Vukile goes property shopping in Spain

Keillen Ndlovu is head of Listed Property Funds at Stanlib. (Picture: Supplied)
Keillen Ndlovu is head of Listed Property Funds at Stanlib. (Picture: Supplied)

With the enormous amount of data now available, one can speculate with some confidence about the health of a country’s economy and investor appeal. 

But the mood is best judged when one’s feet are actually on the ground.  

And Spain is vibrant; the signs of the financial crisis that pulled the rug from under its feet between 2008 and 2013 are all but erased. 

Restaurants, shops and hotels are buzzing, and the pristine streets bustle with people and traffic.   

It’s the mark of a thriving economy so, not surprisingly, investment in recent years has been bountiful. 

Last year, €8.9bn was ploughed into Spain’s commercial property market, a quantum leap from the €1.5bn-odd in 2012.  

Retail-focused South African real estate investment trust (REIT) Vukile Property Fund was one of those investors, putting about R4bn (€290m) into 13 properties last year, mainly retail parks, via its subsidiary, Spanish REIT Castellana Properties SOCIMI SA.

Vukile, whose SA assets include malls in the East Rand, Gugulethu, Atlantis and Dobsonville, owns 98% of Castellana.  

More is to come, the first being a €83m-odd single asset acquisition that, if realised, will take Castellana’s portfolio value to around €380m/€400m and boost Vukile’s total asset value from R21.95bn-odd to around R23bn.  

Offshore exposure has also been boosted to 28% – 22% in Spain through Castellana and 6% in the UK through Vukile’s investment in Atlantic Leaf. 

Offshore earnings now represent around 27%, says Vukile’s financial director Mike Potts.    

Building a business in Spain

But why Spain? Why not central and Eastern Europe, where many other SA property investment trusts, such as Growthpoint and Redefine, have focused their offshore efforts?  

CEO Laurence Rapp tells finweek that aside from an offshore strategy of investing in developed markets, Vukile is not going to add anything to the SA investor base by going into central Eastern Europe. 

“There is already more than enough choice for investors.”  

The macro play of rising interest rates also plays a part, Rapp says. “When interest rates start rising [in the developed world], we think you will see a risk off-trade from emerging markets to developed markets. 

Exposure to a developed market is a good counterbalance to our SA company [exposure] to an emerging market.”  

Spain is seen as one of the more stable markets in Europe, says Steven Weaving, executive director of Retail Partners Europe. 

Even risk-averse German investors are back in the market. “It is a good, stable market to be in, offering good medium- to long-term growth.” 

In 2017, retail investment volume in property reached €2.4bn, up from €75m in 2012. 

Spain has the fourth-largest economy in Europe and is undergoing an economic recovery. (See box below.) 

Says Rapp: “I think it’s a sustainable recovery. While the yield compression that you see in most markets has come about in Spain, rental growth has yet to come through. 

We’ve taken the view that this is a long-term play based on pure property fundamentals, good macroeconomics and anticipation of rising rentals.”  


Much of the capital coming into Spain, says Rapp, is from “briefcase” investors flying in to do a deal. 

It is private equity money looking for yield with no on-ground presence.    

Vukile is doing things differently, building Castellana as a standalone, internally managed REIT with an experienced team of Spanish property experts. 

It is also going above and beyond the level of corporate governance required of REITs in Spain. 

In essence, it is replicating much of the SA REIT model.   

“REIT legislation in Spain is relatively new, driven more by institutional shareholders as opposed to REIT shareholders,” says Rapp. “The sophistication and development of the SA REIT market is not yet apparent in the Spanish market.   

“What we do in South Africa is run REITs very well. Our model works. We are setting up Castellana to operate on the same basis as which we operate in SA. 

Ultimately, we are backing local knowledge and expertise and giving the Spanish team the infrastructure and background to build a business that stands on its own in Spain,” adds Rapp.  

The Vukile model includes acquiring property for yield as an income vehicle and aiming for yield players rather than capital growth investors.   

Vukile’s timing looks to be spot on, because the Spanish market is starting to see a shift away from investors concentrating on capital growth and toward those that are yield driven.   

Keillen Ndlovu, head of listed property funds at Stanlib, comments: “By forming a REIT, Vukile aligns itself with other Spanish property companies. 

REITs come with tax benefits as well as a better regulated environment, and this is all good for shareholders.   

“Management is experienced and knowledgeable with on-the-ground presence, and Spain is currently benefitting from growing tourism, GDP growth and positive retail sales growth,” he adds.   

Castellana is due to be listed on the junior board of the Madrid stock exchange on 28 June 2018, with a governance approach to meet requirements for an intended listing on the main board. 

However, says Rapp, Castellana would need to have around €1.2bn worth of assets to make that viable.   

Vukile is also considering listing on the JSE’s AltX, which would give the company additional options if it needs to raise capital. 

However, the intention is to raise capital primarily in Spain.  

“We need around €400m of free float to be able to get the market interested from a capital raise viewpoint,” Rapp says.  

Retail focus

Like its SA parent, Vukile, the intention is for Castellana to remain a specialised retail fund. 

That, believes Rapp, will not only drive the rating, it will create a differentiator in Spain, given that REITs there tend to have diverse portfolios across all property sectors.  

Only two of Castellana’s 13 assets are non-retail, acquired from SA property entrepreneur and Castellana dealmaker Lee Morze in late 2016. 

Now 100%-owned by Castellana, the office buildings in Madrid and Seville are fully tenanted by Konecta. 

But the focus is on retail, so there is no intention to buy any more office buildings, says Rapp.  
The 177 756sqm Spanish portfolio does not have any exposure to the politically troubled region of Catalonia. 

Its assets, mainly retail parks, cover between 5 559sqm and 32 074sqm and are concentrated in key commercial hubs such as the capital, Madrid, as well as Granada in the south and Asturias in the north.   

Anchor tenants include consumer electronics stores MediaMarkt and Worten; supermarket Mercadona; DIY and gardening outlet Aki; pet care specialist Kiwoko; Bricomart, which provides building supplies; and furniture retailer Conforama.   

The portfolio is characterised by long leases of around 17 years (with five-year breaks), negligible vacancies that for the 2019 financial year are projected at 1%, and multiple accretive opportunities.  

Typically, Spain’s retail parks consist of independent boxes (stores) with independent owners. 

The retail parks in the Castellana portfolio are either 100% owned by Vukile, or Vukile owns more than 50% of  the retail parks.    

Says Stanlib’s Ndlovu: “While this gives some element of control, Castellana does have to work with other parties to ensure a strong retail dynamic at the various retail parks. Sometimes, interests may not be fully aligned between all parties.”   

The multi-ownership model is a common one in the US and Europe, says Stanlib analyst Ahmed Motara, although not popular in SA. 

“The owners form a strong association, and all work together for the benefit of the centre. But, if you don’t own the anchor, that could be a problem.” 

While somewhat concerned about Vukile not having full ownership of all the boxes in some of the retail parks, Mohamed Kalla, director and portfolio manager at Sesfikile Capital, believes this presents an opportunity for Vukile to acquire the additional units.  

Attractive supply dynamics  

Retail assets in Spain are new and modern and, unlike regions such as the US and UK, not oversupplied. 

This is because the development of commercial property dropped sharply after the 2008 financial crisis. 

According to Retail Partners Europe, at the end of 2017 there was 16.5m square metres of retail space, equivalent to 355sqm per 1 000 people. 

By comparison, SA has 23.4m square metres of retail space, equivalent to 417sqm per 1 000 people, according to MSCI data.

Retail parks in Spain can be acquired at yields of around 5.75% to 6.5%, with low interest rate funding of around 2.5% to yield returns of around 9%. 

Kalla tells finweek: “There is not a huge supply of new retail space in Spain. The fundamentals in the Spanish market are quite strong, and the price they paid is fair in our view.

“They didn’t pay for vacant space and, given where rental levels are, Vukile can expect decent growth as leases are renewed.”   

The portfolio’s rentals, says CastellanaCEO Alfonso Brunet, average €7/sqm to €9/sqm compared to a market average of €10/sqm to €12/sqm.  

According to Ndlovu: “The assets are currently showing positive rental growth and could see capital appreciation from acquisition prices. Active asset management opportunities are also quite evident and should, if implemented well, improve the anticipated yields.   

“In the longer term, however, we are concerned around concentration risk to certain types of tenants (such as MediaMarkt and Worten, from which around a quarter of the income is derived) and the broader impact of e-commerce and competing retail offerings in the vicinity,” he adds.  

Unlocking value

The portfolio comes with multiple value-add opportunities. 

These include redevelopment and expansion, the first of which is the reconfiguration of Kinepolis Leisure Centre in Granada, a shopping centre that abuts two other Castellana assets – Kinepolis Retail Park and Alameda Retail Park.  

The remodelling of Kinepolis, a popular 8 000sqm centre that is home to 15 cinemas, includes adding 300sqm of mostly retail and restaurant space, improving the façade and interior, creating a children’s playground, and improving pedestrian areas and connection to the Kinepolis Retail Park and parking.  

Kinepolis’s refurbishment, for which up to €4.5m has been approved, is projected to yield in excess of 10% and increase the centre’s rental income by €475m yearly, says Brunet.  

A future profit driver comes with the ability to access debt capital markets internationally that will bring further compression, although the REIT first has to get to the right size.   

But, says Rapp, it’s not about having to bulk up for the sake of it. 

What’s important, he says, is that the Spanish REIT drives growth in earnings and quality of earnings. 

Reducing Castellana’s gearing from 48.2% to 40% is also on the agenda.   

Ultimately though, the objective is to build a business that can be sustainable even without Vukile. 

The SA REIT is therefore not intent on maintaining its almost 100% level of shareholding in Castellana.   

“At some point we will look to bring in external shareholders, and that should drive significant value for Vukile shareholders,” says Rapp. 


(2017 figures unless otherwise stated)

46.5m inhabitants

4th-largest economy in the eurozone

2nd-most visited country in the world after France

15.3% unemployment (2018)

3.1% GDP growth in 2017 versus 2.5% European average (2.6% 2018)

7.4% five-year annualised consumer confidence index growth

4.8% e-commerce retail market share

Export ranking: 15 ($282bn) out of 135 countries

 Strong demand for retail property

4th-largest retail investment market in Europe by volume

 €2.4bn Spanish retail investment volume

38% Spanish retail investments outside of Barcelona and Madrid

73% international capital (share in Spanish commercial real estate)

76.3% shopping centre transactions of retail investments

28% retail investment share in Spanish commercial real estate

The writer was a guest of Vukile Property Fund in Spain.

This article originally appeared in the 12 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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