Spanish venture a solid move for Vukile Property Fund
Investments in the country have brought rewards, and dividend growth of 7.5% for the year to March is expected
After clever asset management, which included a foray into Spain, Vukile Property Fund has been touted as a counter that may be worth a second look.
The company has evolved since it listed in 2004 with exposure to retail in Randburg’s CBD. Led by CEO Laurence Rapp, it now owns property assets worth R32.3bn.
Half of its exposure is in Southern Africa, with assets in SA and Namibia.
Vukile owns a direct property portfolio made up of 91% retail assets, which is worth R14.8bn, as well as stakes in two listed SA companies, Fairvest and Gemgrow, worth R620m and R780m respectively. These have performed "acceptably" over the past year, Rapp says. The SA and Namibian retail assets achieved 5.1% like-for-like growth in net property income and positive rental reversions of 4.3% in the six months to September.
Retail vacancies were stable at 3.4%, lower than the market average of about 4.2%. Retail trading densities grew 1% overall, exceeding the SA Property Owners Association September average of 0.2%.
Rapp says Vukile’s rural and township shopping centres stand out, with 3.1% and 2.1% trading density growth respectively, compared with urban centres, which suffered an overall shrinkage in trading density of 0.8%.
The other half of Vukile’s portfolio includes a R1.3bn stake in UK company Atlantic Leaf Properties.
Then there is the R14.8bn worth of exposure to its subsidiary Castellana Properties, a Spanish landlord and property manager.
Vukile is the only SA property fund with exposure to Spanish real estate, and so far the move to invest there in 2017 is reaping rewards.
Says Keillen Ndlovu, head of listed property funds at Stanlib: "We really like this stock. The decision to invest in Spain has been a game-changer. Vukile offers a good yield of almost 10%, driven by average dividend growth of more than 5% in the next two to three years."
Vukile is a very defensive investment compared with its SA peers, according to Lawrence Koikoi, a fund manager at Stanlib.
The SA economy is struggling to grow, and property companies have forecast weak dividend growth. Some think their dividends will even shrink in their 2019 financial years, but not Vukile. It has forecast dividend growth of 7.5% for the year to March.
Koikoi says: "Vukile has bucked the trend
by reiterating its strong earnings growth guidance when peers are presenting anaemic growth guidance. Moreover, Vukile’s strong guidance is underpinned by better property fundamentals both in SA and Spain. In this context, the share doesn’t look expensive at about 10% forward yield."
Nesi Chetty, head of listed property at Momentum Investments, is also a fan of Vukile and its Spanish foray.
He says the market, which may have been apprehensive at first about an SA company spending a large amount of capital in a big economy like Spain, has warmed to Vukile’s Spanish strategy.
He says the company’s strategy has worked so far. It invested in a strong team in the formation of Castellana, and that team has brought two asset portfolios to Vukile, which offer the company different ways to grow its earnings.
"The investment offers two opportunities. The first portfolio includes retail parks, which tend to be older and which need better asset management than their previous owners gave them. This will lead to strong letting [income], which can greatly improve the net operating income growth from the portfolio," he says.
"The second acquisition of a portfolio of
high-quality shopping centres adds a defensive quality," he adds.
Chetty says Castellana’s team has a deep understanding of commercial property in Spain and it has selected various attractive shopping centres it wants to buy in the future.
Vukile’s shopping centres include a number of very strong anchor tenants. This includes El Faro, its flagship centre in Badajoz. The centre includes retail and leisure facilities as well as a dining hub of more than 66,300m².
As much as 43,423m² is owned by Castellana Properties. The centre is conservatively valued and is experiencing good trading density growth and footfall, Chetty says.
The main tenants at the centre include giants such as Irish fashion retailer Primark. It’s the only Primark store in the southwest Badajoz region.
The mall also has the Inditex Group (the Zara owner), along with other high-end brands as tenants.
Castellana is also interested in UK shopping centre group Intu’s Spanish portfolio. The company has been under pressure amid uncertainty around the Brexit process.
It promoted its FD, Matthew Roberts, to the position of CEO last week. He says Intu needs to increase its cash on hand, and as a result it will need to sell some of its malls.
The company is most likely to have success selling its Spanish mall portfolio. Many fund managers say UK commercial property may include some very high-quality assets, but undoing the devaluation of assets that has followed the Brexit vote will be a long process.
Intu owns a development called Intu Costa del Sol, in the south coast resort town Torremolinos, in the province of Málaga in the Andalusia region.
Juan Palomo Marín, senior asset manager at Castellana, says Spanish shopping centre landlords are eager to see whether this asset will succeed and will fit snugly into Castellana’s portfolio alongside its other malls in Andalusia.
Over the next five years, it is expected that Vukile will sell its stake in Atlantic Leaf and spend most of its new capital in Spain.
Locally it will redevelop its SA assets, but Rapp says he is cautious about buying new local assets while economic conditions are poor and business and consumer confidence remains in the gutter.