The share price of Balwin Properties climbed 5.15% to close at R6.94 on Monday after it announced it had formed a strategic alliance with listed residential property owner Transcend to bring to market up to 8,900 affordable rental apartments worth a total of R6.4bn.
This will cover five developments in key Gauteng nodes over the next six years.
The market welcomed the news from Balwin, the share price of which has come under pressure over the past year because of negative sentiment on new property developments.
Keith McLachlan, fund manager at AlphaWealth, said SA’s economy was in the doldrums, which put developers such as Balwin under pressure.
Balwin had also developed properties to sell, which meant its income received was reliant on the transfer of actual sales, said McLachlan.
Investors have been hungry for varied listed residential property offerings. Less than 5% of the listed property sector contains residential property but demand for rental accommodation is high across the economy.
Transcend CEO Rob Wesselo said the deal was the largest the group had done since listing in December 2016.
Tenants would finally be able to rent investment-quality properties for between R4,000 and R8,000 a month, which was a price range in "very high demand", he said.
Balwin would be responsible for design and construction and marketing and securing lease agreements for the apartments.
Transcend would effectively have the opportunity to buy fully tenanted apartments in phases from Balwin.
Transcend’s intention was to participate in all five developments, although they would be reviewed independently.
McLachlan said that while the deal "looked very good for Transcend", Balwin appeared to be adding risk to its balance sheet. "Transcend is able to buy already leased properties through this deal.
"Meanwhile, Balwin has to lease out the apartments, which, as a developer, is not their core business. Balwin always said they would add rentals to what they do, so the market is waiting to see how successful they are," he said.
The next two sets of financial results would be important indicators for Balwin’s prospects, observed McLachlan. "We will then see how they traded through a recession. They had changed their revenue recognition model, which boosted their February 2017 financial year results with a once-off benefit. We want to see how they do without a one-off boost."
Balwin CEO Steve Brookes said the developments would add better-quality stock to SA’s rental housing market.
Green Park is the first development earmarked for this alliance. Located in Boksburg, the first of the 1,200 apartments are expected to be delivered to Transcend in February 2018.
Transcend was created by private equity group International Housing Solutions (IHS).
IHS would continue to provide asset management services to Transcend, including the Balwin assets, through IHS Property Management.
Wesselo said the alliance was in line with Transcend’s strategy of focusing on a defensive asset class which delivered affordable housing rental to an underserviced portion of the market.