Zambians love construction. Wherever you find men and women of means, they are always proud to speak about their construction projects. It’s become a favorite pastime for many with some looking at their projects as a means of “saving money”. However, what is interesting with the construction landscape is the diversity of projects that have sprung up in the big cities of Zambia. Take Lusaka and Kitwe for example (over 90% of Zambian shopping malls are located in Lusaka and Copperbelt towns according to Knight Frank). These two cities have seen a surge in the construction of shopping malls and prime apartments. Prime locations have become targets for investors who would like to play in the arena of the former.
During a glass of wine at the recently hosted British Chamber of Commerce event which had noble speakers in the heads of Knight Frank and REIZ, I realized that competition in the sector had become intense. The arenas identified in the real estate space include office, retail,industrial and residential markets. On the mall side, consortiums are plowing money into the arena which upon completion of the projects is leading to zero-sum of tenant movement. Notable malls have seen some of their top tenants seek newly constructed malls which we believe are competing on price and location. To put into perspective, at the moment, according to Knight Frank,retail space prime rents are billed at US$40 per square meter per month. It provides a yield of 8.5%. Therefore, prime real estate owners are finding themselves in the interesting position of juggling return on investment (ROI)on the spend on the construction projects and holding onto prime tenants.
Prime office space (Grade A) is also another arena that has seen a proliferation of office blocks springing up all over the place. Currently, prime offices yield at 10% for US$20 per square meter per month. Interestingly, construction of most of these blocks is always concentrated around commercial areas of interest. Note that after the exodus from the central business district (Cairo road) for example, areas such as Kabulonga, Rhodes Park, Thabo Mbeki are among the most sort after locations for real estate investors to put up these prime office blocks. What this has inevitably led to is excess capacity being created in the market. The pace at which most of these construction projects are being delivered indicates that there are willing financiers of projects. However,macro indicators must not be taken for granted. With growth slowing down, prime real estate in Zambia will be fighting for a diminished clientele. However,with economic efforts being made by the central bank and Ministry of Finance,boosting investor confidence and inspiring growth of local industry could be the key that unlocks more tenants for prime real estate. At the moment, we believe that 20 and 40 USD will be the upper limit as the force of buyer power increases leading to depressed margins in the sector.
Astute investors in the game real estate will need to keep an eye out for cheaper money for getting projects off the ground. Conversely, when TFHZPC posed the question to the real estate titans of disruptive offerings in the industry, the response was that Zambia was still behind when compared to the west. We disagree. We have seen evidence of the virtual offices which to date have not been amplified enough for consumers to partake. The concept of the virtual office is simple. A company does not need to own brick and mortar. No. They simply need a desk, computer, meeting room, access to a printer, coffee machine and before you know it you have an office. This model has the potential of raising more revenue beyond the current rates for prime real estate as the model is dynamic. Using our tool kit, we envision an Air BnB scenario or time-to-share model that could see prime offices being shared by multiple companies which have different business models and business needs. This will be inspired by the concept of the mobile office. The demographic that will push this model will be millennials with the only thing to stop them being economic fundamentals(access to startup finance). Working with some of them during the development of our website, we found that these kids do not need an 8 to 5 office. They are nocturnal beings that work best with flexi time. Competitive advantage will be achieved through product differentiation through economies of scope. Real estate investors must keep an eye on this or else we will have an abundance of elephant sized office blocks with no tenants to create value. Alternately,economies of scale can potentially be achieved in the densely populated city of Lusaka (population currently north of 2.2m). However, the inter-dependency with GDP for the capital will be a determining factor of whether the residential market sees a surge in uptake.
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