Steve Brookes sounds exhausted, like he’s built an apartment building all by himself just this morning, and has another job scheduled for this afternoon.
The former engineer, who founded Balwin Properties 30 years ago, is digesting the news that the Public Investment Corp (PIC) would lead a R2.26bn buyout of Balwin that will see it delisted from the JSE.
You’ll know Balwin, of course, from its flashy billboards that hawk apartments in estates with lip-smacking facilities such as “London-styled finishes” and “training science gyms”, or a beach-style “crystal lagoon” in Midrand.
And while the architecture, such as it is, is uncompromisingly utilitarian, the prices are manageable: three-bedroom apartments in Waterfall in Midrand, for instance, go for R2.1m.
Still, you wouldn’t think the buyout would be bad for Brookes.
First, he made an estimated R330m when Balwin listed in 2015 at R9.88/share, and he sold down his 49.9% to 35%. And now, Brookes is part of the PIC consortium buying back Balwin for R4.35/share.
The problem is that the past 10 years as a JSE-listed company have been an almighty disaster for investors who bought into Brookes’s dream back in 2015.
“We’ve just had 10 years of nothing, being on the JSE. Nothing,” he tells the FM. “So, I’m sore — but very happy that the PIC will be our new partner.”
More accurately, less than nothing. Had you invested R1m in Balwin at the listing date 11 years back, you’ll only get out R440,200 today — and that’s with the chunky 23% premium to the recent share price in the new offer.
Last week, Balwin said staying on the JSE is “no longer compelling”, given the high cost of maintaining the listing, the low number of shares that trade, and the fact the share price never got close to its true value.
Brookes sounds demoralised. “I put a lot of energy into listing, and it’s almost like it’s perceived as a bit of a failure. Someone said to me, ‘You shouldn’t see it like that, since a [buyout offer] from the PIC is not a failure,’ but still.”
The JSE could no longer offer them what a capital market is supposed to provide: fair valuations, adequate liquidity and meaningful access to growth capital
— Duarte da Silva
Another reason for delisting is that Balwin’s NAV is R9.70 — double the R4.35 offer price. In the real world, Balwin’s share price never came close to touching that.
Asked about this, Brookes says all property companies now trade at steep discounts to their NAV. “It was distressing for me, because I didn’t understand this: I thought your NAV and share price actually improved as you grew, and this didn’t happen. So it’s been a tricky 10 years for me,” he says.
On the flip side, the PIC-led group will, in theory, get a bargain by snapping up Balwin for half its value.
Brookes admits they’re getting a good deal, but says much of Balwin’s value sits in the undeveloped land. “This is long-term, and property can be very cyclical, and it could go either way depending on various factors.”
If the sun shines on it (and the Iran war ends, and South Africa’s growth recovers, and …) they could make a killing. But if basket case municipalities keep gouging home buyers, residential property will flounder.
Anthony Clark, the top-rated analyst who runs Smalltalkdaily, says while a large part of Balwin’s fate is due to South Africa’s lacklustre economic growth, Brookes didn’t make it easy for himself.
“He’s a Marmite character — people love him or hate him, and it’s a taste institutional investors have shied away from,” he says.
Brookes is an archetypical entrepreneur: passionate, brash, and less worried about the metrics asset managers focus on (such as returns) than on growth.
Clark says that as a result, Balwin has been boom and bust. “Rather than consolidating, he took out debt and built more. So perhaps he could have listened more to his shareholders, and accommodated their needs better.”
So what does this episode in value destruction say about the JSE and its utility as a market for raising capital?
Brookes reckons it shows the JSE is no place for small companies, though he stresses this is only his opinion. “Small caps on the JSE are not well regarded. I personally don’t believe small caps should be listed. I think the JSE is for the big guns — those larger than R50bn, with big growth,” he says.
It’s a controversial view, since surely the point of a small cap is that it graduates towards being a larger company? Adrian Gore, for instance, famously launched Discovery with R10m.
But Brookes says this isn’t how it works in South Africa today. To truly be valued, Balwin would have to have expanded overseas, and “we were never going to do this, since we’re a local development company”.
This is an interesting debate in a week in which veteran asset manager Duarte da Silva, who worked at Merrill Lynch, Credit Suisse and Macquarie, lamented the demise of the JSE as a destination for growing companies.
“More than half the companies that once made up South Africa’s public market have gone,” he said. “A significant and growing number delisted because the JSE could no longer offer them what a capital market is supposed to provide: fair valuations, adequate liquidity and meaningful access to growth capital.”
His solution: the government must lower the amount that retirement funds can shift offshore from 45% to 30%. It is a controversial idea, since this feels like rolling back liberalisation of markets and curbing the ability to invest offshore.
Clark disagrees that the JSE is no place for small-cap stocks, though he concedes it doesn’t work for some sectors today, such as residential property. Companies such as Balwin, he says, need consistent employment and wage growth — two things missing from South Africa since 2009.
“There are other dynamics too. Millennials, both here and overseas, can’t afford to buy houses. So, you need an investor like the PIC, who can look far more long-term until the cycle turns,” Clark says.
As for Brookes, he’ll remain at Balwin’s helm. Property, he says, has been his dream ever since his grandmother brought him his first Lego set from Germany when he was 14.
“My problem is I’m too passionate, too driven, and absolutely love this country and love Balwin,” he says. “My friends tease me that I work eight days a week. Someone said to me the other day, ‘Don’t you want to take it easy?’ and my wife rolled her eyes. It’s just not in me.”
