Spanish REIT Castellana Properties, which was incorporated in 2015, is that rare beast in the real estate panorama: a firm specialising entirely in retail properties, with no intention of diversifying into other asset classes.
The business currently owns a €1 bn portfolio of 16 assets in Spain, all of which are shopping centres and retail parks.
Alfonso Brunet is the company’s CEO since 2017, brought in following a major ownership change. In December 2016, South African property company Vukile acquired an 86.89% stake in Castellana to pursue expansion in Europe and reinforce its own faith in retail.
Listed on the Johannesburg and Namibian stock exchanges, Vukile operates what it describes as a ‘diversified fund which is overweight in the retail sector’. In subsequent years, Vukile expanded its stake in the Spanish firm, culminating in a deal in May of this year for a further 9.7% share, bringing its ownership of Castellana to 99.6% as of today.
It was the takeover by Vukile, explains Brunet, that resulted in a laser focus on retail. ‘It made sense to make Castellana a 100% retail specialist not only because that was what Vukile had done in the past, but also because the team that joined Castellana at that time – me included – were all retail specialists.’
The former head of Spain for Pradera, where he spent 11 years, initially as an investment chief for the country, Brunet joined Castellana in a moment of revolution for the retail industry and its relationship with real estate. By the end of 2016, the likes of Macy’s and Sears had announced the closure of hundreds of stores across the US, while brands such as Austin Reed and BHS in the UK went bust.
Several more department store groups and secondary shopping centres were teetering around the globe, while numerous development projects hit the skids. As hordes of retail real estate specialist investors scrambled to leave what they perceived to be a sinking ship, Castellana was nailing its colours to the mast.
‘We believed then and we continue to believe that retail is an asset class which requires specialisation,’ Brunet underlines. ‘It’s probably the most complicated asset class to really know and understand as a wider market. As opposed to say offices or logistics, shopping centres are very diversified in terms of units and types of tenants.
'A retail real estate manager needs to have a very active relationship with their direct customer base, their tenants, but also need to supply the tenant’s customers with a special experience and ancillary services. We need to help the tenant attract footfall to the asset and encourage visitors to stay as long as possible.
‘All that means that at Castellana, we believe that remarkable retail that focuses on customers and delivers positive experiences is not going to disappear, but is going to thrive ever more. That’s why we continue to be a specialist in this field.’
Success in 2023
It’s one thing to declare solidarity with the retail trade, but how is that commitment looking today, in the midst of a cost-of-living crisis, with parts of Europe already in recession? Well, Castellana’s six-month results for 2023 make for surprisingly pleasant reading.
The firm’s Spanish portfolio saw normalised net operating income grow by 9% year-on-year, with positive rental reversions of 3.3%, further enhanced by inflation indexation of 7.7%. Vacancies closed at a negligible 1.3%, on a portfolio which has a long, weighted average lease expiry of 12.6 years. The results also show that portfolio sales exceeded all industry benchmarks, as did footfall, boosted by promotional programmes. Castellana’s tactical 25.7% investment in peer Lar Espana, which took place in 2022, also continued to perform well.
‘Nearly all of our benchmarks have now superseded pre-pandemic levels,’ Brunet says. ‘Actually, they already reached them in 2022. Our metrics are market-leading in terms of vacancy, rent collection and occupancy cost ratios (OCRs) and really tell the story of what we’re doing right.’
Brunet notes that the firm’s chief marketing officer, Cristina Macarrón Cuartero, and her team, are driving a range of initiatives to attract customers.
‘We want to be the town plaza, where people not only come to buy but to meet, and we want to host different lifestyle and shopping experiences,’ he adds.
‘Our initiatives include festivals, concerts, art shows, as well as family-friendly days such as circus entertainment or our Legend of Excalibur event, which turned our shopping centres into medieval spaces offering a whole host of themed shows, parades, activities, games and prizes. We have also launched campaigns against animal abuse and cyber-bullying, to name just two.’
While many of the initiatives recall the golden days of physical retail, Brunet underlines that the business is not only looking to the future but also actively supporting the industry’s online transition.
‘The apocalyptic story of ecommerce devouring the physical space is over. There are still some voices of concern, but the past three years – especially the pandemic period – proved that ecommerce is just another channel for retailers to sell their wares.
'Today, however, we are seeing brands that were digital natives looking for a physical space to have their goods shown and experienced by customers, while brands that have traditionally only really existed in the physical space, are growing that space to adapt to customers, to integrate omnichannel strategies. Things like click and collect and the option of returning to the physical store are proving a way to improve margins.
‘And for all of our tenants, we are seeing that because they are not finding the correct spaces in high streets, and are even closing stores in city centres, they are preferring to enlarge their stores in our shopping centres, where they can have enough room to implement omnichannel strategies, have more storage, and more display space.’
Staying on top of trends also means rethinking tenant types. In September, the firm announced it would start bringing dark kitchens to its shopping centres, in partnership with Booh! Food, a start-up in which Castellana is now the top investor after pledging €3 mln to grow the enterprise.
Los Arcos Shopping Centre in Seville will be the first to see its own operational dark kitchen based on Booh!’s ‘Bright Kitchen’ concept, which offers customers a range of services including home delivery, takeaway, click and collect and on-site dining. Booh! Seville will accommodate more than 12 new food & beverage brands, some launching in the city for the very first time, in a bid to expand the centre’s retail offer.
A further, key part of innovation is being ahead of the curve on environmental, social and governance (ESG) issues. After participating in the GRESB ranking for the second, successive year, Castellana confirmed its four-star rating once more at the start of October. Says Brunet: ‘We stood out particularly in the management category, where we were scored 28 out of 30, and in performance, where we got 58 out of 70. We’re very happy with that and our recent recognition from EPRA for our approach to ESG.’
He adds: ‘We are investing a lot of money in ESG and have developed a strategic plan focused on eight of the 17 UN Sustainable Development Goals. We are in the middle of a project to expand our energy quotient from renewables to 100% as well as pursuing other key objectives. It’s important to us, but it’s important to our tenants and investors as well.’
Resilience and growth
The socimi is also actively buying and repositioning assets across Spain. In September, Castellana acquired a former Hipercor supermarket site in shopping centre El Faro, which it will convert into six new retail units. El Faro is the largest shopping and leisure centre in the region of Extremadura, and is situated in Badajoz, the nearest city to the Portuguese border.
Of its total area of 66,422 m2, over 41,000 m2 is now owned by Castellana Properties. ‘We really see good results from active asset management, which is why we keep doing these kinds of projects,’ Brunet points out.
‘We also minimise the risks associated with investing in totally new assets by investing more in assets we have already underwritten. We apply for planning permission to remodel that space, in response to what customers have said they want, and in order to bring further new brands – and very well-known brands - into the shopping centre.’
Castellana also invests in retail parks, which Brunet defines as a ‘low risk strategy’. He adds: ‘One of the stars of retail investment in recent years has been supermarkets, and retail parks anchored by grocery stores and other units serving everyday needs are very compelling. There are actually very few retail parks in Spain today, so there is potential to develop many more, which is why we are now Spain’s largest retail parks investor.’
Would the firm ever consider branching out into mixed-use assets, as many of its peers have done? ‘We see the appeal in mixed-use, where you make neighbourhoods by combining residential, offices and retail together,’ he notes, ‘but it’s quite complex in Spain due to zoning issues. We do want to remain a retail specialist, but I wouldn’t discount doing joint ventures with other funds, where we could manage the retail part of a wider mixed-use scheme.’
It seems clear that Castellana has proved its case for a 100% commitment to retail, but is this a uniquely Spanish story? Perhaps Spain’s buoyant tourism traffic is the secret behind its strong balance sheet? Brunet doesn’t agree.
‘Tourism has very little impact where a retail asset dominates a catchment of more than 150,000 people,’ he explains. ‘In these cases, the local residents really bring the numbers year-round. But it is true that in cities like Seville or Torrevieja, where footfall fell off during the pandemic in part due to a lack of overseas visitors, that tourism can help boost sales. With tourism having come back so strongly this year, centres in those cities are doing well. El Faro, meanwhile, has lots of visitors from Portugal, because it’s so near the border.’
However, there is something unique about the Spanish market which Brunet says makes all the difference for a retail specialist. ‘We are outdoorsy people, gregarious people,’ he says. ‘We like to meet, we like to eat, we want to be out. Meanwhile, central business districts in our cities are seeing a good return of people to offices, and retail around those assets is doing well.’
He concludes: ‘In Spain, the suburbs and the city centres are full, you can see that the terraces of restaurants and bars are packed. We still prefer to shop in person. While ecommerce is climbing, I think it’s unlikely that southern European countries will ever match the online shopping metrics of northern Europe.’