Is Balwin Properties  too bold for the SA market?

A penthouse going for R80  million, and more than 5  000 apartments — all in one development. That’s a big price tag for Gauteng (and for South Africa in general). When it comes to some of the Balwin Properties developments, it makes me wonder who the buyers of these apartments and luxury penthouse are. Who lives in them?

Balwin Properties was established in 1996 and is the largest sectional title property developer in South Africa. In 2015, it went public and was listed on the JSE. The company has an impressive development pipeline, with more than 42  000 apartments planned over the next 15  years. While its development plans sound promising, the latest figures from its earnings report tell a different story.

Balwin Properties has made significant investments in Gauteng and other provinces such as the Western Cape and KwaZulu-Natal. On reviewing its interim financial results for the six months to end August 2024, it showed that profits had decreased by 57% and revenue was down by 28%. 

Steve Brookes, chief executive of Balwin Properties, is the Sol Kerzner of sectional title development in South Africa. Previously a car salesperson in Johannesburg South, he has boomed the Balwin business over the years with his maverick moves in the sectional title real estate sector. 

He attributed the decline in earnings and stock price to several factors, including the poor economy, rising living costs, high interest rates and other macroeconomic issues beyond the company’s control. 

Customers value transparency, and property-related issues are relevant when explaining poor results. This includes details about occupancy rates, the rising costs of construction and negative rental reversions.

Waterfall City, in Midrand, is a smart city. Retail, commercial and residential real estate developments are located here, as is the Mall of Africa and the head office of big corporates such as PwC. Balwin Properties is known for its bold Munyaka development in Waterfall City, which will have more than 5  000 apartments once it is complete.

When the Munyaka development launched, people were excited about its unique amenities, such as the 30 000m2 lagoon monitored online 24/7 through the Crystal Lagoons control room in Miami. Other amenities include a padel court, cinema, running track, action sports field, playground, restaurant and lifestyle centre.

President Cyril Ramaphosa was present for the unveiling of this development circa 2020. At the time, Brookes said the company planned to achieve a market capitalisation of R10  billion within five years. It’s been almost five years, and Balwin Properties’ market capitalisation today is R1.3  billion. 

He also said that they would build a development similar to Munyaka in the Paarl Winelands. While Paarl has been pumping with commercial and residential developments over the past five years, such a development is yet to materialise. It’s a big project for Waterfall, and it would be an even bigger project for a town like Paarl. 

According to Balwin Properties’ website, Munyaka has a variety of apartment types — one, two and three bedrooms, villas and penthouses. Prices for a one-bedroom apartment (41m2–64m2) start at R1  034  910, while two-bedroom apartments (75m2–115m2) begin at R1  484  910. The prices for three-bedroom apartments (110m2–118m2) start from R1  799  910.

I viewed the floor plans for a six-bedroom, six-bathroom lagoon penthouse that measures 1  230m2 (with 695m2 under the roof and the rest consisting of a covered and uncovered patio, a butler’s suite and basement storage). Balwin Properties advertised the penthouse at a sale price of R80 million. That’s a lot of money for this location compared with other penthouses in Gauteng and Cape Town. In addition, other apartments in this development are advertised at much lower prices. 

Koshiek Karan, a former investment banker with listed real estate deal experience, says that when interest rates were low, many people bought units in Balwin Properties developments. They barely qualified for these home loans, and when the cost of living went up, the interest rates went back up, and now they can’t afford the monthly payments of their real estate investment. 

“Owning a property extends far beyond simple bond repayments. There is insurance, utilities, municipal rates, levies, maintenance, and more. Qualifying is different to affordability.” 

This issue affects many property buyers in the country and points to the problem of poor financial literacy.

Balwin Properties generally builds its developments in working-class and middle-income areas where the cost of acquiring land is cheaper. A few years back, it launched a huge R1.6  billion affordable housing development called Wedgewood on a premium road in Sandton — it was cancelled. The building was going to be 20 storeys with 1340 apartments. The studio apartments were roughly 33m2 in size, with sale prices ranging from R799  000 to R1.49  million. 

Regarding the Munyaka development, of the 5 020 apartments planned, 3 705 remain unsold. This raises concerns when it comes to the demand for apartments in these mass compound-style complexes.

The company certainly goes big when it comes to your home. Is it too big, though? There is a dire need for more affordable apartment offerings to come onto the market. One wonders if Balwin is oversupplying apartments in parts of Gauteng in relation to demand and if they are designed and priced correctly. 

The number of apartments in most Balwin Properties developments is 1  000 to 3  500 units per development. That is an extraordinary scale compared with other sectional title developers in South Africa. If you browse the website, you can find many units still available for sale in most of the company’s developments.

Would you be able to live in a development of this scale? In a world where customers favour boutique brands, specialised expertise, product personalisation, and companies that focus on their niche, I wonder if these big-box offerings appeal to South Africans. 

The question remains: who is the target market?

When I chatted to Nicholas Dakin, a global portfolio manager at Sasfin Wealth, about Balwin Properties’ balance sheet, he said that what stood out for him was the level of debt, which has been trending higher over time as it has taken on more debt to fuel its aggressive expansion plans.

 While the group’s loan-to-value (LTV) ratio did decline marginally to 40.2% in its most recent interim results, it remains elevated. Property companies should try to keep their LTV ratio between 35% to 40%. Therefore, this is a fairly precarious situation, given that the company has a significant amount of unsold stock and high vacancies. 

As a result, Balwin Properties did not declare a dividend in the last financial year in an attempt to reduce the group’s debt exposure. A solid and consistent dividend is one of the key reasons investors like to own property shares. Dakin believes this is the key reason for the weakness in the share price. But he also pointed out that the share price has recovered strongly since April, benefiting from government of national unity optimism.

The company has recently created a subsidiary called Balwin Rentals, reflecting the current times where rentals are in huge demand nationwide. In July this year, Balwin Properties announced expansion plans for its rental portfolio. Over the next decade, it plans to build close to 7  300 apartments dedicated solely to the rental market. I am a fan of this idea because the demand is there. 

The rental portfolio will include one, two and three-bedroom apartments with a monthly rental rate of R6  000 to R13  000. Perhaps the plan is for the rental subsidiary business to generate some annuity income. 

The company has also opened another subsidiary called Balwin Sport, which has padel courts in the developments. 

Balwin Properties has other businesses in the pipeline to offer its apartment owners, such as solar power. Selling apartments provides the company with erratic income, so these annuity-income subsidiaries might be the solution to diversifying and generating a consistent cash flow. 

That said, Balwin Properties has had its worst year on record. Perhaps it should reconsider whether it remains listed. Being listed means it must keep bringing products to the market and constructing more apartments. 

The company is not a dividend payer. Balwin Properties’ current market capitalisation of R1.3  billion is small when compared to other listed property funds on the JSE. Growthpoint’s current market capitalisation is R45  billion (at one point, it was R70  billion) and is the largest listed property fund in South Africa. 

I would say anything under R2.5  billion should be reconsidered when listing on the JSE because a company might not be liquid enough for institutions to buy into. 

Since listing, the share price has decreased sharply, from about R10 a share in 2015 to R2.30 at the time of writing. But Balwin Properties is still pumping out loads of stock. So, do people believe in the product, or is the listing forcing it to build? I am excited to see the next results presentation and how the performance of the newly added annuity businesses, such as the rental portfolio, will help with the bottom line. 

Ask Ash is a new column that examines South Africa’s property, architecture and living spaces. Continue the conversation with her on email (ash@askash.co.za) and X (@askashbroker).