Spanish venture prove the sceptics wrong

Vukile Property Fund, historically regarded as a reliable but somewhat boring dividend payer, is now starting to top many portfolio managers’ stock-pick charts.

That no doubt comes on the back of the company’s success in Spain.

Under the helm of CEO Laurence Rapp, Vukile entered that country about two years ago — the first and so far only SA property player to venture into the Iberian Peninsula. In that relatively short time, Rapp managed to grow Vukile’s Spanish assets to more than €900m, which now accounts for just under half of its R28.7bn portfolio.

The Spanish assets are held via Madrid-listed subsidiary Castellana Properties, which is already the ninth-biggest real estate investment trust in Spain by market cap.

Some analysts initially

doubted the scalability of Vukile’s venture, the strength of the local management team and the quality of the portfolio that was initially acquired. The latter consisted of 11 retail parks, mostly smaller, strip-type centres (similar to value centres in SA) typically anchored by electronics or grocery retailers.

However, last year management upped the ante by bulking up its Spanish portfolio with the acquisition of five larger shopping centres from Unibail-Rodamco-Westfield, one of the world’s best-known mall owners. The deal increased the value of Vukile’s Spanish interests threefold, from €308m to €916m.

More importantly, Vukile has proved the sceptics wrong by unlocking huge additional value from its initial Spanish portfolio of retail parks through various asset management initiatives. For example, manage

ment achieved an impressive 11% rental growth on new lettings and reversions and 3.5% like-for-like gross rental income growth in the year ending March — no easy feat in an economy where the annual inflation rate sits at 1.2%.

The performance of Vukile’s Spanish assets is reflected in the above-market 7.5% dividend growth declared earlier this month for the year to March 31.

That places the company among only a handful of JSElisted property funds that are still achieving inflation-beating dividend growth.

Vukile’s SA mall portfolio also delivered an admirable performance in what Rapp described as a “horrible year” amid a tough political and economic landscape.

Vukile’s directly held SA portfolio, which consists of more than 40 malls that cater mostly for lower-income shoppers, still achieved positive rental reversions of 4.5% and a tenant retention rate of 87%.

Vukile’s SA shopping centres include East Rand Mall, Phoenix Plaza near Durban, Gugulethu Square in Cape Town, Dobsonville Mall in Soweto and Daveyton Shopping Centre on the East Rand. The company also owns a stake in fellow JSElisted Fairvest, which holds a portfolio of rural and township shopping centres.

At Vukile’s annual results presentation, Rapp said the plan to buy three of Rebosis Property Fund’s shopping centres (Mdantsane City in the Eastern Cape and Sunnypark Shopping Centre and Bloedstreet Mall in Pretoria) for about R1.78bn, if approved, will boost the quality and size of Vukile’s SA mall portfolio.

Referring to SA’s depressed retail spending environment, Rapp said the company is seeking different and better ways to operate in all areas of the value chain.

Rapp also hopes to continue growing Vukile’s Spanish portfolio. Management is in negotiations about “a number” of deals, he said. He expects dividend growth to slow to between 3% and 5% for the year ending March 2020 as the Spanish portfolio continues to mature. But that should still be ahead of the sector average.