High cost of borrowing causes rentals hike

DEFAULT rates on properties averaged 45 to 55 percent across Zimbabwe in 2017 due to steep rentals stemming from the high cost of financing.

As from May, default rates on rentals stood at between 45 and 55 percent as the downward trend noted in 2016 continued to slow the property market in 2017. Rental defaults and late payments increased to between 30 and 40 percent over the 18 months preceding December 2016. Rental costs also decreased between 20 and 30 percent over the same period to underscore the effects of a contracting economy on the property market.

According to the Centre for Affordable Housing Finance Africa, the cost of borrowing in Zimbabwe remains prohibitively high and short term in nature.

“Landlords no longer demand cash for rental payments; mobile money and bank transfers have become widely acceptable. Traditional financiers have not been lending to private property developers with some building societies opting to fund their own housing projects. When financing is availed, the interest rates are too high, which inadvertently pushes property prices upwards,” CAHF.

For 2017, the housing sector has seen a general decline in interest rates on mortgages from an average of over 22 percent to about 18 percent, indicating, in part, availability of mortgage finance for eligible borrowers. The majority of borrowers with bank and micro-finance housing loans are individuals and companies with regular verifiable income. On the whole, these borrowers constitute less than 38 percent of the working population.

There is therefore a need to avail inclusive finance for mortgages to prospective borrowers in the informal sector. This would boost their ability to undertake housing development projects and increase the supply of housing units in the country. Additionally, developers are constrained by the inadequacy of appropriately structured project finance. Lenders in the sector structure developer loans in such a way that repayments must be made on a monthly basis.

This is well aligned to the financial institutions’ own funding obligations, which may be monthly, quarterly or bi-annually. However, owing to the fact that developers derive their repayment funds from the sale of funded housing units which may not be regular, defaults begin to emerge, not as a result of market failures, but loan structuring deficiencies.

It is therefore important to have developer finance appropriately structured and tagged to the sale of the funded units rather than tagged to the expiry of the time period. Commercial property owners are feeling the pinch of increased tenants’ defaults on lease obligations due to an unrelenting economic crisis in the country.

The sector has also witnessed an unprecedented increase in vacant or unrented commercial and residential properties, reflecting a worsening economic situation. The fragile economy has resulted in property market fundamentals weakening. Analysts say that a significant number of tenants had huge arrears in rentals due to a depressed economy, a situation that has affected the property market. This has resulted in property owners’ incomes declining significantly.–herald

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