May 20 2024 19:00
SA's largest sectional title home developer saw its performance metrics take a hammering in the financial year to end-February 2024 as fewer people chose to buy units in it developments.
While some potential customers may have chosen not to buy into the Balwin brand specifically, general affordability is under strain across the country. Nevertheless there is optimism that Balwin will turn a corner when interest rates ease and when the economy gains momentum, hopefully post the March 29 general election.
The group's financial results were released on Monday. CEO Steve Brookes said the group's results reflected the macro-economic conditions
experienced in the country, characterised by high interest rates, inflationary increases and rolling blackouts. These factors affected consumer demand, loan affordability and investment in fixed property.
“The past financial year was the toughest in our 28-year history as escalating interest rates, higher fuel and food prices as well as political uncertainty over the upcoming elections impacted on demand for residential housing. Our relentless focus on innovative design efficiencies and overhead reductions was further supported by a pleasing contribution from the annuity business, which resulted in a materially consistent gross profit margin of 28%,” Brookes said.
Balwin sold 896 fewer apartments in the reporting period, which resulted in the company’s 2024 full-year profit falling 50% to R217.4m. Revenue fell a devastating 29% to R2.4bn. These weak numbers saw the company’s headline earnings per share slide 48% to 47.94 cents per share.
Balwin listed on the JSE's main board on Thursday, October 15 2015. In February 2023, it joined the A2X with a secondary listing. The group is trying to raise capital in trying times and to build more liquidity in its shares.
The Western Cape also overtook Gauteng as Balwin Properties' main revenue contributor as income from the richest and densest province plunged nearly 50% in the financial year.
“The pressure on consumer spending from sustained high interest rates and above-inflationary living cost increases has translated into reduced demand for apartments, owing to the lack of affordability of loans. Consequently, the number of apartments recognised in revenue declined 32% over last year, to 1 892 apartments,” Brookes said.
“The largest sales decline was experienced in Gauteng, where revenue declined by 47%. Gauteng has traditionally been our flagship region, while this year the contribution reduced from 48% to 39% of total apartments handed over. However, we are optimistic on the long-term sustained demand within Gauteng, which is expected to gradually improve as the market recovers,” he said.
Coastal regions contributed 63% of revenue during the period under review, up from 52% reported in the 2023 financial year, mainly as a result of semigration.
“For the first time in our history, the Western Cape has emerged as the group’s top revenue earner, contributing 46% of total group revenue, from 35% previously. We however remain positive on the longer term contribution of Gauteng as the main driver of sales,” said Brookes.
According to the latest Rode Report on the South African Property Market, both FNB and research house Lightstone’s house-price indices recorded the lowest growth rate for the past four years in the last quarter of 2023. This was significant, as it includes the Covid lockdown periods.
But “the first quarter of 2024 showed a reversal of this trend", and although several macro-economic headwinds remain – especially in an election year "it appears that the sector has at least stabilised,” Brookes said.
Developments under construction, which include the value of land and infrastructure costs, development rights and construction costs, increased by R607.8m to R6.3bn. This increase was driven predominantly by construction and development costs as opposed to additional investment in land, reflecting Balwin’s focus on developing the existing pipeline of projects.
The group’s annuities businesses reported strong growth on increased scalability, with an aggregate revenue of R132.5m for the year, an increase of 70% on the prior financial year. The business segment recorded an operating profit of R69.5m before intergroup eliminations. Half of the revenue was derived from fibre and infrastructure service, which increased its active clients to 9 109.
In line with its sustainability objectives, all new developments undertaken by Balwin Properties are aimed at achieving EDGE Advanced ratings, which recognizes excellence in design for greater efficiency. A total of 23 273 apartments developed by Balwin have been registered as EDGE (Excellence in Design for Greater Efficiency) with the International Finance Corporation.
Balwin has achieved significant milestones with 15 833 apartments registered as EDGE Advanced, demonstrating energy savings of 40% or more and water savings of 20% or more.
The company's dedication to sustainable practices extends beyond individual apartments. Nine of Balwin's lifestyle centres have achieved six-star green ratings and have been accredited with Net Zero Carbon ratings by the Green Building Council of South Africa, affirming their ability to generate and maintain a net zero carbon footprint.
The group closed the year with a strong cash position of R289.6m. Its loan-to-value reduced marginally to 40.5% from 40.7% a year ago, well within covenant requirements.
“We expect that the domestic economic outlook will remain challenging in the short- to medium term, especially given the South African Reserve Bank’s continued hawkish stance on interest rates and prevailing political uncertainty in light of the upcoming elections. Any reduction in interest rate should have a catalytic effect on demand," said Brookes.
“Our short-term focus will be to protect our existing margin levels, with the practice of using sales incentives as a strategy to drive sales expected to continue for the upcoming financial year. The target gross margin of the group remains in the low-to-mid-30%," he said.
From an operational perspective, Balwin has slowed the rate of construction to match the rate of sales.
"In addition to ongoing cost containment, we will focus on leveraging our existing land bank and pipeline of developments, with strategic acquisitions considered on an ad-hoc basis, especially in the Western Cape. The emphasis will however be on continued prudent cash management and responsible environmental practices," Brookes said.
The group said that considering current and expected trading conditions and market
uncertainty, the board has resolved not to declare a dividend for the 2024 financial year compared with 2023's dividend of 24.0 cents per share.
The board will reconsider the declaration of a dividend for the 2025 financial year.
alistair@propertyflash.co.za
