Prescribed asset status alone is not sufficient

Real estate development news takes center stage in public dailies, both on the positive and the negative side.

Victor Makanda

Some banking institutions are slowly relaunching themselves and some are setting up mortgage outlets to respond to this area.

For banks, real estate companies, insurance companies and pension funds, housing development appears to be an attractive area for investment given the backlog of more than 1.5 million housing units in the country.

Last week, Finance Minister Patrick Chinamasa told delegates at an official groundbreaking ceremony at Fidelity Southview Park that the government would grant prescribed asset status to such projects.

“Any housing project that comes my way, I will give it prescribed asset status, just like what happened with Fidelity Life,” Chinamasa said.

He said insurance companies and pension funds are a channel for resource mobilization. Housing developments require huge capital outlays and currently most real estate developers have failed to develop stalls and build houses due to lack of funding.

In this case, Fidelity created a special purpose vehicle to raise US $ 5 million through a bond for the development of residential stalls.

In analyzing this government’s decision to support real estate developers, it is essential to assess whether granting prescribed asset status to bonds will contribute to infrastructure development.
Accessing long-term capital in Zimbabwe’s financial markets soon after adopting the multi-currency system was a challenge due to a combination of external and internal factors.

The external factors emanate from the effects of the global financial crisis that were observed between 2008 and 2009.

Internal factors include delicate issues over property rights and inconsistent policies that have scared off potential investments.

All these factors gradually worsened the liquidity crisis that hit the economy.

Nevertheless, the growing need for social services such as the provision of clean water, electricity, housing, health and education has also increased despite the lack of funding from the national front.

It is in this context that the Ministry of Finance is gradually opting for the prescription of assets to develop infrastructure projects.

Asset limitation is a regulatory measure taken by the government to require insurance and pension companies to hold a minimum of 10% of their assets in such instruments.

So, from this perspective, prescribed asset status seems like a step in the right direction.

Labeling residential subdivisions with prescribed asset status apart from the fact that the government views this decision as a tool for its inability to unlock funding from foreign sources is beneficial for insurance and pension funds.

The major advantage is that these assets benefit from tax advantages. With the economy’s relatively high tax rates compared to peer countries, pension and insurance companies stand to benefit.

While acknowledging the positives, two critical issues determine the success rate with regard to infrastructure development and these are: the use of these funds and the characteristics of these bonds.

First, the targeted use of funding determines success. The finance minister stressed that all projects that have received prescribed asset status should be used for critical development such as housing and small hydropower projects rather than for consumption.

Although the comments are noble, the implementation of such projects has in most cases suffered from stillbirths.

This is supported by the recent treasury bills issued by the government in February which, given the inflated budget structure, have mainly been used to cover recurrent spending.

It is therefore necessary for the government to modify its budget structure to avoid the crowding out of investment projects through recurrent expenditure, mainly the public service wage bill.

In addition to the attribution of prescribed asset status, other key features of these development projects can potentially go a long way in determining or promoting infrastructure development.

A number of projects in Zimbabwe have been granted this status but have still failed to raise the necessary funds, due to unattractive features. The main features include the coupon rate, the bond guarantor and, to a lesser extent, the duration.

With the exception of the IDBZ bond, other bonds, such as the AMA agro-bills, IPEC Housing Bond and NMB SME bonds, have been little used.

Although the structure of the returns is not yet fully established, it remains crucial for the issuers of these bonds to take the nominal interest rate into account. Most issuers, especially the government, offered relatively lower rates, resulting in low adoption.

In addition, research has shown locally that most bonds that have the government as guarantor have performed relatively underperformance compared to those that have other guarantors outside of the government.

The reason is that confidence in the government has diminished due to its inability to service debts from local and foreign sources.

Therefore, the government may need to resolve trust issues in order to assist issuers who focus on infrastructure development.

Overall, the government has a lot of work to do to revive infrastructure development.

The most important of these concerns the continued appeal of the International Monetary Fund to remedy the fiscal imbalance that weighs on recurrent spending. By achieving this goal, capital formation will be achieved.

The development of a secondary market for bonds is also essential, especially with the illiquid economy, as it allows actors such as insurance companies and pension funds to trade these assets in order to meet their financial needs.

The development of a yield curve will also present a guide in which interest rates can be set. This is also essential if ever the national bond market can be developed as a way to complement government efforts to support infrastructure projects.

Overall, offering prescribed asset status on its own is not sufficient to develop infrastructure in Zimbabwe.

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