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Vukile Property Fund’s story, somewhat more cheery in an environment of mostly anaemic results performance, has rapidly become a tale of two portfolios – one in SA and another in Spain.
The JSE-listed retail-focused real estate investment trust (Reit) now has 46% of its total R32.3bn property assets in Spain through its Spanish subsidiary Castellana Properties SOCIMI SA and 4% in the UK through Atlantic Leaf.
The remaining 50% is held in Southern Africa.
The Spanish engine
Lack of right-priced domestic product and an economy in a downturn has driven Spanish acquisitions in the last two years. But in its half-year to 30 September, Vukile rapidly ramped up its Spanish portfolio, and its investment in Spain jumped from 21% to 46%.
“Vukile have said they want a more concentrated strategy in South Africa and Spain. But it was surprising that they ramped up the portfolio in Spain so quickly,” 36ONE’s Wessel Badenhorst told finweek.
Following the acquisition of five dominant shopping centres, four of those acquired from Unibail-Rodamco-Westfield, Vukile’s investment in Spanish properties increased from €308m to around €900m during the period.
“While Unibail needed to sell down to reduce debt, what is of concern is that all Unibail’s metrics looked better without those assets they sold to Vukile,” says Badenhorst.
“Over the short term Vukile has already made progress with the assets. But only time will tell what the long-term asset management results on those assets are; whether it is really asset management that is generating uplift or whether it is a cyclical effect,” says Badenhorst.
Vukile Property Fund CEO Laurence Rapp says the longer they have assets, “the more value we can add to them”.
“The Spanish portfolio value has grown an organic 8.82% compared to acquisition price. The Unibail assets have already grown 6.56% and those only came through in August.”
According to financial director Mike Potts, there is no yield compression on the value growth numbers. “This is just from additional income generated, which is driving that growth.”
During the period, Castellana listed as a Reit on the junior market of the Spanish Stock Exchange. It is now the ninth-largest Reit in Spain.
Castellana’s portfolio comprises 19 properties of which 97% is retail. The portfolio has a low 1.8% vacancy, a weighted average lease expiry (WALE) of 14.8 years and a 99.3% rent collection rate.
“Projects on the Spanish assets have added €1.2m additional net income and there will be further value uptick in the next six months from the Kinepolis Leisure Centre project,” says Rapp.
Domestic success
Despite the tough economic environment locally, Vukile recorded continued success with its Southern Africa portfolio in large part due to its diversified, defensive retail portfolio that caters predominantly to the mid and lower LSM of the market.
Its SA portfolio delivered like-for-like net income growth of 5.1%, positive retail reversions of 4.3% and vacancies were maintained at 3.4%.
Shopping centres in Vukile’s township and rural portfolio accounts for 54% of the domestic portfolio, and delivered 3.1% and 2.1% trading density growth respectively compared to the negative 0.8% from its urban centres.
But 50% of Vukile’s income stream is now no longer related to the SA economy and the REIT’s growth in Spain appears to be on a path to surpass Vukile’s asset holding in SA in the not-too-distant future.
“Castellana will be the growth engine,” says Rapp. “We are more likely to invest in Spain than South Africa,” he says, explaining that this is mostly driven by limited rightly-priced domestic product.
“At the moment our offshore focus is very much only on Spain. In time we will look at other areas,” Rapp tells finweek.
In November, Vukile reported 7.5% growth in dividends for the six months to 30 September. It extended its record of unbroken dividend growth to 15 years.
Distributable income rose 23.3% from the prior half year to R713.5m and its net asset value increased to 2 027c /share. Gearing is at 38% with a long-term target of 35% and 94% of debt is hedged.
Vukile forecasts 7.5% dividend growth for its full year. And it aims to hedge 75% of dividend flow from offshore investments over a three to five-year period to provide investors with predictable stable rand-denominated income streams.
