Funeral business adds more life to Calgro M3 | Fin24
 
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Funeral business adds more life to Calgro M3

Jul 18 2018 12:02
Lloyd Gedye

For residential property developer and builder Calgro M3, land occupations are a “real risk” that will be increasing in its line of business, says CEO Wikus Lategan.

The group, which specialises in integrated housing developments and is building its cemetery business (see sidebar), is yet to announce the costs of illegal occupations at its key Fleurhof project in south-west Johannesburg – during which 150 units were damaged in February – and its Scottsdene project in Cape Town in March.

At Scottsdene, 500 people occupied completed houses in the Sunset Village flats, claiming to be frustrated with empty promises from the city to deliver housing. 

Evictions at Scottsdene resulted in rubber bullets being fired and the burning of tyres, fuelling street battles between protestors, police and private security.

Lategan suggests that there may be some political meddling in the occupations, related to calls for expropriation of land without compensation in the country.

“We started working on the Scottsdene project in 2012 and we have had no problems, so where did the people come from?” he asks rhetorically.

Integrated housing 

The award-winning Fleurhof development is a 440-hectare property being developed in partnership with the City of Johannesburg as an integrated residential project, which means it offers a variety of housing options?– from stand-alone houses for sale to higher-income earners, to fully subsidised government housing, as well as amenities such as schools, parks, places of worship and business and retail opportunities. 

Once finished, it will contain 10 411 units and provide housing for an estimated 83 000 people.

Fleurhof contributed nearly 23% to Calgro M3’s revenue of R2.3bn in the year to end February.

The Scottsdene development is Calgro’s first integrated development project to be undertaken outside Gauteng and is being developed on land that is owned by the City of Cape Town. 

The project, awarded by the city in November 2010, is set to be completed in 2019, providing 2 897 residential units.

While a “desperate need for housing close to places of work” remains, it is unlikely that government will be able to spend sufficiently in the next 12 to 18 months to “impact the gap in even a small way”, Calgro said.

Other challenges include greater indebtedness in the mid-income market, an increase in new bad debts and consumers that remain under financial pressure, it said.

Diversification

With government spending expected to remain under pressure, Calgro is increasing its focus on the private sector, selling 935 homes to individual private clients in the past financial year. 

Its diversification drive also includes the introduction of rental units in collaboration with SA Corporate Real Estate’s Affordable Housing Company (AFHCO) – it estimates the shortage for residential rentals in SA at 1.5m units – and the expansion of its cemetery business, adding 85 593 burial plots to its pipeline through acquisitions in Fourways, Springs, Durbanville and Bloemfontein. 

Calgro entered the rental business to secure annuity revenue for use as operating cash, and says it also benefits from bulk infrastructure created previously under its residential property development division, rather than having to create infrastructure each time a development commences. 

While the division suffered an after-tax loss of R4.6m in the past financial year, Calgro believes there is a demand for affordable rental opportunities in metropolitan areas, and the consortium is targeting net property income yields of around 10.5% a year. 

The first phase of its expansion involves 3 852 units in its South Hills development in the south of Johannesburg, another key integrated development for the group.

Residential property development remains the mainstay of Calgro's business, with a pipeline of R25.3bn consisting of 54?376 opportunities, which Lategan says will be executed over the next six years.

Expanding Memorial Parks

Calgro M3 has big plans to expand its cemetery business, Memorial Parks, which it sees as a high-growth business due to a shortage in the market for burial products.

“We are running out of burial spaces quickly,” says CEO Wikus Lategan. “Municipalities can’t keep track.” 

Challenges facing the burial industry in SA include a shortage of burial land, with insufficient funds from government for the development and maintenance of cemeteries, and the existence of informal or illegal cemeteries due to the high price of conventional and traditional burials, Calgro said in its annual report. 

There is also resistance from communities to adopt alternatives to burials, such as cremation and the recycling of graves, it said.

Calgro’s cemetery business offers plots for burial and so-called “ash graves” in a landscaped, secure setting, with clients also able to hire chapels or tents and buy tombstones from the business. 

The first Memorial Park was opened in Nasrec, near Soweto, in 2015. It will be able to accommodate 33 500 graves once fully subscribed. 

In the first two years, 449 graves were sold at Nasrec Memorial Park, representing revenue of R4.8m. In the year to end February, 785 graves were sold, representing revenue of R9m.

Calgro owns cemeteries in Springs, Durbanville and Fourways, with a total capacity of 127 000 graves, and opened its Avalon Memorial Park in Bloemfontein in June. 

The division has a project pipeline of R2.2bn and targets a return on equity (ROE) of more than 30%, including by increasing its policy sales to support annuity income.

In the 2018 financial year, Memorial Parks contributed R6.2m, or 5.14%, to the group’s after-tax profit of R120.8m, up from zero in the 2017 financial year. 

This reflected ROE of 10%. The aim is to increase its profit contribution to 10% by 2019 and 33.3% by 2021, Lategan says.

Calgro's annual report states that while these targets may seem “rather ambitious”, they are supported by grave sales that are increasing month-on-month, coupled with ongoing improvements and advancements within the business. 

This article originally appeared in the 19 July edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.


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