2018.

Arcades Shopping Centre, the single largest revenue contributor to the Group, operated at its normal leasable capacity during the year after redevelopment project that straddled the past two consecutive financial years. Prior to redevelopment, Arcades’ rental contribution to the Group was 55% while the contribution in 2019 was 59% despite its average vacancy rate of 12%. Southview Park Housing Complex that was acquired in 2018 without a single tenant experienced a steady increase in occupancy having started the year with a vacancy rate of 100% to close at 32%. Central Park and Counting House Square experienced reduced revenue contribution to the Group due to increased vacancies closing at 40% and 51% respectively. Both properties are receiving special attention in order to realize optimal returns from them. Descriptions of the various properties in the portfolio are covered on pages 15 to 21.

The following fundamentals had significant positive impact on the operating results:

  1. Growth in rental income as a result of improved occupancy levels at the Group’s investment properties especially at Arcades after completion of the mall redevelopment and expansion project.
  2. Depreciation of the Kwacha during the year accounting for approximately 20.8% favourable impact on US Dollars based operating leases. The Group’s rent roll is approximately 90% US Dollar based. The average exchange rate in 2019 was K12.93/$ compared to K10.70/$ in 2018. In US Dollar terms, rental income increased by 10.3%.
  3. Kwacha value appreciation of investment properties due to devaluation of Kwacha from K11.89/$ at the close of 2018 to K13.95/$ at the close of 2019. The Group posted Kwacha revaluation surplus of K53.5 million on the investment properties, compared to valuation surplus of K26.3 million in 2018. Investment properties are valued in US Dollars the predominant currency of the operating leases.

Notable negative impact on the operating results came from the following:

  1. During the year, most annual rental escalations were not effected and in some cases, rental rates were revised downwards in line with market trends.
  2. Collection of historical rentals was very challenging leading to increase in impairment of receivables to K7.3 million compared to the 2018 amount of K4.0 million. The Board determined that despite t h e v ario s efforts employed by Management to collect past due receivables, the impairments were prudent and necessary given current operating and economic environments. The provisions for impairment are in line with the International Financial Reporting Standard (IFRS) 9 and were subjected to robust review by the audit and risk committee as well as external auditors.
  3. An increase of K10.9m in net interest expense as a result of a combination of increased borrowings to complete the Arcades mall redevelopment and the depreciation of the Kwacha against the US Dollar during 2019 which contributed about 20 % to the increased the Kwacha equivalent of interest on US Dollar liabilities.

The Group’s balance sheet remained strong anchored by its diversified property portfolio. Value of the investment property portfolio (including land banks and Right of Use assets) increased to K1.074 billion in 2019 from K978.7 million in 2018. The increase is attributed mainly to the depreciation of the Kwacha against US Dollar. The impact on Investment Property from fair valuation was a net increase of K53.5 million compared to an increase of K26.3 million in 2018. In US Dollar terms, the overall value of investment property, excluding Right of Use assets, reduced to US$74.0 million in 2019 from US$82.6 million in 2018, an US$8.6 million loss of value owing to downward shift in market rental rates. There was an improvement in vacancy rate from a portfolio vacancy of 29.1% at the close of 2018 to close 2019 at 21.5%, a 7.6% improvement. A breakdown of individual property values and vacancy rates is tabulated on page 21. The Group has 4 real estate sectorial exposures which include residential, commercial office, retail and warehousing. This multi-sectorial business strategy offers a firm footing to ride out different downturns in the real estate industry. With this diversification, when the industry goes through turbulence and some engines of the industry slowdown, we believe other engines will keep the pace and foster business sustainability.

The fair value of investment property was determined by external, independent professional property valuation experts Knight Frank Zambia Limited who possess appropriate recognised professional qualifications and have requisite experience in the location and category of the properties being valued.

Business Outlook

The property market outlook remains uncertain. Property is a cyclical business and the current deteriorating industry fundamentals are not likely to improve over the short-term. The property industry in the year ahead is expected to remain challenging with most of the market forces that characterized 2019 expected to continue to prevail in 2020. Occupancy, rental rates and collection of receivables are expected to continue to face downward pressures. The Group will therefore remain cautious about the overall sector and continue to exercise prudence in its business conduct. Operationally, the Group will continue with its focus on innovative and responsive business practices for sustainable performance. These practices will include among others:

  1. Rigorous leasing efforts to improve occupancy levels especially for properties that faced the highest challenges in 2019 particularly Counting House Square and Central Park. The measures being taken had already started bearing fruit by the close of the year 2019.
  2. Rigorous debt collecting efforts to mitigate on the quantum of impairment of receivables among other factors that negatively impact performance.
  3. Continued cost-cutting and rightsizing measures to ensure operating and administrative costs are contained. These measures will see the collapsing of Group structure so that REIZ and its subsidiaries become and operate as one entity since both subsidiary companies (i.e. Arcades and Thistle) are in the same line of business as REIZ thereby creating duplicity in administrative and operational functions. We believe that following the Group’s amalgamation, the integrated business will reinforce foundations for generating sustainable competitive returns over the longer term.

As seen from the analysis of the financial performance, the improvement seen in 2019 operating results against 2018 is underpinned by improvement in rental revenues between the two years. Every effort will continue to be directed into achieving the necessary required progressive improvement in this area. With the Group’s current exposure to four sectorial real estate range that include retail, commercial office, residential and industrial warehousing, it is well positioned to navigate the sectorial market shocks that might weigh on the industry at different times.


Finally, I would like to express my earnest appreciation to the Board of REIZ for its priceless support and guidance throughout the past year. I also wish to thank Management and Staff for their dedication, hard work and teamwork in the face of a challenging financial year. I am grateful to Shareholders and our many partners and stakeholders for the unflagging belief in and support for REIZ. I believe REIZ will continue soaring above any momentary downturns in 2020 and will end the year even stronger than 2019.

Sydney E. Popota
Chief Executive Officer