Why Zimbabwean Property Prices Defy Gravity

...and how this affects the valuation of listed companies like Innscor.

Why Zimbabwean property prices defy gravity

Pension funds in Zimbabwe have 15 times more capital invested in property compared to those in South Africa.

The implication of this is huge for property prices and other asset classes like stocks that have lagged behind.

Here’s what every buyer, seller, and investor needs to know.

Pension Funds and Investments

Pension funds essentially exist to invest money today in assets that will generate reliable and steady cash flows in the future to pay people's pensions.

As an investor block, pension funds are also the biggest in the world and have a large influence on asset prices.

Now, in an environment marked by hyperinflation, currency instability, and company collapses, it’s pretty hard to find assets that provide reliable and steady cash flows.

As a result, pension funds turn to property, which generally holds up well against inflation and produces steady streams of USD income.

This has led to an incredible amount of capital being allocated to Property in Zimbabwe compared to other asset classes such as equities.

Pension Funds Investment Allocation: Zimbabwe vs South Africa

The chart below shows how pension funds have invested their capital in Zimbabwe (on the left) compared to those in South Africa (on the right), which is structured more in line with global norms.

What is clear from the above is that pension funds in Zimbabwe have an incredibly high share of their capital invested in property (47%) compared to South Africa (3%) —over 15 times more.

Some of this imbalance is also due to property values rising whilst other asset classes have remained stagnant or dropped in value.

What you also see is that investment in Equities (Stocks), such as those listed on the Zimbabwean Stock Exchange (ZSE) or the Victoria Falls Stock Exchange (VFEX), is much lower compared to South Africa.

The Stock Exchanges in Zimbabwe have not experienced much growth over the last decade. Currently, the combined Market Cap of all the companies on the ZSE and VFEX is about $3.4 billion. Exactly 10 years ago, it was $4.1 billion.

With lagging returns and uncertain dividend payouts, Pension funds have allocated less cash to stocks and much more to property, breaking the global trend. But it's not just pension funds, pretty much all institutional investors and even ordinary people are taking the same approach.

This means the demand for properties to invest in is high.

Unfortunately, the supply is quite low. The number often cited is that currently, there is a shortfall of about 1.5 million houses in Zimbabwe.

So, as we all know, whenever there is high demand and low supply, the prices of the asset go up.

Does this mean that there are no instances of overvalued properties? Not at all.

Those exist, but it does mean that there are genuine economic factors driving up prices, other than just speculation, which is not always the case in most economic bubbles.

Where’s the Money, What’s the Move?

The data suggests that growth in the property market is still ongoing. Players in that space are likely to do well at least over the next 2 - 3 years. Prices will come down as supply increases, but the market should still provide sufficient growth.

On the other hand, there is a possible opportunity to invest in high-quality stocks of Zimbabwean companies, which appear undervalued, such as Innscor, for example.

The low valuations may be driven by the bias towards property investments, which should correct in the long term as the environment stabilises.

To identify undervalued companies, we can look at the price-to-book ratio. Simplified, this ratio compares the value of the company's market capitalisation to its net assets.

Innscor Africa currently has a Price/Book ratio of 0.9. Since a business is more than a collection of net assets, the Price/Book ratio is normally above 1.0.

For example, Tiger Brands in South Africa, a company similar to Innscor, has a Price/Book ratio of 2.6. This implies that Innscor could be worth double its current price, although one must also consider the country risk.

Further evidence that Innscor may be undervalued is that they bought their own shares through a buy-back program last year.

Typically, companies do this when they believe their share price does not accurately reflect the value of the company.

It’s a bit like if you're in the business of selling cars and you hear that one of the cars you sold is now available on the market for $3,000. If you value it at $6,000, it would be a good decision to buy back the car and keep it for later.

Innscor is just one example of a potentially undervalued stock, but there are other companies that fall into this category.

Perhaps, while the stock market is struggling, this is the time to look for opportunities? Whatever the case, it's worth keeping an eye out.

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