After many years of angst regarding investing in SA’s housing market, listed property investors have only recently warmed up to residential-focused companies.
Dealing with delinquent tenants and SA’s onerous eviction legislation which typically favours tenants – making residential property investments management intensive – has not created a favourable track record for the sector.
Furthermore, SA’s housing market is still recovering from the five-year-long slump prompted by the 2007/8 global credit crisis resulting in humdrum house price growth, banks closing mortgage loan taps and the glut of distressed properties on the market. These are some of the concerns that have left investors nervous about residential investments.
But recently-listed Balwin Properties is piquing the interest of investors in SA’s more than R400 billion-worth listed property sector.
Balwin, which focuses on sectional title residential estates in metropolitan areas, is cashing in on the insatiable demand for lock up and go residential units. And institutional shareholders like the Public Investment Corporation, Investec Asset Management, Abax Investments, 36ONE Asset Management, Stanlib and Visio Capital have supported Balwin.
The company’s share price has jumped by 22.65% in the past week after it reported a 68% rise in headline earnings per share to 131 cents for the year to February 29 2016. Balwin also declared profit after tax of R559 million – exceeding its pre-listing forecast of R542 million by R17 million. These were the company’s maiden results following its listing on the JSE’s main board in October 2015.
Balwin’s business model is premised on building and selling one-, two- and three-bedroom sectional title residential units, priced from R600 000 to R1.6 million.
Eight months as a listed company and the market still doesn’t understand its business model, says Balwin CEO Stephen Brookes, who founded the company in 1996. “Most analysts are still looking at us a Reit (Real Estate Investment Trust) expecting us to pay distributions and get yields,” he says.
Balwin largely derives its profit from the sale of residential units and is fully involved in the planning, financing, construction and management, marketing and sale of a residential project. Brookes quips: “I am even involved in the selection of tiles in units.”
This approach has spurred the company to grow its profit margin to 42.6% from the previous year’s 35.9%. Its gross profit margin was well above its long-term target of 40%. CFO Jonathan Weltman says the average gross profit margin on a development is 40%, but this depends on the life cycle of a project and its stage. “An increase in the margin could be higher due to a number of projects being in the later stages of development and ready to be sold in the market,” Weltman explains.
During the period under review, the company registered and sold 2 087 units across Johannesburg, Pretoria, and the Western Cape compared with the previous year’s 1 655 units.
Stanlib’s head of listed property funds Keillen Ndlovu says Balwin sold just over 2 000 units in a very challenging economic environment, coupled with interest rate hikes. “[This] indicates a strong demand for their product. Going forward sales could slow down with any dramatic spike in interest rates,” Ndlovu tells Moneyweb.
Ndlovu says the company remains cash-flush with R462 million of cash on hand at year-end and little gearing of 26% (land debt, development finance, and other liabilities) on its balance sheet. It has a gearing target of 30% to 40%.
Balwin’s cash on hand and low gearing is supportive of its secured development pipeline of 16 167 residential units – expected to be delivered over the next seven years. In addition, the company recently acquired the development rights to develop about 15 300 units at the fast-growing Waterfall node, sandwiched between Gauteng’s Midrand and Pretoria, for R1.5 billion.
Balwin expects to break ground at Waterfall in the current financial year (full-year 2017) and the project is expected to be completed in about ten years. “This a big project for the business as it will double our pipeline to 31 467 residential units. It’s also in line with our focus to be in good nodes with good public transport, hospitals, entertainment and schools,” says Brookes. The company is also looking to grow its exposure to the rental market.
Investors are increasingly attracted to specialised property funds which offer sustainable income payouts or capital growth. Balwin’s stock has delivered a total return of 7.11% so far this year compared with 6.54% posted by the FTSE/JSE SA Listed Property Index at the time of writing. However, its share price is still below its listing price of R11 compared with Friday’s close of R9.30.
Ndlovu says if Balwin maintains its residential unit sales then “there could be value in the stock at current levels”.