This year has turned out to be a horrible one for many property investors. Not only have real estate punters suffered losses on the capital growth front — the SA JSE-listed property index has tumbled about 30% in the year to date — but there has also been bad news in the form of lower-than-expected dividend growth.

Most local counters have struggled to maintain the usual inflation-beating growth in income payouts as tough trading conditions in SA continue to erode earnings from office, industrial and shopping centre portfolios. Quite a few have in fact declared a drop in dividend payouts in recent results periods. These include Accelerate Property Fund, Rebosis Property Fund (B shares), Delta Property Fund, Texton Property Fund, Arrowhead Properties, Liberty Two Degrees and SA Corporate Real Estate.

But it’s not doom and gloom for all SA-based property funds. There have been a few notable exceptions, such as logistics company Equites Property Fund, Cape-focused Spear Reit, Stor-Age and blue-chip mall owner Hyprop Investments, which have all delivered dividend growth of between 7% and 12% this year.

Vukile Property Fund is the latest addition to this category. Last week management, under CEO Laurence Rapp, declared dividend growth of a decent 7.5% for the six months to end-September. Vukile’s solid performance was supported by its well-timed entry into Spain about 18 months ago. At the time the rand was still trading at below R14/€, compared with R16.27/€ today. Vukile was the first SA property player to enter the Iberian Peninsula, and is still the only one there.

Last year the company bought 11 retail parks in Spain, and it recently bulked up its Spanish portfolio with the acquisition of five shopping centres.

The initial acquisitions were mostly smaller strip-type centres (similar to value centres in SA) typically anchored by electronics or grocery retailers. The more recent acquisitions are larger shopping centres that dominate their catchment areas.

Vukile’s retail portfolio in Spain, held through Castellana Properties (listed on the junior board of the Madrid Stock Exchange) is now worth about €900m (R14.2bn) and makes up a hefty 46% of total assets of R32.3bn. Vukile also owns a stake in UK industrial property play Atlantic Leaf Properties (4% of assets).

Its R14.8bn directly held SA portfolio consists of more than 40 shopping centres, including East Rand Mall (50%), Phoenix Plaza near Durban, Gugulethu Square in Cape Town, Dobsonville Mall in Soweto and Daveyton Shopping Centre on the East Rand.

Vukile owns a stake in fellow JSE-listed Fairvest, which owns a portfolio of shopping centres that cater mainly for lower-income shoppers in rural areas and townships.

Rapp, a former investment banker, has been instrumental in growing the company’s asset base, which has ballooned more than sixfold since he took the reins as CEO in August 2011.

Some analysts were initially sceptical when Vukile entered Spain, saying that the jury was still out about the scalability of the venture and the strength of the local management team.

However, 18 months on it seems that Vukile’s Spanish foray is starting to pay off.

The company’s team on the ground in Spain has swelled to 21. And had it not been for its exposure to the Spanish retail market, dividend growth for the six months to September would have been closer to 5% instead of 7.5%.

Sanlam Private Wealth equity analyst Richard Colburn says Vukile’s move into Spain has made sense from a capital-allocation and revenue-diversification perspective given the weakening local operating environment and limited growth opportunities in SA. "What is impressive is the asset management initiatives undertaken by the team in Spain, including new lettings at increased rentals and cost management, which have already created additional value in the portfolio."

He says the general risk for SA property companies that go offshore in search of growth opportunities is that they can easily overpay for assets. "This has not been the case for Vukile. I am impressed by management’s astute approach to asset allocation. The 8.82% organic valuation increase already seen in the Spanish portfolio relative to acquisition prices tells me that management has the ability to pay the correct price for assets and the expertise to extract further value for shareholders," he says.

Colburn says even more encouraging is how well Vukile’s SA shopping centre portfolio is holding up. The company achieved an average 4.3% rental reversion on leases that have expired and an 87% tenant retention ratio.

"This may be lower than previous reporting periods but is a good result given the current tough operating environment in SA."

Kelly Ward, investment analyst at Metope Investment Managers, agrees that Vukile has delivered an outstanding set of results considering softer consumer spending and recessionary conditions in SA.

She says that while the SA retail sector may still face some challenging times, Vukile has achieved solid operating metrics, which is evidence of a smart move over the past few years to rebalance the portfolio out of office and industrial into retail. "Vukile’s rental renewal rates of 4.1% and tenant retention ratio of 87% compares with Growthpoint Properties’ -3.1% and 81.8%, Redefine Properties’ 0.1% and 90.7% and Hyprop’s rental renewal growth of 1.5%."

Ward says while Vukile’s loan-to-value has crept up somewhat to 38%, as much as 94% of its debt has been hedged — mitigating much of the impact from any potential interest rate hikes ahead. She says the future focus for Vukile will be its investment in Spain, where growth prospects are significantly better than at home. "We continue to believe in the investment case for Vukile."

At the company’s recent results presentation Rapp said Vukile’s biggest investment proposition is that it offers proper diversification between rand-based and hard currency assets. "The benefits of owning shares in Vukile is that 50% of the company’s income is now built off European assets. So it is investing in rands but getting returns in hard currency."

Rapp said that whereas SA is facing anaemic economic growth and rising unemployment, in Spain GDP growth of 2.7% is expected this year and unemployment numbers continue to fall.

However, he said Vukile’s SA shopping centre portfolio is nevertheless "well-positioned to weather the storm" given its focus on low-to mid-income shoppers. "Our portfolio is very defensive, as township and rural malls are outperforming other types of centres and still doing exceptionally well for us."

Looking ahead, Rapp said growth opportunities in SA have become few and far between while Spain still offers plenty of acquisition opportunities. "Unlike SA, Spain is still underserviced in terms of retail space. The country has about 560 shopping centres, versus SA’s 2,000. It has a much higher income per capita and its population of about 45-million is not that much smaller than SA’s 55-million."

A central factor that will support growth in Vukile’s Spanish portfolio is that Castellana has feet on the ground. "We now have an experienced management team in place with intimate knowledge of the Spanish retail market. So we are well-positioned to become a major player there, with good deals already coming to us off-market."

Rapp said more income and valuation growth is yet to flow from the Spanish portfolio over the next year or two as the benefits of asset management initiatives continue to filter through to the bottom line.

The company is on track to maintain dividend growth of 7.5% for the full year to March, which places the counter on an attractive forward dividend yield of just more than 9%.