Vukile Property Fund plans to conquer the Spanish retail real estate sector. This follows it securing a €1 billion (around R16.15 billion) foothold in the country through its Madrid-based listed subsidiary Castellana Properties Socimi SA.
Speaking during Vukile’s half-year results to September 30 at a media briefing in Johannesburg on Monday, CEO Laurence Rapp said the SA real estate investment trust (Reit) is looking to dominate the Spanish retail property scene, with the aim of being “one of the top three largest retail Reits” within the next few years.
“We are doing tremendously well in Spain and what we targeted at the onset is coming to fruition. Our subsidiary, Castellana is now the eighth largest property company by market capitalisation in Spain and the seventh largest retail-focused Reit by gross lettable area,” he says.
“We are poised for further growth in the market and want to have a dominant position.”
Rapp points out that as a recognised retail landlord in Spain, it can get “economies of scale” to lure new tenants and enhance its negotiating power. “Castellana is consolidating Spain’s fragmented retail property market,” he says.
“We made two further acquisitions in Spain during the period, which took the value of our assets there to more than €1 billion.
“These acquisitions were below their valuations,” he adds. “We believe we are buying ‘undermanaged’ assets, but through our active asset management, we are extracting value.
“Our growth in Spain is not coming from yield compression, but through NOI [net operating income] growth.”
The 30 000m2 Puerta Europa shopping centre in Algeciras, Cádiz, is Vukile’s latest acquisition through Castellana in Spain and was announced in August. Puerta Europa is a double-level mall that has 97 stores, with a dedicated food and leisure area, including a 10-screen cinema complex.
Rapp says Castellana delivered strong operational performance with reduced vacancies to 1.4%, positive rental reversions up 6.7%, and 21% rental growth on new leases. Portfolio retail sales increased by 3.1%, double the 1.4% national benchmark.
Vukile’s investment drive into Spain was launched three years ago, and its Spanish assets now contribute some 47% of its earnings, while the balance comes from its SA portfolio.
Rapp says despite the tough market in SA, the local portfolio, which is largely made up of township and rural shopping centres, also performed well.
“The defensive nature of our grocery-anchored shopping centres, which mostly sell everyday goods to everyday South Africans and have a mix of retailers that offer necessities and value-driven items, is serving us well,” he says.
Vukile managed to reduce vacancies within its SA portfolio to 2.8%, retain 82% of retail tenants and gain strong like-for-like net property income growth of 6.1%.
For its half-year to September, Vukile reported 3.5% growth in dividends to 80.84 cents per share. This came in at the lower end of its market guidance of 3% to 5% growth in dividend per share (DPS).
Highlighting how dividend growth has slowed in the SA listed property sector, even for better performing funds, Vukile’s distribution growth for the half-year to September 2018 came in at 7.5%. Vukile is anticipating full-year DPS growth of between 3% and 5% for its 2020 financial year.
Vukile currently has more than R35 billion in assets. The latest results extend its track record of unbroken growth in dividends for investors into its 16th year. And earlier this year GCR Ratings upgraded Vukile’s national scale issuer ratings to AA-(ZA) and A1+(ZA) for the long and short term respectively.
Vukile’s loan-to-value ratio (LTV) now stands at 41%. However, the group recently announced the sale of its last non-retail assets in SA to unlisted empowerment group, Mbako Property Fund, for R700 million. Rapp says ideally the group would like its LTV to be between 35% and 40% and that the money from the recent sale will go towards bringing down its debt.
He points out that Vukile will now be a specialist retail-focused fund and is still investing in SA. The group acquired Mdantsane Mall in East London for R516 million from Rebosis Property Fund earlier this year, but the transfer took place in November after Vukile’s half-year period.
Evan Robins, portfolio manager at Old Mutual Investment Group, says Vukile delivered a solid set of results, despite a higher LTV.
“Vukile needs to bring their LTV down, and more than they have done with their recent sale,” he notes.
“Vukile has had success with Spain and they need to ensure the valuations hold and increase as they entered that market after prices had already appreciated. Given Spain’s size in their portfolio, and the amount of debt relating to it, this will be an important determinant of how the fund does.”
Reitway Global’s chief investment officer Garreth Elston comments: “LTV ratios north of 40% are generally a concerning sign. In a growing economy, it is not as much of a concern as it is in South Africa. With the current economic situation in South Africa and the potential for further economic decline, LTV ratios higher than 35% concern us.”
He adds: “Vukile’s asset sales are a positive development, and should the company achieve their target of 35% LTV, the impact on mitigating company risk will be significant.”
Elston says he is positive on the economics of the Iberian Peninsula, including Spain and Portugal, which are “far superior investment locations currently than South Africa.”