The residential property development sector has been under the whip for years.
Earnings have been indifferent as consumers, strangled by high interest rates and the soaring cost of living, eschewed buying new homes. Developers have been in a noose, needing to trim prices and offer incentives, often at the expense of margin, to try to shift stock.
The two residential developers’ counters listed on the JSE, Balwin Properties (225c) and Calgro M3 (716c), are a dichotomy. Both operate in a similar space, yet the latter is seen as a stock market darling and is ahead 60% year to date and 124% over five years, while Balwin is up only 1.4% year to date and has been in a perpetual downtrend since 2015.
Both recently released interim results to end-August 2024 and on a high-level basis both had revenue declines on lower units sold in the six months. Calgro’s revenue fell 26% to R507m, yet profit before tax rose 15% to R97m with headline earnings rising 28% to 101.4c a share. Units sold fell to 869 (down 27%).
Calgro has a different mix than Balwin, including memorial parks, low-end high-density units and high-end cluster homes, and, intriguingly, always seems to make a turn on its infrastructure investment, which padded this period’s results.
Balwin’s forte is sectional-title apartment complexes in a secure lifestyle estate. At Balwin, revenue fell 28% to R853m with a 57% slide in profit before tax to R104m and a 57% cut in headline earnings to 16.26c a share. Gross margin fell from 28% to 23% as Balwin offered incentives, especially in Gauteng, to entice buyers, but even that only saw 640 units handed over (down 23%).
As a blend, selling prices for all sold properties from one to three bedrooms dipped in the six months. Balwin has pushed the small but fast-growing annuity business, which offers energy solutions, fibre services and products tied into the Balwin apartments. That unit saw revenue rise 17% to R66m and aided the overall group gross margin to be maintained at 32%.
The company also sharpened its pencil and cut costs 7%; it is a master at eking out more for less in its construction builds.
Balwin’s old heartland, Gauteng (51%), struggled to generate its usual robust sales. The Western Cape accounted for 46% of all units sold. Sales in KwaZulu-Natal collapsed 88% due to provincial issues.
Balwin has hefty developments planned mostly in Gauteng and remains confident that is where long-term sales will be generated. About R6.5bn of development is under construction with an apartment pipeline of 42,000.
What is often overlooked is the tight cost operating structure of the business
Balwin is nothing if ambitious. As CEO Steve Brookes commented, the sector’s saviour will be lower interest rates. The Reserve Bank trimmed by 0.25% on September 19 with a further cut expected on November 21. However, Brookes said rates need to drop 1% to really kick-start the market, and that may not materialise until the second half of 2025. This may drag on Balwin.
Balwin traditionally has a better second half and, from a sale base of 640 units in the first half, aims to sell near to 1,800 for the year ending February 2025. Into 2026, Balwin believes it can regain momentum as interest rates are cut, and push to sell nearly 3,000 apartments a year.
IM contends that is possible — it was the standard in better times. As interest rates ease and economic green shoots appear, sectional-title residential property demand both in sales and rentals should recover, as can Balwin.
The company traded lower latterly from weak earnings and the markets wariness on the expansionary cash-hungry business model. The stock hit 160c in early 2024 and trended sideways until after the election, when it rallied 40%.
IM believes most of the past problems are priced in and it has plateaued with the recent results. What is often overlooked is the tight cost operating structure of the business alongside the potential kicker from lower interest rates that could give Balwin operational leverage. If earnings recover back to 2022/2023 levels (70c-90c a share), the forward earnings multiple starts to look as cheap as chips.
At 225c, IM can see Balwin as a recovery punt worthy of consideration in a small- to mid-cap portfolio.
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