Gauteng-based JT Group is a diversified property development company focused on undervalued raw land earmarked for future residential property development. In these times of doubt and economic uncertainty, the company is diversifying its offering but not abandoning its core principles. Enterprise Africa finds out more from this ambitious organisation…
It’s looking like 2016 is going to be a tough year for South Africa’s construction sector. Uncertainty in the economy and murmurs of slowdowns in China, SA’s biggest trading partner, have caused the pipeline to begin drying up.
In November, SA’S construction and engineering sector index was trading 69% lower than at the peak of the global economic crisis. A construction report by global consultancy PwC, released at the end of 2015, revealed that five of the nine biggest listed construction firms surveyed had market capitalisations below their net asset value.
The declining Rand, the lack of confidence in the industry, the lack of investment into new infrastructure projects and the uncertainty in the global economic climate have piled substantial burden on construction companies and many industry commentators are now suggesting that the big firms are under pressure and will remain under pressure for some time to come.
FNB released a report in September stating that the industry is facing difficulties; Jason Muscat: senior industry analyst at FNB said: “While many projects are now coming to an end, few new projectsare being brought into the pipeline.”
International consultancy and construction company, Mace, said recently that it forecasts continued slow growth in South African construction market. Mace’s Associate Director for Sub-Saharan Africa, Alan Lemberger said: “Some consultants and contractors are looking at opportunities in other parts of Africa where there has been good growth in the last couple of years.”
However, it’s not all bad news. Andries Rossouw, energy and mining assurance partner at PwC, said when presenting the company’s report last year: “(Public sector) expenditure is not really happening in line with expectations. Meanwhile, a recent shift in public sector spending towards social infrastructure such as housing and associated schools, clinics and water reticulation, along with spending by the SANRAL, has kept some smaller construction companies ticking over nicely,” indicating that there are some positives to be had for companies that are specialised in these specific areas.
One company that is operating successfully in the affordable property construction sector is Gauteng’s JT Group. Established in 1984, JT Group specialises in all aspects of land development namely the acquisition of land, town planning, project management, overseeing installation of civil and electrical services, construction and property consulting services, obtaining the rights to develop, managing the marketing and construction of top structures. To date, the company has completed projects involving the development of more than 18,000 residential properties and various commercial and industrial developments and has 16,000 residential opportunities under development.
Project Manager, Nicholas Nolte tells us that the key to thriving in difficult economic conditions is diversification and adapting to the market.
In recent times, the company has looked at broadening its strategy to ensure a continuous and steady cash flow. Affordable housing development remains a vital component but in the future, JT will look at developing its shopping centre portfolio and also its rental market capabilities.
“In terms of retail, strategically, we are moving towards the purchasing of smaller shopping centres, neighbourhood-sized shopping centres, which are undervalued with high vacancies but high potential,” explains Nolte. “We would perform a lease analysis and a value audit to determine the potential for a revamp on the entire centre. We would thenacquire the property through bank financing, and then spend additional money – up to about 10% of the value of the property – revamping the property. We then go out and find new tenants for the centre and this creates extra additional value. We also manage the shopping centre and eventually sell the property to a fund or investor or keep it to supplement cash flow streams,” he explains.
“The most recent one we did is the Evander Shopping Centre in Mpumalanga.”
Nolte also explains that the company is currently involved in a big project just outside the capital where it is seeking a partner to move forward on an exciting industrial development.
“For new industrial/commercial work, we have about 23 hectares of land in Atteridgeville in Pretoria where zoning rights are in place for industrial and commercial use and we are planning a value-mart type shopping complex,” he says. “We own the land and we are now in negotiations with a development partner who would come in and form a JV agreement with us for the development. This means we wouldbe able to fund the financing shortfall from the banks and that enables us to increase our gearing ratio.”
“We like to work in partnerships, especially with land owners, as this reduces the holding cost which is helpful as the process is so uncertain.”
Further diversifying its offering and bolstering its strong presence in the local property market, JT will also look at investing in the residential rental market.
“We believe there is going to be a stronger residentialrental market in the next one to three years so we are acquiring sectional title properties in the middle income class where we would buy the land, do the construction and rent the property out to individual tenants or sell off a phase of the development and use the capital to develop the next phase of the complex and look after the property management side of things,” says Nolte.
TODAY’S CHALLENGES
The company’s diversification has only been made possible by a long-term focus on its core business – the development of affordable housing. While this market has become more and more difficult over the years with increased legislation, decreased availability of suitable land and fluctuating interest rates, it is still an important sector for JT but Nolte notes the difficulties that now face developers.
“The risk/reward ratio is getting worse and that is one of the reasons that we are moving towards commercial investment and asset management. Our company was originally an affordable housing land developer but the margins in that sector of the market has changed drastically in the last decade and we are starting to move away from that; not entirely, but it’s not our main focus for the next two to three years.
“You used to be able to do 200 units a year, along with a couple of other developments, and get by ok but now, because of the low margins, you need to be doing at least 2000 to make it worthwhile. There is now so much infrastructure which needs to be funded by the developer where previously the municipality would have funded this,” he says.
“Land development processes have become very cumbersome. There is a lack of understanding from government institutions regarding practicalities for the developer. Many officials have no understanding of the major impact that a time delay can have on the financial viability of a project.
“Power restrictions are a serious problem. There is a lot of land that is simply not developable at this stage because of the lack of electricity. The municipality will grant approval for a development but then you have to install or supply the electricity yourself and that can make the project literally unfeasible for the next five to ten years.
“Interest rates going up, inflation and the cost of building materials all affect us. The main concern is the increase in interest rates which affects the spending power of our clients,” he adds.
STRONG FOUNDATIONS
Even considering the challenges that face the affordable housing development market, JT Group has performed particularly well in recent times and currently has important projects underway.
“We’re busy with the Grootvlei Estate that is located in Springs. It’s 187 houses in an affordable gated community. We are basically sold out on that development and we’re about 70% complete with the construction,” says Nolte.
“We’re busy in Daveyton, we call it Mayfield Village. It’s 611 affordable housing stands. We bought the land as a farm from a farmer and we then embarked on the planning process, doing the township establishment, doing the surveys, and all the necessary studies such as traffic studies and geotechnical investigations, we then obtained approval from the municipality. We started with that process in 2009 and the stands were only ready for transfer in 2015 so it’s around a six year process from start to finish. We went into a JV with the farmer in order to cap our holding costs and we also established an estate agency where in-house agents are appointed to market and sell the properties. We recently sold a large chunk of this development to another affordable housing developer.”
“Another project in our portfolio is the Zamdela Project which is also affordable housing but is a mixed development. It’s in Sasolburg in the Free State. It has 346 stands which includes a sectional title component, a full title component and a retail component. That project started in 2007. We decided to sell the entire development to a construction company and we retained the shopping centre site which we are now either planning to sell or to go into a joint venture with a shopping centre developer. We would then partner with the experienced shopping centre developer where we would put the land in and keep that as cash flow income stream for the future,” he explains.
These, along with the many other projects which JT is part of, make up a significant market for both the company and the municipalities which are involved.
JT Group has the vision to become the leader in the South African property development market and as long as it continues to successfully complete projects – while focussing on sustainable development, sustainable environment and sustainable communities – it can certainly achieve that; especially while the big, sub-Saharan organisations battle for share in tough economic conditions.