Vukile Property Fund’s initial acquisition of two office properties in Spain in 2016 gave little indication of how swiftly the Spanish portfolio would be ramped up.
Once primarily SA-focused with negligible offshore exposure, Vukile’s offshore exposure now sits at 50%, a hefty 46% of that to Spain via Spanish subsidiary Castellana Properties Socimi S.A.
The balance of 4% is to the UK through Vukile’s investment in Atlantic Leaf.
In 2017, 11 retail properties followed the 2016 acquisitions.
Fast-forward to 2018 when in just six months Vukile more than trebled its investment in retail properties in Spain, from R4.56bn to R14.77bn.
That came on the back of its Habaneras shopping centre acquisition, followed in quick succession by the purchase of four shopping centres from Unibail-Rodamco-Westfield.
These new assets comprise 60% of the value of the Spanish portfolio, says Vukile CEO Laurence Rapp.It also brought with it a shift from retail park acquisition and brought to 19 the number of properties held by Castellana, 17 of them retail.
Of more consequence perhaps, the latest acquisition led to an equal amount of exposure to Spain as to SA.
“Vukile’s offshore embarkment wasn’t just opportunistic. This was a very calculated investment across the board, from building a platform and management team, into ability to acquire assets and fix them,” says Evan Jankelowitz, fund manager at Sesfikile Capital.
Vukile has put together a powerful management team in its Spanish subsidiary, most with extensive retail property experience.
Last year, Castellana listed as a real estate investment trust (Reit) on the Spanish stock exchange.
It is the ninth-largest Spanish Reit with a 21-strong team.Largely as a result of the Unibail-Rodamco-Westfield acquisition, Vukile’s holding in Castellana diluted from 98% to 73%.
But that holding is likely to increase.
“We have an appetite to invest more in Castellana,” states Rapp.
“That doesn’t mean a capital raise is coming. There isn’t,” he stresses.
What of capital required for Castellana’s accretive development initiatives?
“The money is lined up where needed,” says Rapp.
Perhaps that will come from the sale of non-core SA assets, discussions currently underway. Or Castellana’s two office assets could come under the hammer.
“Those come with long leases (12-years to run) so will be easy to sell,” says Rapp.
The Castellana portfolio
Castellana acquires dominant retail assets in secondary cities.
Albeit with a concentration in the South, assets are spread across Spain in locations like Madrid, Granada, Seville and Valladolid.
Retail parks made up much of the original portfolio.
But it is the latest shopping centre acquisitions – Bahía Sur, Los Arcos, El Faro and Vallsur acquired from Unibail-Rodamco-Westfield – together with Castellana’s Habaneras shopping centre, and its revamped Kinépolis assets acquired in the original portfolio, that represent the lion’s share of Vukile’s Spanish portfolio.
“The latest shopping centre acquisitions are of a higher quality than the original portfolio,” observes Rael Colley, real estate analyst at Anchor Stockbrokers.
The Castellana portfolio is characterised by long leases, low vacancies and a spread of tenants that include fashion outlets like Zara and Mango, supermarket chain Carrefour, food outlet Burger King, MediaMarkt (electronics), and Aki (DIY) among others.
“Castellana’s diversified tenant mix that includes an increased focus on food and beverage and leisure, will help offset risk from further e-commerce penetration,” says Colley.
Value extraction through asset management
More often than not, the acquired assets are those to which value can be added.
A good chunk of Castellana’s value-adding initiatives involve food and beverage (F&B) and leisure.
The F&B offering will be expanded and improved in Los Arcos, El Faro, Vallsur and Bahía Sur. F&B offerings have increased dwell time, footfall and cross-selling synergies across the Castellana portfolio.Asset management initiatives generate uplift.
For Colley, it is the Kinépolis, Habaneras and Bahía Sur assets that have the most potential to uplift income.
Initiatives undertaken include the rebranding of the former ‘Kinépolis’ node in Granada to ‘Granaita’ to create a single holistic shopping node.
The €5m refurbishment of Kinépolis Leisure Centre, rebranded as Granaita Leisure Center, includes new roof and floor, the creation of a kids zone, and upgrades to food and beverage areas.
Asset management initiatives have resulted in 17 new leases and added €500 000 of net operating income (NOI).
“In our view the asset management initiatives at Kinépolis were done very well,” says Colley.
Liliane Barnard, CEO of Metope Investment Managers, concurs, citing the Kinépolis refurbishment as the “best example of asset management” she has seen.
Granaita Retail Park (previously Kinépolis Retail Park) now trades with 0% vacancies and the downsizing of MediaMarkt has resulted in a yearly NOI increase of €29 200.
Last year’s revamp of the Alameda Shopping Center and Retail Park, now Granaita Shopping Center, has brought about a 3.5% increase in sales and reduced vacancies from 18.67% to 2.2%.
“We want to own more of the centres that we are in and make them absolutely dominant in the market. There are three or four projects coming together contingent on deals at sensitive stages,” says Rapp.
One of these projects is Los Arcos, a 17 906m2 inner city centre in Seville and one of Castellana’s top three assets.
Redevelopment opportunities here include a 609m2 extension.
Another is the Habaneras shopping centre in Torrevieja (Alicante) where the top floor will be reconfigured to accommodate around eight restaurants.
A travellator will link the centre to the ten cinemas and bowling alley across the road.
All Castellana’s properties are freehold, with the exception of Bahía Sur in the coastal town of Cadiz.
This leasehold property, Castellana’s second-largest by value, has 41 years remaining and a 30-year lease extension option, Castellana CEO Alfonso Brunet tells finweek.
Negotiations to convert from leasehold to freehold are underway with authorities.Adjacent to Bahía Sur, Vela Retail Park, a 9 000m2 extension, will be developed with a bridge connecting it to Bahía Sur, taking Castellana’s ownership from 24?760m2 to around 33 000m2.
Expected yield on the retail park is 7.5%.Several of Castellana’s shopping centres cater to Spain’s strong cinema-going culture.
High-quality cinemas positively impact footfall, dwell time and cross-selling in shopping centres.
In December 2018 alone, cinemas received 12.1m visits.
Cinema operators are trending towards opening luxury cinemas like the eight premium cinemas in Castellana’s Vallsur shopping centre in Valladolid.
Here meals can be taken on the luxurious lounging cinema seats.
A proven Spanish investment thesis?
If you ventured into a shopping centre or retail park in Spain in the early afternoon you could be forgiven for thinking that Spain’s retail spaces were not well supported.
The opposite is true, and the first impression skewed by a lack of local culture knowledge.
Spaniards take a siesta (a long lunch or nap) and shopping hours (10am to 10pm) are later.
Pay a visit to a retail space at night and it’s a different story.
Retail support extends to retail parks, spaces that in some countries are beginning to take strain.
“In Spain, people shop at retail parks,” says Jankelowitz.
“There’s a very different mindset and culture in Spain; people shop late at night and safety is not a concern, so it works.”
Retail parks often complement rather than compete with shopping centres.
“The most successful retail park is next to the most successful shopping centre, so they work well together,” says Ramiro Rodriguez, research professional at Cushman & Wakefield.
But the retail sector is beginning to experience market negativity.
Rapp says much of this stems from the US where there is an oversupply of space and where department store-anchored centres particularly are causing pressure.
“A lot of the lessons coming out of America are not immediately applicable in Europe,” he maintains.Vukile’s two-year Spanish investment thesis is being proven, he says.
“There is a steady access to deal flow. A large part of the deal flow is coming from closed and private equity deal funds that bought just after the crisis, generally five- or seven-year funds that are coming to end of life.”
Many are selling their assets because the yield compression that funds subscribe to has come about.
But Vukile’s strategy is different.
“We are able to buy at rental growth rates and stable, predictable income. So it’s a different strategy to what they [the funds] have been playing,” explains Rapp.
These exiting funds create opportunity for Vukile, he says.
“We are able to buy assets that are undermanaged,” he says, citing the Castellana team’s achievements with the Unibail portfolio.
“We have grown net asset value by 16% in just over a year.”
According to Rodriguez, secondary city spending capacity is increasing. Says Brunet, “Dominant assets in secondary cities is the right way to go because we can add value to them.”
A long-term play and value-adding strategy is inherent to Vukile’s DNA.
It is the same philosophy with Castellana.
“It has to be a long-term story,” Rapp says.
“We are building long-term value creation. It’s going to add significantly to the value of the portfolio, the value of the assets. The way we have structured the business gives the SA investor a very stable, predictable, growing income stream built off European assets,” he says.
According to Colley, Anchor is “impressed with the assets, the team on the ground seems solid, and their ability to extract value seems promising”.
Next stop Portugal?
A few kilometres from Portugal’s border in the Spanish town of Badajoz is El Faro, Vukile’s flagship Spanish property valued at €161.5m.
It’s the largest centre in the Castellana portfolio and one that attracts plenty of visitors from Portugal. Investment in Portugal is on Vukile’s radar.
“As part of an Iberian Peninsula play, the next logical country would be Portugal, run as a subsidiary of Castellana. We have been thinking about that. We would look at any asset that provides a stable income stream,” says Rapp.
Castellana has a good starting point in this Iberian play.
CEO Brunet knows the market well, having headed up Portugal for specialist retail sector fund and asset manager Pradera.
“There is still a lot to do in Spain, but we are keeping an eye on Portugal,” confirms Brunet.
“We will look at a deal there if it makes sense and can add value. And it must have catchment.”
*Glenda Williams travelled to Spain as a guest of Vukile Property Fund.