Balwin’s potential exit spotlights tough road for residential developers on JSE

The listed property market is becoming increasingly inhospitable for residential developers, with a weak economy and subdued housing demand exposing the vulnerability of development-led earnings.

The sector has steadily contracted as several residential-focused counters have delisted, while higher interest rates have weakened affordability and slowed new-home demand. Rising construction costs have further increased development risk and squeezed margins.

Balwin’s proposed exit from the JSE is the latest sign of this pressure. South Africa’s largest sectional-title developer is planning to delist, subject to shareholder approval of a R2.26bn buyout offer from a consortium led by the Public Investment Corporation (PIC) and the company’s founders.

The deal highlights a broader mismatch between residential development and listed property investors’ preference for predictable income. Build-to-sell developers are exposed to fluctuations in housing demand, construction costs and the development cycle.

“The South African listed property sector has proven to be a bit of a graveyard for standalone residential counters. The listed real estate market is fundamentally geared towards institutional capital seeking predictable, recurring distributions. Build-to-sell developers, such as Balwin, are intrinsically misaligned with this mandate,” said Golden Section Capital MD Garreth Elston.

That pressure comes as the residential market remains constrained. New building activity is subdued, while fewer existing homes are being put up for sale, helping to support house prices, according to FNB’s residential property barometer.

The South African listed property sector has proven to be a bit of a graveyard for standalone residential counters.

—  Garreth Elston, Golden Section Capital MD

Balwin’s proposed delisting follows a broader retreat from standalone residential property. Indluplace Properties delisted in 2023, while diversified Calgro M3 remains listed but shut down its construction division in 2020, moving away from the capital-intensive operation and outsourcing construction.

For residential rental funds, however, the problem has been different. Elston said Indluplace and Transcend had sound underlying assets but lacked the scale needed to make the listed model work efficiently.

“Managing thousands of individual leases, tenant turnover and administration creates high operating costs, while compliance and head-office costs add to the burden. Ultimately, the resulting net yield was not attractive enough to justify the listed structure,” he said.

Meanwhile, senior equity research analyst Ridwaan Loonat said the JSE generally favours property companies with recurring rental income over residential developers.

“Listed property investors typically look for predictable earnings, sustainable dividends and visible cash flows. Reits provide this through rental income secured by lease agreements, making earnings easier to forecast. Residential developers are more dependent on property sales, which are influenced by consumer confidence, mortgage availability and interest rates. As a result, earnings tend to be more volatile,” he said.

The same issue extends to development pipelines. Developers may hold significant value in land and future projects, but it can take years to convert that value into earnings. With costs, timing and returns uncertain, investors are often reluctant to fully value those pipelines, Loonat said.

Liquidity has added another layer of pressure for smaller specialist funds. Elston said Indluplace and similar counters fell into a “liquidity trap”, with low trading volumes contributing to discounts to net asset value and making it difficult to raise capital to expand.

‘Rational option’

“Ultimately, delisting or a sale became the only rational option,” he said.

The contrast with larger diversified property groups is becoming increasingly apparent. Elston said SA Corporate Real Estate’s acquisition of Indluplace showed how residential assets could become more viable when housed within a larger listed platform. This allows them to benefit from greater scale and existing operational infrastructure.

“In my opinion, the standalone listed residential experiment in South Africa has effectively ended. The macroeconomic barriers to entry for a new listed specialist fund to achieve the necessary scale and liquidity are prohibitive,” Elston said.

“Moving forward, listed residential exposure on the JSE will belong almost entirely to the diversified megafunds, which possess the balance sheets and operational leverage required to hold these assets through the cycle.”

Business Day