Vukile tapping into Spain’s growth and retail park prospects

Laurence Rapp, CEO of Vukile Property Fund. (Picture Supplied)
Laurence Rapp, CEO of Vukile Property Fund. (Picture Supplied)

A R2.8bn (€193m) off-market transaction for nine high-quality newly-built retail parks across Spain via its new 98.3% Spanish REIT subsidiary Castellana Properties SOCIMI SA, has given Vukile Property Fund further traction in the developed markets of Western Europe. 

The deal has grown its Spanish portfolio to 11 assets and bumped up its total assets to R18.7bn, some R14.8bn (79%) of that invested in South African property assets. 

The remaining 21% equating to R3.9bn is invested in developed markets via an investment in Atlantic Leaf (Vukile’s UK investment vehicle) and Spanish investment vehicle Castellana.

Spain’s economy provides one of the most attractive growth rates in the eurozone region, says Vukile Property Fund CEO Laurence Rapp. GDP growth of 2.2% is forecast for 2017 against the Eurozone’s 1.5% while declining unemployment is spurring robust economic growth and increasing spend.

Export markets in Spain are picking up and the automotive industry is thriving. Tourism is another important driver of the economy, Spain being the world’s third most visited country.

In another nod to the country, S&P upgraded the country’s credit rating to BBB+ with positive outlook.

The Spanish acquisition represents a 6.2% pre-geared property yield and reaffirms Vukile’s prospects to deliver growth in dividends of between 7% and 8% in its current financial year ending 31 March 2018.

The nine properties are geographically diversified across Spain. The portfolio has a low vacancy rate of 2.7%. This figure excludes a development vacancy at Kinepolis Leisure Centre in Granada, which is undergoing a €2m refurbishment project.

The project, due for completion in six months, offers further income enhancement, Rapp tells finweek.

The robust portfolio has a low tenant turnover with around 80% of tenants trading through Europe’s double-dip recession.

Ninety-five percent of gross revenue, says Rapp, is derived from leading Spanish national and international retail tenants that include Media Markt (an international electronics player), Sprinter, Worten, Aki and Mercadona. 

Main retail market indicators show a positive trend, with current yields of secondary retail parks still 150 bps higher than the market peak in 2007, making retail parks the properties with the highest potential for further yield compression. “They are not the poor cousins to traditional shopping centres,” adds Rapp.

Rentals are still below the pre-financial crisis levels, so while rental growth of around 2% p.a. would not challenge SA’s 6% to 7%, the portfolio says Rapp has potential rental upside given its monthly rentals of €9/sqm against a market average of €10-€12.

To fund the acquisition, Castellana procured debt funding of €94.8m from Spanish lenders an all-in cost of debt of 1.98%. Vukile funded the remaining €103.3m, using its substantial R1.5bn war chest built mainly from the sale of its R1.2bn sovereign property portfolio. Group gearing is thus still a conservative 31.7%. 

A foreign exchanging hedging policy has been put in place to minimise adverse foreign exchange fluctuations. Vukile will hedge on average 75% of its earnings from its international investments over a three-year period.

Castellana will be internally asset managed. Current managers Redevco, will continue to property manage the portfolio for six months before handover to the highly-experienced asset management team of Spanish retail property experts that Vukile has built in Spain.

That team will be led by CEO Alfonso Brunet who has a deep knowledge of the Spanish property market.

The Morze family, Vukile’s partner in Castellana, was instrumental in securing the transaction on an off-market basis. Lee Morze, a successful South African property entrepreneur now based in Madrid will continue to source acquisitions and new opportunities for Castellana.

Rapp says there is no particular target for offshore exposure (currently 21%), but rather a question of where capital is allocated. 

“It is prudent to diversify our economic streams. We need to make sure we are allocating capital correctly between SA, UK and Spain and this will be where we get the best return and what is most accretive to shareholders,” says Rapp. 

“We have built the Spanish asset management team to build scale in the business. It is not only about these assets. Castellana presents plenty of deal flow. We are aiming to get to the €800m to €1bn mark in the next couple of years,” confirms Rapp.

Castellana will list on the Spanish Exchange by September 2018 in line with SOCIMI regulations (a SOCIMI is the Spanish equivalent of a REIT). This will be in the form of a technical listing, with Vukile remaining the sole entry point for public investment into Castellana.

Spanish acquisition – key facts*

Portfolio: 9 retail parks in Spain
Purchase price: €193m 
Net operating income: €11.94m
Net initial yield: 6.2%
Loan to value: 49%
Interest cost: 1.98%
Cash-on-cash yield: 8.4%
Lettable area: 117 670m 
Average asset value: €21.4m
No. of stores in portfolio: 73 
Income derived from national tenants: 95%
Lease term: WAULT of 15.6 years to expiry and 4.9 years to next breaks
Average monthly rent: €9.04 per sqm.
Vacancy rate: 2.7%*
*Excluding development vacancy at Kinepolis Leisure Centre.


The first working day of July turned out to be a busy one, Redefine Properties announcing it had expanded its student accommodation pipeline in Australia with the purchase of a second site in Melbourne. Redefine currently has a A$139m development underway in Melbourne catering for 804 beds. The new site at 500 Swanston Street is well located to Melbourne University with potential for up to 700 beds. 

Development is anticipated to begin in 2018 and is expected to cost A$103.3m with Redefine’s share of the development cost A$93m. The REIT is looking to develop the site at about a 10% income yield.

That wasn’t the only news to come from Redefine, the REIT announcing on the same day that it had sold its 22.8% stake (162m shares at R9/share) in Delta Properties to a women-led BEE consortium in a R1.45bn vendor-funded transaction.

Delta had previously acquired 15 government-tenanted offices from Redefine in 2015 through the issue of shares to Redefine.

Nooraya Khan from the BEE consortium says the transaction will result in Delta shares being owned by long-term strategic investors whose interests are closely aligned. The majority black female owned component of the consortium is 51%, while 49% of the shares are owned by Delta’s management and staff, which is also majority black. 

The vendor loan will be 50% settled after an initial period of five years and, at the consortium’s election the loan can be extended for a further three years.
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