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Rental charges harm business, investment flows in Tanzania

4th March 2012
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Editorial Cartoon

A few days ago there was a strong but fruitful debate about the cost of doing business in Tanzania as well as consumer behaviour in the country. The debate was initiated by a Tanzanian journalist, a researcher and lecturer currently living in Washington, Mobhare Matinyi.

The genesis of this debate was the sad story of the closure of Deacons, the clothing and lifestyle goods retailer. The firm's board decided to exit the country after its subsidiary, Tanzania Fashion Stores, incurred losses worth $200,000 in the full year ending December 2011, marking a fifth straight year of losses despite efforts to turn it around, according to a story published by The East African, a flagship weekly of the Nation Group.

The Nairobi-based retail chain will close three stores in Tanzania -- Truworths, Identity and 4u2 branded stores. The company’s chief executive, Muchiri Wahome said, "Doing business in Tanzania has been extremely difficult. The cost is 30 to 40 per cent higher compared with other markets.

According to Deacons, the Tanzanian middle class is also not as big and the uptake of our brands was also not as big," noting that the cost of upmarket rental space in Tanzania is $40 per square foot compared with $18 in the rest of the region.

In South Africa the cost of rental space ranges between $15 and $20 per square foot depending on the location of the property.

Measured by any standards, the Deacons’ closure is another evidence of the surging cost of doing business especially for medium scale companies with a capital base ranging from $1million to $10million.

We have always believed that the amount of rent charged by some real estate developers can only be afforded by drug dealers and corrupt business. Taking the advantage of the lack of a regulatory authority, Dar es Salaam property owners have been operating under the ‘jungle rule’ theory.

If the rest of East African region charges $18 per square foot, but in Dar es Salaam the same cost you two times, then it means ‘we are more expensive in the region.’ If you add this with draconian tax rules, which seek to encourage more taxpayers to qualify as tax evaders, the cost of surviving in Tanzania for small medium enterprises remains ‘a nightmare.’

Commercial and residential rents charged by real estate investors are shocking and painful to tenants. The most appalling thing is that most real estate owners charge rents in US dollars, and apart from being expensive, a tenant is forced to pay for 12 months before entering the house.

For instance a two-bedroom house at Mikocheni suburb cost $3000 per month, while the same in Nairobi or Johannesburg cost $2000 depending on the location, and you can choose to pay your rent monthly or after every three months.

We have always maintained and still believe that Dar es Salaam is our economic hub as well as our sitting room. Therefore the government and private sector have a role to reduce the cost of doing business in Dar es Salaam and the rest of the country.

Landlords should understand that real estate is the most valuable business that gives you your return in a longer period ranging between 10 and 30 years depending on the location, and therefore it’s impossible to build a $50 million shopping mall and expect to recover your cost in five years.

If this is the case then to recover your money whether be it bank loans or drug billions within five years, you will have to charge exorbitant rents at the expense of your tenants. Our investors especially in real estate should understand that we are not living in an island, but in a globalised village where we compete with others.

SOURCE: GUARDIAN ON SUNDAY
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