Housing and property development
There appears to be a dichotomy in the South African residential property market. On the one hand, there i s subdued activ it y for properties costing R600 000 or more, hardly any price appreciation, and not much new supply coming on to the market. The reasons for this are varied. Banks are probably still sitting with a lot of ‘ dead wood’ from the previous credit cycle and loath to fund developments when this unwanted inventory stil l needs to be run down. The margins on lending to t his market are also very low, creating a disincentive for banks to turn on the taps, which has r esu l t ed i n l ow r et urns a nd constrained supply.
But in the space below R600 000 (the one Calgro M3 is involved in), things are quite different. Banks – via commitments made in the f inancial services charter – are eager to lend in this market (the margins are higher), and t here is considerable Government support to not only develop infrastructure required for housing but also to subsidise the cost for consumers to purchase or rent property.
“We think there are probably about 600 000 to 700 000 families t hat could qualify for bonds, but there is no inventory for properties costing R600 000 or less,” says Ben Pierre Malherbe, CEO of Calgro. In order to operate on commercial terms in this space, the company has integrated all operations required to transform bulk agricultural l and to f ully ser viced housing developments. “We have collapsed the entire structure,” says Malherbe. This has seen the company acquire f irms involved in town planning, project management and construction, to form a one-stop shop.
As can be expected the business has a long working capital cycle from the time it secures land to the point Price 850
Oct 2013 where it realises the value. It is also very capital hungry. For this reason Calgro sources f unding f rom both privately generated sources, as well as taking money from the public sector on a project-by-project basis. In the case of debt, f i nancial director Wikus Lategan says t hat t he company has a note programme in place t hat sources f unding over periods of t wo to four years, but accounting for it means classif ying all debt as current. “Inventory is classif ied as being 12 months or less, so the debt is classif ied as current as well.” With signif icant project risk, Lategan says that the business has gone to great lengths to de-risk itself through the use of contracting that can keep costs f lexible.
Last y e a r t he c ompany s pent R120m on new projects with t he aim of developing 55 000 units in the next six years. With the share price at R7.85 ref lecting a market capitalisation of close to R1bn, there appears to be plenty of value for the company to unlock providing it executes its projects on time and on budget. And there is no shortage of demand.