REIZ 2021 Annual Report

By Published On: April 26th, 2022Categories: Corporate announcement, Earnings

Real Estate Investments Zambia PLC (REIZ.zm) 2021 Annual Report

Chairman’s Statement

Dear Shareholders,

On behalf of Real Estate Investments Zambia Plc (“REIZ” or the “Company”) and its subsidiaries (collectively referred to as the “Group”), it gives great pleasure to present this statement in relation to the 2021 financial year and 2022 outlook.

The Economy
The Zambian economy is expected to have grown by 3.3% in 2021 measured by real gross domestic product (“GDP”) as compared with a 4.8% contraction in 2020 and a moderate growth of 1.9% in 2019. The growth was underpinned by strong performances in the mining, agriculture, financial and insurance, information and communication, as well as the wholesale and retail trade sectors. However, the first half of the year saw the onset of the second and third wave of the Covid-19 pandemic affecting the retail and hospitality segments resulting in a further deterioration in the economy with an unstable to depreciating Kwacha, coupled with high inflation and low liquidity levels in the market.

The Kwacha remained under pressure until the second half of 2021 when we witnessed an appreciation of the currency and a trend which continued well after the general elections were held in August 2021. The markets reacted positively to the peaceful transition of power following a massive voter turnout. Inflation as measured by the consumer price index (“CPI”) began the year at 17.4%, peaked at 24.6% in July before reducing back to 16.4% by end of December 2021. Overall, the Kwacha appreciated by 21% during the year but remained volatile against all the major foreign currencies.

The Industry
There is some reason for optimism in real estate industry with the rollout of the vaccines to tackle the COVID-19 pandemic and business confidence returning to the fore whilst facing a tough and challenging economic environment. However, the overall fundamentals remain in the industry, which is characterized by an oversupply of retail, office and commercial letting spaces. This has led to heightened competition and a significant lowering of rental rates whilst operating and administrative expenses have remained static. Early in the year, as infection rates increased during the second and third wave of the pandemic, we saw the return of limited trading hours and restrictions in certain hospitality and recreational sectors in the interest of public health and safety. We are happy to report that these were subsequently lifted, and some normalcy has returned to consumer habits and spending patterns which bodes well for the industry for the future.

The disruptions to businesses and the fallout from the reduction in economic activities did adversely impact on the Group’s operating performance in 2021. Measures have been put in place to mitigate and defend the Group’s assets in the portfolio through competitive space offerings, cost containment and streamlining of operations, refurbishments, and redevelopments wherever possible.

Performance
Over the last couple of years, amid the country’s economic decline and Covid-19 pandemic era, the Company has remained resilient and met all its obligations. I am pleased to report that we are finally seeing some positive operating signs during the latter part of the year with the appreciation of the Kwacha and, as mentioned earlier, with business confidence returning to the market.

However, the financial performance of the company was down year on year due to the continued rental remissions and capping of the Dollar denominated leases extended in the first half of the year. As the Kwacha appreciated midyear there was no longer a need to continue extending the support which had been extended to our clients over a prolonged period of time. The Board and management remain confident that the remedial measures instituted were necessary and required at the time in ensuring that your Company, and its tenants, remain viable going forward. The Group’s vacancy rate increased for the year from 26.8% as at the end of 2020 to 33.1%. However, we have seen this trend reverse early in the first quarter of 2022 with vacancies dropping to 21.1% and an increased number of enquiries both for office and retail space.

The gross rental revenues for the Group were down by 6% from ZMW62.5 million in the prior year to ZMW58.8 million as we extended discounts and capped the Dollar denominated leases to a fixed Kwacha rate of ZMW18 to a Dollar during the first half of the year. Equally, the impairment of the value of Arcades, increased Group vacancy rates and the appreciation of the Kwacha negatively impacted on the Dollar denominated fair value of the Group’s investment property portfolio from ZMW1,179 million in 2020 to ZMW757 million in 2021. Conversely, the appreciation of the Kwacha resulted in net finance gain of ZMW60 million in the year from a net finance cost of ZMW191 million in the prior year. The Chief Executive Officer’s report covers more details on the financial performance of the Group.

Future Outlook
The medium-term outlook for the Zambian economy remains positive, as measured by real GDP, with growth projected at 3.3% in 2021 and is expected to rise to 3.5% and 3.6% in 2022 and 2023 respectively. Underpinning this growth will be stronger performances in the mining, financial and insurance, information and communication, retail and wholesale, and agriculture sectors. The copper prices have maintained their record high prices on the back of international demand and the government is committed to promoting consistent fiscal policies in the mining sector to increase much needed investment and ultimately production output. The roll out of vaccines is anticipated to contain and reduce the number of COVID-19 cases and raise activities in the service and hospitality industries.

There are potential headwinds and risks anticipated to the country’s growth prospects including the outcome of the government negotiations with its foreign creditors to reach an amicable and workable resolution on its debt repayment default, the resurgence of new Covid 19 variants, low vaccination rates, the lower than anticipated recovery of the major trading partner economies and the disruption caused by the Ukraine war. The downward inflation trend may be affected by the rise in cost of electricity and crude oil, as the government moves to a more cost reflective model.

Addressing the maturing corporate bond of US$12 million by November 2022 and improving the Group’s performance in 2022 remains a top priority for management and the Board. In this regard, the Board and its management have engaged consultants to run with the process of raising capital to settle the corporate bonds through two possible avenues. The first option entails partly redeeming the existing bonds through an underwritten rights issue, and refinancing and restructuring the balance, subject to discussions to be held with the bond holders. The second capital raising option is through a private placement offering to an interested investor. By fixing the capital structure of the business we believe that the business will yield better results, maximise returns and protect shareholder value.

Board changes
During the year Mr. Chikusi Banda resigned from the Board on 10 June 2021 after he separated with the institution that had nominated him to the company’s Board. At the AGM held on 16 December 2021 the members appointed Mr. Samson Zulu to fill the casual vacancy left by Mr. Chikusi Banda thereby maintaining the Board size at 5 by the year end. Allow me to thank Mr. Chikusi Banda for his contribution to the Company and wish him all the best in his future endeav