Balwin bridges the sectional title gap
Balwin Properties is one of the more interesting property companies on the JSE. Instead of being a typical property fund that owns a variety of shopping malls or office properties, Balwin develops residential estates and sells off the units.
It’s primarily a gross profit model, not a rental model, although Balwin isn’t shy to rent out properties either.
They’ve been doing it since 1996 and they do it well. With a focus on one- and two-bedroom apartments (74% of total sales), the company sells an average of 239 apartments per month, although actual monthly sales fluctuate wildly.
Balwin targets a profit margin of 35% over the lifecycle of each project. Critically, at the time of releasing the Feb 2020 results, the company had an 8-year development pipeline of nearly 29,500 apartments.
The strength of Balwin lies in its turnkey model. They do everything from sourcing the sites through to marketing the properties and establishing the body corporates. In doing so, they have built a property development brand that is well-known in major provinces in South Africa.
But, everyone is poor and can’t afford properties, right?
There is an incredible irony in the property market: in tough times, the upper end of the market suffers the most.
The super wealthy feel nervous to sink R40m into a Camps Bay palace, but first-time homeowners looking for a R1.5m property are still active. These are young families and they need a place to live. When interest rates are low (and currently they are at an all-time low), bonds become more affordable.
You can work remotely, but you cannot live remotely.
Balwin specializes in this end of the market. They build apartments aimed at young people who are just starting their journeys on the property ladder. Whilst Balwin has typically built upmarket complexes with small units, they have now announced a development that takes the strategy to an entirely new market.
Bridging the gap
Balwin is now targeting the so-called gap housing market: those who earn too much to qualify for a free house from the government, but too little to qualify for a bond. It’s an enormous market in South Africa that includes households with combined income of R3,501 to R18,000 (a ridiculously wide range, I know).
How will people buy without a bond? Qualifying individuals will be able to obtain assistance through the Finance Linked Individual Subsidy Programme, a government initiative aimed at this gap market.
It’s a clever play from Balwin.
A 70% shareholding in a project called Mooikloof Mega City is in store for Balwin shareholders. The land has been acquired for over R430m, which gives you an idea of the scale of this project. It’s a 210-hectare monster that will house at least 16,000 apartments with the potential to increase this to 50,000.
A 3-bedroom unit will start from R799,000 which makes this incredibly affordable for many South Africans.
Could this change the share price trajectory?
Unfortunately, Balwin shareholders haven’t had a happy time since the company listed around 5 years ago. The share price is down 70% and the company has a market cap of R1.45bn which reflects a P/E ratio of barely 3.5x.
That’s a really low valuation multiple for a company with a long development pipeline and strong cash flow generation.
Perhaps shareholders are worried about growth in a South African economy that isn’t exactly shooting the lights out? It still feels like a painfully low valuation for a company with this track record and such an interesting strategy.
One to watch for sure, although one wonders what the catalyst for a re-rating might be when the share price only jumps 1.7% off the back of news like a housing development of this size.
If I was the Balwin CEO, I would be feeling frustrated to say the least.