Steve Brookes, founder and CEO of South Africa’s largest JSE-listed residential developer Balwin Properties, is unperturbed about having to shelve the group’s much-hyped R1.6 billion Wedgewood high-rise development in Sandton.
Speaking to Moneyweb following the release of Balwin’s full-year results on Monday, Brookes insisted that it was the correct decision and said the cost of shelving the project was “insignificant” in the context of the overall business.
“Admittedly, I spent much of last year putting the project together and we spent some money on marketing it, but it was not a lot of money … Ultimately, the risk of the project was simply too high and Balwin’s executive committee decided not to go ahead with the development. This decision was supported by the board,” he notes.
Brookes did not reveal what the final costs were but confirms that the group did not end up purchasing the site originally earmarked for the development from JSE-listed real estate investment trust Fortress.
Balwin launched the Wedgewood development to the market in November last year as its first high-rise – a 20-floor apartment block that was to be located just down the road from the Gautrain Sandton Station and envisioned as an affordable housing project.
Read: Balwin bets R1.6bn on new Sandton high-rise (Nov 2020)
In January, it trumpeted that it had done over R1 billion in sales for the 1 340-unit project.
However, it seems Balwin counted its chickens before they hatched.
Risky, ultimately unviable
Brookes concedes that only around 20% of these sales ended up translating into actual bankable deals, which resulted in the development becoming too risky and ultimately unviable. Last month, Balwin canned the project.
“We learnt a lesson here that we need to stick to our core business and what we know well [large scale mid-level residential developments],” he says.
“However, I am an entrepreneur and will always look for new opportunities … We may relook the model again, but in the current market it seems investors and the target market for such a development are not ready to commit, especially if they have to wait a few years before it is complete,” adds Brookes.
He stressed that for such a scheme to work, a developer needs to secure around 75% in pre-sales.
Prior to the sales launch of Wedgewood in November, Brookes did tell Moneyweb that he was testing the market for such a development. If successful, he planned to convince mall owners, such as Liberty Two Degrees, about developing high-rise residential towers above the parking lots of major shopping centres.
Anthony Clark, an independent analyst at Small Talk Daily Research who covers Balwin, tells Moneyweb the developer “made a mature move” in deciding to can the Sandton high-rise project.
“Balwin realises its core competency is building up to four storeys… The large Wedgewood development in the heart of Sandton I think looked good on paper when the bustling metropolis was full of people. However, if you go to Sandton right now, it’s a ghost town [due to Covid-19],” he says.
“Whilst Balwin achieved reasonable sales for the development, the underlying hurdle rate they wanted to attain in order to press the button to go ahead and purchase the land, and spend two years building this thing, was just too much to bear,” adds Clark.
“Frankly they pulled it. They walked away from a land deal. They had a clause in the agreement [with Fortress], which meant they could walk away without any penalties or costs,” he points out.
“The only costs they actually incurred was the advertising and the hoardings and banners, which were only a few million [rand].”
Clark says Brookes and Jonathan Weltman (Balwin’s financial director) did admit that putting up such a large project, which would have taken two years and was above and beyond the competency of Balwin Properties, was a risk.
“It would have involved deep level basements and building up to 20 storeys… If anything went wrong or if there were any delays and insurmountable problems, it would have caused a ripple effect across the entire Balwin balance sheet,” he notes.
“Given that the underlying sales were below the 70% mark… they decided to can it. The Balwin of old might have pressed the button… and said lets just go for it and see what happens. The more mature Balwin realises that the shareholder and investor does not want risky developments occurring in their business. They want a far more mature and reliable pipeline of phased in projects,” adds Clark.