Vukile Property Fund, the Johannesburg-listed South African REIT, harbours aspirations to expand its €1 bn portfolio of retail assets in Europe.

The group owns an 82.5% shareholding in Spain’s Castellana Properties, having first made an investment in the SOCIMI during 2017; Castellana is a specialist in the acquisition, management, and refurbishment of properties in the retail sector in Spain.

Explaining the bullishness of Vukile Property Fund towards the retail property sector, CEO Laurence Rapp, says: ‘Retail is different now. Yes, it is evolving rapidly but we have shown an equally agile response to the challenges, as borne out by our operating results.’

He continues: ‘We are quite happy to be contrarian. We feel there are still tremendous opportunities to grow and consolidate the industry. There are some great companies in retail that are ultimately providing the covenants, and if you are well-diversified, execute underwriting correctly, and invest in assets that dominate locally or in a given region, retail property remains a very good investment in terms of long-term cash flow generating ability.’

He adds: ‘We would like to grow further in Spain, Portugal and other markets in Europe.’

Vukile, which means ‘new awakening’ in Zulu, listed in Johannesburg 17 years ago. Meanwhile, Castellana Properties is the only Spanish SOCIMI owned by a South African REIT.

Rapp joined the group 10 years ago from Standard Bank in order to build Vukile’s business. Various objectives have already been achieved, he explains, such as growing the fund to in excess of SA Rand 10 bn (€600 mln) of assets (the company has close to ZA Rand 35 bn), increasing earnings growth, becoming much more retail property focused, and solidifying the balance sheet.

Expansion to Spain
A huge part of the growth has come via international expansion to Europe. In the last decade, South African groups decided to expand to European real estate by entering the Central & Eastern Europe territories, but Vukile opted for the unconventional move to Spanish retail property. Rapp felt that Vukile should be looking towards developed markets offering better diversification for its investors while being able to hedge the volatile ZAR currency adequately.

In 2016, Spain was growing faster than the average EU economies. Various macroeconomic indicators such as rising employment and consumer spending, made the country look promising. Meanwhile, Spanish retail property appeared ‘fragmented’, says Rapp. 

Hedge funds and international private equity firms had begun making Spanish real estate investments. However, with hold periods of such investors tending to be short, Vukile felt there would be an opportunity to acquire those assets from them and then utilise its retail property expertise to add value.

Vukile hired a local team, and positioned itself as a ‘business builder, value creator, and retail specialist’ rather than an ‘investor’.

Having taken a majority position in Castellana, the Spanish group’s first purchase in Spain was a portfolio of retail parks in June 2017 for €193 mln, to which it added value. In July of the same year, Castellana listed on the Spanish stock exchange. Next, in November 2018, the big deal arrived: the company acquired four shopping centres (El Faro, Bahia Sur, Los Arcos, and Vallsur) for €459 mln at a yield of 5.6% from URW, the listed French global retail giant.

The deal made headlines as it was part of URW’s €3 bn disposal programme. El Faro is a 66,300 m2 shopping centre in Badajoz in the southwest of Spain; Bahia Sur is a 59,300 m2 asset in Andalusia; Los Arcos is a 44,000 m2 mall in Seville; and Vallsur is a 36,000 m2 mall in Valladolid.

At first glance, Vukile might not have seemed the obvious buyer of retail property from URW. However, a mixture of market intelligence and fortune played a part. Rapp was sharing the stage during a panel session at a South African REIT conference with Jaap Tonckens, URW’s CFO.

They seemed to share the same outlook on retail property. Afterwards, Rapp discussed a shopping centre portfolio he had heard URW was bringing to the market. He promised Vukile would be a very dependable buyer though it did not wish to enter into a bidding process. Vukile executed the deal as promised.

Value creation
Though URW is one of the most experienced managers of shopping centres in the world, and a company Rapp has ‘tremendous respect for’, Vukile remained convinced it could add value to the centres. Now coming to the end of a value creation process, the expansions and refurbishments are yielding around 10%.

With that major deal, Vukile’s assets swelled to €1 bn. Nowadays, Castellana owns a total of 18 assets worth €987 mln and a gross lettable area of 367,015 m2, with 98.3% occupancy.

In Vukile’s Spanish portfolio, it has been able to undertake other value creation projects such as buying units from El Corte Ingles in May 2019 for €36.8 mln in order to repurpose them for new tenants. Transactions in 2019 included acquiring Pinatar Fase II for €3.6 mln, and Puerta Europa for €56.6 mln. Last year, the company bought an office building next to its Los Arcos shopping centre.

Its local team of over 30 people is bringing the expertise on top of Vukile’s retail property know-how gained in South Africa.

The CEO of Castellana is Alfonso Brunet Morales-Arce, a former CBRE and Pradera professional, who joined in 2017. Chief development officer is Pedro Diaz, also formerly of Pradera, while a third former Pradera professional, Julio Gracia Lopez, is COO. Castellana’s CFO is Débora Santamaria, previously financial director of Axiare Patrimonio Socimi, S.A.  Only one professional in Madrid is not Spanish, and that is Omar Khan, CIO of Castellana Properties who moved to Spain from South Africa. Castellana is currently ranked the seventh largest retail landlord in Spain.

So far, acquisitions have been funded from South Africa, and with 50% leverage typically. European banks that have provided finance include most notably Aareal of Germany, and Santander and Caixa of Spain.

In due course, Rapp believes the company might be able to tap Green Bonds, a relatively new feature of the European real estate market.

Speaking of the retail property market, Rapp sees Vukile and Castellana as being very much ‘at the beginning of our growth path.’ Given omnichannel retailing, he feels there will always be a ‘very strong place’ for physical retail. In Spain, online purchases still only account for 8.7% of total retail sales, which is a rise of 3.7% compared to pre-Covid-19 levels but low for Western Europe countries. It is thought rental growth for physical stores will go up in Spain for the next four years by approximately 3%, second only to Poland according to various data providers including Savills, INE, and JLL. 

Omnichannel opportunities
Rapp says he is upbeat about the future of the retail property sector and believes there are currently ‘excellent opportunities’ for investment in Spain and even in Europe beyond Spanish markets. ‘The key to securing success in an increasingly omnichannel world lies in good relationships with tenants, customers and communities,’ he says.

For an in-house survey carried out in April 2021 of its retail tenants, the company discovered 60% planned to invest in improvement to their physical stores, 72% planned to invest in the omnichannel of their stores, and 84% of the retailers believed their customers preferred shopping in physical stores to purchasing online.

Revenue is above pre-Covid levels at its retail parks, which make up 42% of Castellana’s portfolio for lettable area. Footfall recovered at its shopping centres to 80% of its pre-Covid levels over the Christmas period last year.

In general, the company has navigated ably during Covid-19. All operating metrics are holding up well with the only negative impact on earnings being the discounts granted to tenants to help them through the pandemic.

As he puts it, Rapp has set Vukile and Castellana on course to leverage the data-driven shopping transformation to create more value for their tenants by providing great customer experiences.

‘It is about integration. We see retail moving more towards being an operating asset class including other revenue streams. We are putting more into innovation, customer-centricity, data analytics and so on. That is where we see the future of retail, and where we feel we are differentiated from others. We believe this level of specialisation will attract capital in due course.’

He adds: ‘We are committed to Spain. But we would love to find growth opportunities. We have a team that is focused on bottom-up analysis and underwriting backed up with a great culture.’

Laurence Rapp
Laurence Rapp is CEO of Vukile Property Fund (South Africa) and chairman and non-executive proprietary director of Castellana Properties (Spain). He is a former chairman of the South African REIT Association. He has extensive experience in the financial services environment, spanning investment banking, private equity, retail banking, insurance, and asset management. Prior to joining Vukile, he was a director of Standard Bank, one of South Africa’s big four banks, where he headed its insurance and asset management division. Before that, he led the strategic investments and alliances division.