There’s a measure of negativity around listed retail space.
But JSE-listed Vukile Property Fund’s performance illustrates that even in a weak macroeconomic environment impressive operating metrics can be achieved with a stable, defensive retail portfolio.
In line with its market guidance, Vukile reported 7.4% growth in dividends per share in the six months to end September.
The internally managed retail real estate investment trust (REIT) boasts a R20.4bn portfolio, 76% of that in Southern Africa (SA and Namibia).
It is on track to deliver its forecast growth in dividends of between 7% and 8% for the year ending March 2018.
And Vukile Property Fund CEO, Laurence Rapp is confident enough to forecast at least 8% dividend growth for the financial year to end March 2019.
“Vukile’s interim results to September were very pleasing as they delivered on their stated objectives for the half-year,” says Kelly Hook, analyst at Metope Investment Managers.
“Distribution growth and full-year guidance is largely due to the repositioning of the portfolio towards retail (now 91% of SA assets). As a result of this shift, Vukile has delivered like-for-like increase in net property income of 6.1%.”
Aside from net property revenue increasing, gearing remains conservative at 29%, with 94% of interest-bearing debt hedged.
Vacancy levels in the Southern African retail portfolio reduced to 3.4% while positive retail rent reversions of 5.2% and inflation-beating contractual rental escalations of 7.3% were achieved.
During the period offshore assets were boosted to 24% via its two strategic international investments in Spain and the UK.
Vukile concluded the acquisition of 11 retail parks for €193m via its new Spanish REIT subsidiary, Castellana Properties Socimi, bringing the total number of properties in the Spanish property portfolio to 13. None of the assets are situated in Catalonia.
Rather than integrating Castellana into Vukile, the REIT created a business infrastructure and team in Spain to allow Castellana to operate locally.
“Operating on the ground as locals will be a key differentiator,” says Rapp. “We have established Castellana very quickly as a key player in the Spanish retail market in terms of deal flow.”
Two further deals with a combined value of around €70m are due to close on 5 December, he said. That will push Castellana’s current assets of €225m to just under €300m. Plans are also in place to list Castellana on the Madrid Stock Exchange by mid-2018.
The Spanish subsidiary now accounts for 18% or R3.6bn of Vukile’s assets.
Investment in UK-based Atlantic Leaf equates to 6% or R1.3bn of Vukile’s assets.
Vukile’s shareholding in the UK investment vehicle has risen to 35%, the result of underwriting an Atlantic Leaf deal. That triggered a minority offer but Rapp says waivers in place from the majority of the shareholders means that Vukile won’t take control of the business.
As a significant player, Vukile does, however, have influence on the entity’s growth and direction.
For Atlantic Leaf, who play in the logistics, warehousing and distribution space, deals have become more expensive. But Vukile believes retail parks might be a space that Atlantic Leaf could explore.
“There is a lot to be learned from the retail park environment. The omni channel world of retailing (ecommerce) with its click and collect and distribution hub is part of retailing going forward.
Shopping centre and high street retail is being punished in the UK, but retail parks offer around 6.5% to 7% yields with great tenants and long leases,” he explains.
According to Hook, “Vukile’s investment in the Spanish retail park market through Castellana and its 34.9% shareholding in Atlantic Leaf offer a diversification into the strong growth opportunities both in Spain and the United Kingdom”.
On the local front, Vukile’s high-quality, low-risk retail portfolio is focused on shopping centres that primarily cater for non-discretionary spend.
These mostly small regional centres and community centres are showing 4% and 5.6% growth in trading densities respectively. Around 80% of shopping centre tenants are national retailers, giving Vukile a defensive tenant mix.
While there are few opportunities to grow the SA retail portfolio, the stable local retail base does provide the platform for continued international expansion that will allow the fund to further diversify its assets in counter-cyclical markets with stronger currencies.
Investment therefore will be focused offshore, primarily through Castellana and Atlantic Leaf, confirmed Rapp.