Hous­ing and prop­erty devel­op­ment

Finweek English Edition - - INVESTMENT -

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

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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.

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