This South African property group is dropping ‘elite’ developments – because the economy can’t take it

Property group Baldwin says that it will move away from developing new ‘elite model’ apartment buildings, as the current economic climate in South Africa is not conducive for these types of projects.

The group has published its interim results for the six months ended 21 August 2019, showing a 19% jump in revenue to R1.42 billion.

Ebitda was up 2%, while profit for the year increased 4% to R185 million. Headline earnings per share were up 5% to 40 cents.

Developments under construction – including the value of land, land contribution costs and development costs – increased by R194 million to R3.2 billion, the group noted. Land costs account for approximately 36% of the value of work in progress.

“The group’s focus remains on the execution of its existing development pipeline and it is not actively exploring new land parcels.

“It does, however, remain alert to strategic opportunities in identified nodes and any such opportunities will be contracted in a manner that is not onerous on the cash resources of the group,” it said.

The group operates mainly on a build-to-sell model and is currently developing between 2,000 and 3,500 sectional title residential units per year, with most of its offerings priced in the R600,000 to R1.99 million bracket.

These apartments are designed to have mass appeal, drawing in a wide range of home buyers – particularly first-timers, young professionals and young families.

However, the group has also ventured into an elite model of apartments, where developments are built at a higher spec and often achieve selling points at between R2 million and R3 million.

It currently has two elite model developments within its portfolio – The Polo Fields in Waterfall City and Paardevelei Lifestyle Estate in Somerset West.

However, the group said that the current economic climate does not make this a viable route for its business, and has decided to exit it.

“Considering the prevailing macroeconomic conditions, the group does not intend to continue the elite model developments, and will phase these out once the existing developments are completed,” it said.

The reasons for the move were evident in the group’s financials.

“The rate of sales across the developments was in line with the group’s expectations. Strong sales continue to be recorded at The Blyde (Tshwane East), Ballito Hills (Ballito) and Kikuyu (Waterfall), with sales rates exceeding the development average of approximately 25 apartments per month.

“Conversely, the sales rate at the Balwin elite model developments, namely The Polo Fields (Waterfall) and Paardevlei Lifestyle Estate (Somerset West) continue to be below the sales rate of the core business model developments due to the current challenging economic conditions,” it said.

The group’s gross profit margin for the period was 25%, down from 27% in the comparable period last year.

Among the factors contributing to this contraction, Baldwin specified that there was reduced profitability realised on the elite model developments when compared to the targeted gross margin of the group.

“The group does not intend continuing the elite model developments upon completion of the current elite estates and has changed its sales strategy with respect to the ‘green’ projects in order to maximise returns to shareholders,” it said.

The Polo Fields is expected to be completed in 2023, while the Paardevlei Lifestyle Estate is expected to be completed in 2021.

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This South African property group is dropping ‘elite’ developments – because the economy can’t take it