Unlocking value: The Kinépolis Leisure Centre. Picture: SUPPLIED
Unlocking value: The Kinépolis Leisure Centre. Picture: SUPPLIED

When Laurence Rapp started looking at offshore expansion opportunities two years ago, he didn’t want to follow the rest of the SA crowd to Eastern Europe. So the CEO of Vukile Property Fund set his sights on Spain.

Rapp’s tentative entry into the Iberian Peninsula at the end of 2016 through a R200m investment in little-known Castellana Properties understandably raised a few eyebrows. At the time, the Madrid-based company, founded by SA property entrepreneur Lee Morze, owned only two call centres.

Rapp has since put his money where his mouth is. In just more than 12 months, Vukile has established a strong Spanish management team, led by local architect and retail expert Alfonso Brunet, and assembled a portfolio of 13 retail parks across the country worth a substantial R4.3bn. Another acquisition valued at about R1.12bn is likely to be completed in the coming weeks.

"We believed we needed to counterbalance our SA portfolio with exposure to a developed market, especially given the possibility of funds flowing out of emerging countries if global interest rates should rise. Spain is also the fourth-largest economy in Europe and has experienced a stronger economic rebound than most of its neighbours following a double-dip recession post-2008," says Rapp.

He adds that Spain overtook the US as the world’s second-most popular tourism destination after France last year. And despite an uptick in retail sales and consumer confidence, rentals are still below pre-crisis levels.

Rapp was also looking for a country that offered an actively traded real estate sector. "It’s one thing to buy assets. But how do you sell if you don’t have depth in your market?"

Though Spain is still a relatively unknown port of call for SA property players, Rapp believes the country ticks all the boxes as an offshore destination in which Vukile will be able to successfully replicate its SA business model. The former investment banker has been instrumental in growing the company’s SA asset base from about R5bn to close to R16bn since he took the reins as CEO in August 2011.

The company’s flagship SA properties include East Rand Mall in Boksburg, Dobsonville Mall in Soweto and Gugulethu Square in Cape Town. It also has a stake in Fairvest, which owns a portfolio of shopping centres that cater mainly for lower-income shoppers, as well as an interest in UK-focused Atlantic Leaf Properties.

Castellana’s current focus is on retail parks, which usually comprise a number of big-box, stand-alone stores — similar to SA’s value centres. The parks — sized between 8,000m² and 32,000m² — are spread across various regions of Spain, including the capital, Madrid, Granada in the south and Asturias in the northeast. Anchor tenants include leading Spanish electronics, hardware, supermarket, apparel and furniture retailers such as MediaMarkt, Sprinter, Worten, Aki and Mercadona.

Rapp says the company likes retail parks as they tend to be defensive assets, lending themselves to omni-channel retailers that increasingly have a click-and-collect focus.

Retail parks can typically be bought at yields of about 5.75%-6.5% and funded at interest rates of about 2.5%, which means cash-on-cash returns of close to 9%. Rapp says this is attractive compared with the SA scenario, where property acquisition yields are typically below debt-funding costs.

Spain’s compelling investment case has of course attracted plenty of other real estate investors looking to cash in on the country’s economic and retail-sales rebound. But Rapp believes Castellana’s competitive advantage is its local management team, which has intimate knowledge of the Spanish property market.

"Most other players are briefcase deal makers — they fly in and out from the US or London to close deals, but [they] don’t establish a presence on the ground."

Castellana has now reached the scale to justify a listing on the junior board of the Madrid Stock Exchange.

Keillen Ndlovu. Picture: Russell Roberts
Keillen Ndlovu. Picture: Russell Roberts

Rapp says the listing, which is scheduled for June 28, holds tax benefits for the company, and will also allow Castellana to tap the Spanish market for capital at a later stage.

Rapp is confident that Castellana will be able to grow assets from the current €380m to about €1.2bn over time, which will make a move to Madrid’s main board viable.

He says Spain offers a healthy pipeline of potential deals: "There are plenty of private equity players and offshore pension funds that entered the market at the back end of the recession and now need to unwind their holdings."

Brunet, whose extensive knowledge of the Spanish property market was gained at the likes of Pradera Spain and CBRE, says a number of Castellana’s retail parks are under-rented, which creates potential to increase earnings through various redevelopment and asset management opportunities. Rentals currently average about €7-€9/m² — below the market’s €10-€12/m².

A major value-unlocking opportunity for Castellana is the redevelopment of the Kinépolis Leisure Centre, a standalone property adjacent to the company’s 18,500m² Kinépolis and 32,000m² Alameda centres that form part of the Alameda Park on the outskirts of popular tourist hub Granada.

Vukile has earmarked €4.5m to refurbish and reconfigure the 8,000m² leisure centre, which houses one of the largest cinema complexes (15 screens) in the south of Spain. About 300m² of additional space will be created for more restaurants, a children’s play area and other leisure facilities, which Brunet says will push up the centre’s rental income by €475m/year.

Property analysts are supportive of Vukile’s Spanish expansion trail, but caution that any offshore investment poses risks.

Keillen Ndlovu, head of listed property at Stanlib, says the company likes Vukile’s specialised focus on Spain’s retail park sector, which hasn’t yet experienced the same yield compression as that of the country’s larger, regional shopping centres.

"An on-the-ground management team, which is critical when you are entering different markets, as well as GDP growth exceeding the EU average, and asset management opportunities from right-sizing and reconfiguring the tenant mix at some parks are other positives," says Ndlovu.

The downside, he says, is that the portfolio exposure is concentrated on a few major tenants, such as MediaMarkt (Europe’s largest consumer electronics retailer), speciality pet store Kiwoko, and electronic and home appliances retailer Worten. This could create large vacancies, should any of the major tenants fail or downsize.

Another concern is that Vukile doesn’t own 100% of all its retail parks, which means it has to work with other landlords to ensure a strong retail dynamic is in place. "Interests may not always be fully aligned between all parties," says Ndlovu.

Anchor Stockbrokers real estate analyst Rael Colley says the fact that Castellana doesn’t have any investments in Catalonia mitigates the risk of exposure to political unrest.

"Vukile’s Spanish portfolio is defensive in nature given the long weighted average lease expiry profile of 17.6 years (with five-year break intervals)," he says. "In addition, the portfolio has a minimal vacancy (excluding the 30.25% development vacancy at Kinépolis Leisure Centre), which shows strong tenant demand for the company’s retail parks."

But he says because escalations are linked to the consumer price index, strong earnings growth will depend on asset management initiatives and/or further accretive acquisitions.

"The portfolio’s high exposure to electronics stores (about 25% of total rental income) is a risk in our view, given the potential impact that e-commerce may have on actual sales in brick-and-mortar stores."

Meago Asset Management director Anas Madhi echoes the sentiment, saying Vukile offers a unique entry point for SA investors into the increasingly attractive Iberian Peninsula. But they will need to keep a close eye on whether Vukile achieves its key targets, including the successful listing of Castellana on the junior board of the Madrid Stock Exchange, further acquisitions, and the redevelopment and integration of Kinépolis Leisure Centre into Alameda Park.

"The achievement of these milestones will confirm the scalability of the venture and the strength of the management team," says Madhi.

The writer was a guest of Vukile in Spain