Pebble Properties Limited

PROPERTY INVESTMENT IN ZAMBIA: WHY THE POLICY RATE AND BOND YIELDS SHOULD DETERMINE REAL ESTATE RETURNS
By Mulenga Kachela, FCCA, MBA Finance & Strategic Planning, PGDip Public Financial Management, FMVA, CMSA, Commercial Real Estate Finance Specialist
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Most discussions about property investment in Zambia begin at the wrong place. They start with locations, finishes, or future price expectations, but ignore a far more fundamental question: what is the cost of money in the economy? Until that question is answered, any conversation about property returns is incomplete.
At the center of this question sits the policy rate, set by the central bank. This rate is not just a technical number for economists; it is the foundation upon which all financial assets are priced. It influences how expensive it is to borrow, how attractive it is to save, and ultimately how investors evaluate risk and return. When the policy rate rises, money becomes more expensive, credit tightens, and investors demand higher returns to justify committing capital. When it falls, liquidity increases, borrowing becomes easier, and asset prices often rise as investors search for yield.
From this base, the financial system builds upward into longer-term interest rates, the most important of which is the 10-year government bond yield. This yield represents what an investor can earn over a long period with relatively minimal risk. In Zambia, government bonds are backed by the state and provide predictable income streams, making them the closest practical benchmark for a “risk-free” return in the local context.
This is where the conversation becomes uncomfortable for many property investors. If government bonds are yielding around 17%, it means an investor can earn that return without dealing with tenants, maintenance, legal disputes, or the illiquidity that comes with real estate. It is a passive, structured, and relatively predictable return. Once this benchmark is established, every other investment must justify why it deserves capital instead of that bond.
The 10-year bond yield, therefore, is not just another data point, it is the true opportunity cost of capital. Every kwacha deployed into property is implicitly being compared to what it could have earned in bonds. This shifts the key investment question from “Will this property go up in value?” to a far more disciplined one: “Am I being adequately compensated for taking more risk than a government bond?”
Real estate, by its nature, carries multiple layers of risk. Income is not guaranteed; tenants default, vacancies occur, and maintenance costs erode returns. There are also structural challenges such as illiquidity, property cannot be quickly sold without potential loss and legal complexities that can delay or impair value realization. Given these risks, it follows logically that property should not merely match bond yields; it should exceed them by a meaningful margin.
A rational framework, therefore, is straightforward: the expected return on property must equal the bond yield plus a risk premium. In the Zambian context, with bond yields around 17%, and considering the realities of property risk, a reasonable required return would fall in the range of 22% to 27%.
However, when one examines the actual returns being generated in the market, particularly in Lusaka, a stark disconnect becomes evident. Residential properties are often yielding between 6% and 10%, while commercial properties may achieve between 8% and 12%. These returns are not only below the required threshold they are below the bond yield itself. In effect, investors are accepting lower returns while taking on significantly higher risk and reduced liquidity.
This is not a minor inefficiency; it is a fundamental mispricing of assets. It suggests that property values in many cases are being driven not by income and financial logic, but by sentiment, speculation, and long-held beliefs that property is inherently a safe and appreciating asset. While property can indeed be a powerful wealth-building tool, it is not immune to the laws of finance. When pricing becomes detached from underlying returns and benchmark interest rates, the result is overvaluation.
The persistence of this disconnect can be attributed to several factors. Many investors do not benchmark property against alternative investments, particularly bonds. There is also a strong cultural bias toward real estate as a store of value, often reinforced by past periods of appreciation. Additionally, limited use of financial models means that decisions are frequently based on intuition rather than structured analysis.
Yet the solution is not complex. It begins with a shift in mindset. Property should be evaluated as a financial asset, not an emotional one. Before committing capital, an investor must ask whether the expected return justifies the risk when compared to the bond market. If it does not, then the investment is not attractive regardless of how desirable the property may appear.
The discipline required to walk away from such investments is what separates speculative behaviour from professional capital allocation. It is also what protects wealth over the long term.
The conclusion is clear and uncompromising: if a property investment does not deliver a return that exceeds the government bond yield after adjusting for risk, it is fundamentally mispriced. Everything else location narratives, future appreciation stories, and market sentiment is secondary to this principle.
If investors in Zambia begin to anchor their decisions on interest rates rather than emotion, the property market may gradually transition from speculation to a more disciplined and sustainable model of capital allocation.
Disclaimer: This article is for educational purposes only and does not constitute investment advice. Investors should conduct their own analysis or consult a qualified professional before making investment decisions.