Calgro M3 Holdings: Opportunity Knocking on the Door

Timing can be everything in business, particularly when times are challenging. The property market slump of 2008 hit South Africa businesses hard, but created new emerging markets that shrewd property developers are now tapping into.

calgrom3-logoOne such company is Calgro M3 Holdings, a company that has taken full advantage of its Johannesburg Stock Exchange listing just a year before the crash, to become a major player in the mixed-use and integrated residential development, as Ben Pierre Malherbe, chief executive officer explains:

The integrated market came to the forefront when the previous Minister of Housing, Lindiwe Sisulu, promulgated the BNG (Breaking New Ground) principle of integrated residential Developments during 2007 – and there are new players entering the market all the time. We estimate that at present Calgro M3 is only meeting around 3 per cent of the market needs here in South Africa, so there is tremendous potential,” he states.

The integrated market approach entails catering for fully subsidised, social housing, rental housing, entry-level affordable housing (finance linked bonded housing) all in one project, leading to integration of different market segments.

Because the dynamics of lending are strict, a high percentage of properties generally have to be sold (presale requirements, as stipulated by the financial institutions) long before building starts on a project, Malherbe says that Calgro’s unique business model reduces that time period significantly:

Much of the delay between selling properties and handing over the keys is down to a reliance on other entities to build infrastructure before we can start construction on a project. At Calgro we will build much of that infrastructure ourselves, including water, sewer systems, roadways and electricity supplies. Because we fund our own infrastructure we can bring delivery of the home much closer to the sale time.

As co-founder, Malherbe has seen great change in the direction of the company since its inception, when Derek Steyn started the company as an affordable housing developer during the early 1990’s. By 2000 Calgro and M3 Developments had merged to form Calgro M3 and Malherbe says that in the last couple of years there has been a policy shift towards social housing projects, which was prompted by the Government’s focus on this area, allowing the company to diversify with financial assistance from authority grants.

Such was the success of Calgro that it listed in November 2007 and in the year before the property slump, acquired a company called CTE Consulting, which brought town planning skills in-house.

Over time we have been able to acquire architecture skills and the addition of the town planning business has definitely helped us to not only keep our costs down but to build on existing relationships with local authorities,” Malherbe outlines.

In February of this year the company moved to the main board of the Johannesburg Stock Exchange and Malherbe feels that this positive move has delivered an important edge;

Of course being listed means that we have to have a high degree of corporate governance in place, which, along with our excellent track record on projects, helps us to acquire funding when necessary.

Today Calgro M3 Holdings is a forward-thinking business in a market offering almost more opportunity than is manageable. The company is headquartered in Bryanston, Sandton, and historically concentrated on the Gauteng province.

However the past twelve months has seen the business turn its attention further afield, as Malherbe explains:

We started off in Gauteng only but last year we began work on our first projects outside Gauteng with the Brandwag project in the Free State, followed with the Scottsdene project in the Western Cape. We subsequently opened an office in Cape Town in November 2011. It took two years of planning and negotiation but we are able to spread our risk which is always an important consideration when dealing with Government projects and adopting our business model.

Our model is based on us being the landowner; we buy the land either from the Government or private sector – so our work does not involve a bidding process. When we have bought land and have an idea of what we want to do with it, we then approach the Government and ask them if they are interested in working with us, so having more options available across three provinces is important to us.”

Malherbe says that even before Calgro buys land it will have entered a lengthy process to identify a location and will enter a due diligence period to help determine whether the land is usable.

This process helps us to decide that there is a market and what type of project we need to build. So before we begin the design process, we will have a pretty good idea of what we want to do with the land, although we always allow for an element of flexibility,” he clarifies.

Our marketing plays a pivotal role in the process as we then aim to sell properties and we won’t build unless there is a need in the area. The marketing process will then dictate the construction phases as no units will be constructed without a sale backing up. We see the marketing as the key “value-add” and the construction as a way of delivering units sold to end-users.

That of course requires work with the local community and we will develop community participation processes and at the construction phase we will always hire local workers and use local supply chain as much as possible. We then do all of the construction ourselves, overseeing sub-contractors and providing a turnkey solution as we feel it is important to have consistency on each project,” he adds.

One of the drawbacks of the financial downturn four years ago was that funding was dramatically cut back. However, Malherbe remains positive and says that Calgro’s business model now has a proven track record which helps when approaching the banks.

We have just announced our turnover for the first six months of the year which came to R400 million, excluding joint ventures. We don’t readily look to new joint ventures at this time but back in 2009 when times were tougher we had to diversify our exposure to more than one project and joint ventures was the route taken.

Today we are working on some very exciting projects like Scottsdene, an R800 million development comprising of 2,300 units. Closer to home we have been working on 9,600 units at the Fleurhof Ext 2 development, situated south west of Johannesburg and next to the existing Fleurhof proper residential township. It is set to be one of the largest integrated housing developments in Gauteng and is another major project at R2.8 billion.

We are also currently busy with construction on a project that will deliver 4,200 units in the Jabulani CBD (with currently 1,211 under construction) adjacent to the Jabulani Mall and hospital, in Soweto. Jabulani CBD is a joint venture with Inkanyeli Projects and will consist of sectional title residential units offering secure apartment living with high quality finishing and close accessibility to a variety of major transport nodes. The development will comprise of social housing, rental units and open market GAP units.

Right now, with affordable housing very much going through a boom period, Malherbe cites the need to manage growth as a critical factor in Calgro’s future. Depending on the size, projects can take 6-7 years to complete and the company only starts to see a first return on its investment 18 months to two years into a project, meaning that the company has to be discerning when deciding on its opportunities.

Sometimes it can be hard to say no to a project but is necessary,” he admits. “Issues such as town planning and understanding the needs of an area can be time consuming and everything has to be right before we will consider building.

From 2008 to 2010 we were in survival mode but we are now achieving rapid growth so we will need to look at our internal systems and may need to upgrade these as they were designed for a business with much smaller turnover.

The opportunities before us are huge but we have to measure those against how fast we can grow and what our construction capacity is. Our strategy of working in the integrated development market has worked wonderfully and the new Finance-Linked Individual Subsidy Programme (FLISP) also offers an exciting future,” Malherbe concludes.