Balwin Properties shifts focus from buy to rent
Bid to create a R5bn rental portfolio that could become the JSE’s first middle-income housing Reit
JSE-listed home builder Balwin Properties is adding a rental product to its existing build-to-sell development model, a move that is likely to place the counter more regularly on the radar of property fund managers.
The developer has, since its inception 22 years ago, built and sold more than 17,000 sectional title apartments in close to 80 lifestyle estates across Johannesburg, Cape Town and Pretoria.
Balwin’s model is to build estates consisting of at least 1,000 one-, two-and three-bedroom units that typically sell for between R600,000 and R2.5m.
The company is now starting to add rental stock to the mix, which Balwin CEO and founder Steve Brookes believes will improve the quality of the cash flows.
Though Balwin already pays a dividend twice a year, it trades at a lower dividend yield (about 6%) than the average 8%-12% currently on offer from SA-focused real estate investment trusts (Reits).
Unlike Reits, which pay dividends from rental income, payouts from developers such as Balwin typically come from development profits, which tend to be more cyclical in nature.
For this reason. developers often fall outside the investment universe of property fund managers. Adding a rental product to Balwin’s development model to supplement earnings is likely to bring more institutional investors into its fold.
Brookes believes there’s a gap in SA’s rental housing market for a quality product that will appeal to SA’s middle and upper-middle income market, where rentals are between R4,000 and R12,000 a month.
"We have seen a huge increase in demand for rentals among millennials, young professionals and small families who are struggling to keep up with the ever-rising cost of property ownership," he says.
Brookes refers to this segment as the "sweet spot" for residential landlords, especially those with the capacity to create a product of sufficient scale. He says there are no large players in this space despite attractive initial rental yields on offer of 10%-11% and rental growth of 4%-8% a year.
"This market segment is also less management-intensive than the lower end where rental collections and arrears can become more challenging," Brookes says.
Balwin’s competitive advantage is the large development pipeline on land parcels it already owns in Pretoria and the East Rand in Gauteng, Somerset West and the Milnerton node in greater Cape Town, as well as Ballito on the KwaZulu-Natal north coast.
Balwin has also secured the development rights to build up to 15,500 apartments at the Waterfall precinct north of Sandton.
Brookes is now in the process of creating a rental portfolio, which he hopes to list as a stand-alone Reit once it reaches sufficient scale.
That will create the JSE’s first rental housing listing aimed at the middle and upper-middle income market.
Currently, only a handful of JSE-listed players — including Transcend, Indluplace Properties, Octodec Investments and SA Corporate Real Estate — offer investors exposure to the rental housing market.
However, these companies cater mainly to the lower-income market in the R1,800-R5,000 a month bracket.
Brookes says Balwin has the capacity to roll out a rental portfolio of about 5,000 units worth R4bn-R5bn within the next three to five years. That is over and above the 2,500-3,000 build-to-sell apartments it already delivers every year. Balwin plans to retain ownership of about 15%-20% of the units in a number of its new developments for rental purposes.
A few estates will also be purpose-built exclusively for the rental market under Balwin’s more affordable "Green" brand, which will provide solar-energy solutions and high-speed fibre connectivity to tenants.
One such development, Green Park on Jet Park Road in Boksburg, is already nearing completion. The 1,200 one-and two-bedroom units are renting for R4,000-R8,000 a month.
Brookes says the scale of Balwin’s estates allows the company to subsidise a comprehensive lifestyle offering, which is key to the success of its model.
For instance, at Balwin’s newly developed Amsterdam estate in Olivedale, in the north-west of Johannesburg, lifestyle amenities include a gym with squash courts, an outdoor yoga deck, an Amici restaurant, a Camelot Spa, a pool, children’s play areas; a board and function room; a cinema, lounge and TV room, laundromat and car wash and free Wi-Fi at the lifestyle centre. All units are fitted with a fridge/freezer, dishwasher, washing machine and tumble dryer.
Analysts believe there is undoubtedly scope to list a middle-income, residential Reit on the JSE.
"The size and scale of the fund, liquidity and pipeline will, however, be key considerations for investors," says Craig Smith, head of real-estate research at Anchor Stockbrokers, who cites a market cap of at least R5bn as an ideal starting point.
Smith notes that there is a growing trend globally towards mobility, which supports demand for rental properties.
"Residential rental portfolios also offer diversification benefits — low concentration risk to any single tenant and, as a consequence, significantly lower default risk."