The listed property sector’s earnings outlook has dimmed in recent weeks as commercial real estate owners battle higher than expected interest rate hikes. Profits are being further eroded by millions in unplanned spending on diesel to keep the lights on in offices, factories and shops during load-shedding.
The result is that a number of real estate investment trusts (Reits) that released results in recent weeks have either already cut dividends or plan to do so in their next reporting periods.
Unsurprisingly, South Africa-based property stocks have been sold down as investors look for better prospects elsewhere.
Balwin Properties, arguably South Africa’s largest apartment developer with more than 100 sectional-title complexes under its belt, hasn’t escaped the negative investor sentiment weighing on property share prices.
The stock is down more than 40% since its early 2021 highs of 480c. However, Balwin appears oversold given that its earnings haven’t been hit to the same extent as those of most Reits.
Balwin has emerged as one of the JSE’s most reliable dividend payers
And Balwin has emerged as one of the JSE’s most reliable dividend payers.
That’s despite the fact that the developer is not structured as a Reit and is therefore not obliged to dish out dividends to shareholders. In contrast, JSE rules require Reits to pay out at least 75% of net profits.
Last month the company declared a healthy 15% year-on-year increase in dividend payouts for the year to end-February. That comes on the back of a 20% uplift in group profits and 6% growth in revenue.
Revenue from Balwin’s burgeoning annuity income business, which includes fibre installation, mortgage origination and rental management, is also up — a hefty 61%.
The solid set of results was achieved against the background of higher interest rates, which is placing pressure on apartment sales. Balwin sold 6% fewer apartments in the year to February than in the prior 12 months — 2,788 vs 2,962.
However, CEO Steve Brookes says asking prices increased by an average 12%, offsetting the drop in sales volumes. Most of the price adjustments were to entry-level apartments, which he says are trading at a discount to the rest of the market.
Rising construction costs have also been counteracted by what Brookes refers to as “some serious cost engineering”, including improving the company’s buying power with building suppliers and tweaking the design of its units.
He says Balwin’s products nevertheless remain competitively priced, with one-bedroom apartments ranging from R599,000 to R1m and two- and three-bedroom units typically selling for between R1.2m and R2.5m.
At Munyaka at Waterfall City in Midrand, which spans 5,500 units and is one of the largest lifestyle estates developed by Balwin to date, a swanky penthouse was recently sold for R30m.
Brookes concedes that the fear of more rate hikes and ongoing load-shedding will weigh on consumer confidence and housing demand, which will place “moderate” pressure on margins in the year ahead.
“Our business is very dependent on interest rates and it’s going to be a tough year.”
However, he is confident that Balwin is well placed to benefit from an uptick in sales when rates start dipping again.
The company has a large development pipeline consisting of nearly 44,000 apartments spread across 26 projects in Joburg, Pretoria, Durban and Cape Town that he says will keep Balwin busy for the next 18 years.
Ongoing semigration to the Western Cape should continue to provide a strong underpin for apartment sales in Cape Town and surrounds. Coastal sales were up 12% in the year to end-February.
Still, Brookes expects overall volumes to stabilise this year in line with what was achieved pre-Covid before pent-up demand and record low interest rates pushed sales numbers to historic highs in 2021/2022.
There’s no doubt that Balwin is cheap at these levels
— Anthony Clark
Balwin shares traded below 280c last week, which places the stock at a 66% discount to NAV and a forward dividend yield of 8.5%. “There’s no doubt that Balwin is cheap at these levels,” says Anthony Clark, small-cap analyst and founder of Small Talk Daily Research.
He believes investors don’t necessarily understand property companies such as Balwin. That, he says, probably explains why the market hasn’t bought into Balwin’s story despite the company consistently growing its earnings and dividends.
Clark cautions that Balwin is not immune to the macroeconomic headwinds South Africa faces. But he believes the company’s earnings are not under the same level of pressure as those of commercial property-focused Reits.
Clark says moving house is probably now the “last thing on many people’s minds”. However, he believes Balwin’s model of delivering affordable products in secure estates with an array of lifestyle amenities will continue to appeal to first-time buyers and those looking to downgrade because of rising rates and living costs.
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