While not regarded as a glowing beacon on the JSE’s cluttered real estate board, Lighthouse Properties is appearing on more institutional buy lists as it looks to cash in on Spain and Portugal’s post-pandemic retail rebound. It’s a left-field rand hedge property play, certainly. But could it become as much of a money-spinner as its former stablemate Nepi Rockcastle?
Des de Beer certainly believes Lighthouse is ready to shine. The property maverick, who owns a sizeable 18% of the company, reckons it’s on a similar trajectory to Nepi Rockcastle. “It’s just a much smaller version of Nepi Rockcastle — but in more secure markets with less political risk,” he tells the FM.
At first glance, the numbers may suggest otherwise. Taken over three years — and with some big swings along the way — Lighthouse’s share price is down about 5% against Nepi Rockcastle’s 35% rise and a 15% increase in the South African listed property index (Sapy).
Besides, Nepi Rockcastle is a tough act to follow. With a market value of almost R90bn, the company is the stuff of market legend. Consider it this way: if you’d bought R100,000 worth of its shares when the then little-known retail landlord listed on the JSE in April 2009, your investment would now be worth R1.6m. That’s a cool 21% annual return — remarkable, given the huge knock that real estate stocks across the globe have taken over the past few years. And it’s way ahead of the 11.8% and 8.5% delivered by the JSE top 40 and the Sapy respectively over the same 15-year period, according to Anchor Stockbrokers and Reuters figures.
Back when Nepi was founded, it owned only a handful of shopping centres worth about €150m. Today, its asset value is €6.8bn and its sprawling real estate empire spans more than 50 shopping centres in nine countries in Central and Eastern Europe. It’s one of the largest and most successful retail-focused real estate investment trusts (Reits) in Europe and the largest property stock on the JSE.
But Nepi Rockcastle was never a one-way bet. When South Africa’s Resilient property group co-founded the company in Romania in its original guise as New Europe Property Investments (Nepi), the former communist region was uncharted territory.
Given South Africans’ less than stellar track record in making money offshore, many were understandably sceptical that Resilient’s entry into the region would pay off. However, De Beer, the former Nedcor investment banker and co-founder of Resilient, was confident that the group could replicate its South African business model there.
Besides, De Beer was never one to follow the crowd. During the early- to late-2000s he was a trailblazer in South Africa’s township and platteland retail space, and gained a formidable reputation for spotting contrarian opportunities.
The strategy delivered handsome returns — even with an aggressive sell-down of Resilient Reit and its then associated companies (including Nepi Rockcastle) in early 2018 amid allegations of share price manipulation. (The group was later cleared by the Financial Sector Conduct Authority of any wrongdoing.)
De Beer was never one to follow the crowd. He was a trailblazer in South Africa’s township and platteland retail space, and gained a formidable reputation for spotting contrarian opportunities
Then there’s Lighthouse Properties. Another rand hedge stock created by the Resilient group, it first listed on the JSE in mid-2016 as Greenbay Properties. Since then, it’s delivered a more erratic performance — no doubt due partly to relatively low liquidity and a smaller market cap of R14.8bn. As a result, it’s garnered little interest from institutional investors.
In part, the issue seems to have been that the company lacked a clear strategy. It initially invested in a mixed bag of offshore assets including listed infrastructure stocks in the US, Canada, Europe and Hong Kong. By 2017, it had also acquired stakes in three shopping centres — one in Slovenia and two in Portugal, co-owned with Resilient. (It has subsequently sold one of the Portuguese malls.)
Then, in 2020, when the demise of UK retail-focused Intu Properties triggered a widespread sell-off of other mall owners, Lighthouse stepped up its retail focus. Management started buying shares in London-listed Hammerson, one of the largest shopping centre owners in the UK and Europe, at deep discounts to NAV.
The joint acquisition of four French shopping centres for €305m (with Resilient) followed in September 2021. In early 2022, Lighthouse announced its entry into Spain, where it bought the Centro Comercial Torrecárdenas mall in Almería for €162.5m.
Early this year, Lighthouse and Resilient jointly bought Salera Shopping Centre in Castellón, also on Spain’s Mediterranean coast, for €171m. And in April, a fourth Iberian property was added to the portfolio — the Centro Comercial H2O near Madrid, acquired for €121m.
So, in two years, the value of Lighthouse’s directly held retail portfolio has grown more than fourfold — from less than €200m to €855m. At the same time, it has sold its 22.8% stake in Hammerson down to less than 13%. That came on the back of Hammerson’s unpopular decision to withhold dividends and allocate capital to development projects instead. Lighthouse’s remaining Hammerson shares are worth about €200m, taking the company’s total asset value to just over €1bn.
Lighthouse is now poised for another growth spurt as it looks to further bulk up its retail footprint in Iberia. So is it finally on track to replicate the success of Nepi Rockcastle?
Spanish acquisitions
De Beer says Lighthouse’s entry into Iberia couldn’t have come at a more opportune time. “Lighthouse has the resources to cherry-pick the best assets at what we believe is the bottom of the market,” he says.
Retail properties in Spain and Portugal have traditionally been tightly held, mostly by large pension funds and private equity players. Given the challenges faced by mall owners in the past few years, coupled with the rising cost of debt, many are now looking to unwind their positions in a bid to shore up overstretched balance sheets.
This has created a limited window to buy quality shopping centres at decent prices before interest rates fall, says De Beer. Helping Lighthouse’s case is a war chest of about €200m and below-market debt levels, with a loan-to-value ratio of less than 25%.
Lighthouse’s recent Spanish deals were closed at yields (first year’s rental income as a percentage of market value) of 7.5%-7.7%. The same malls would have traded at 5%-5.5% pre-pandemic — if at all.
“So there’s plenty of value to be unlocked over the next few years,” says De Beer, who retired as CEO of Resilient in December but remains on the boards of both Resilient and Lighthouse.
He adds: “Lighthouse has no secondary assets in its portfolio, which is how it differentiates itself from other Western Europe-focused Reits.”
De Beer is confident Lighthouse will appear more regularly on the radars of large fund managers given its shift to directly held retail. “The company now has a very clean and focused strategy, which institutional investors understand and like,” he says.
Lighthouse CEO Justin Muller, a former investment banker who joined the Resilient group in 2013 and spent two years with Nepi Rockcastle in Poland, concedes that the market may not always have understood the company’s strategy. “Our mandate was quite broad in the early years, but we were always opportunistic, looking for undervalued investments in global markets.”
Muller says Lighthouse’s investment case has become more compelling now that it’s scaling up its directly held retail portfolio. “We have streamlined our investment mandate and will continue to rotate out of Hammerson to become a pure property play.”
He adds: “We have access to cheap capital and have a lot more growth to offer than more established Western Europe-focused Reits.”
It also helps that Lighthouse has a flat management structure that allows the team to close deals quickly. It comprises mostly South African expats based at the company’s Amsterdam head office.
As far as Muller is concerned, Lighthouse has a competitive advantage in that it’s the only pure rand hedge property play that offers South African investors exposure to Iberia.
Vukile Property Fund, the only other JSE-listed Reit with exposure to Iberia, entered Spain six years ago and has since built a sizeable retail portfolio worth R24.5bn via Madrid-listed subsidiary Castellana Properties. But 40% of Vukile’s assets are still South Africa-based.
Muller now plans to build critical mass in Iberia. “It gives you far better bargaining power on lease terms with retailers if you own 10 malls in a region instead of two,” he says.
Besides, he believes the European retail sector has been properly “crash-tested” over the past five years. Shopping centres have faced not only the onslaught of online shopping and pandemic-induced trading restrictions, but also consumer spending constraints caused by rising interest rates and surging energy prices on the back of the Ukraine war.
“Though there have been a lot of casualties, especially among the secondary malls, the right assets in the right locations are now set for a rebound,” says Muller.
He reckons the value of the portfolio could rise another 50% to €1.5bn within a year, which will push the Iberian exposure to more than 80% of assets. “But the good assets are few and far between. Out of every 20 shopping centres that come across our desks, we typically end up looking at only one,” he says.
For now, Muller is eyeing three potential deals — though any acquisitions have to adhere to a strict set of investment criteria. “We are very picky. We won’t buy a mall unless it has a Zara and a Primark; is located in a city with a growing population; and is the dominant shopping destination in its catchment area.”
Lighthouse favours cities and towns with a population of at least 100,000 people. The “sweet spot” is centres of 40,000m²-60,000m², typically valued at €120m-€200m.
“But we won’t overpay, so won’t look at anything that trades at yields of less than 7%.”
So far so good on the Iberian front — but why the diversion from France?
Muller admits that Lighthouse’s French foray has proved more difficult than expected. The economy is still weak and the country faces sociopolitical challenges, which have dampened consumer spending and retailers’ expansion plans.
“A lot of French retailers have folded, so it’s taken longer to fill vacancies and grow rentals. It’s also much easier to do business in Spain and Portugal than in France, which is quite bureaucratic.”
Retail property investors in France must compete with the big listed guns such as Klépierre and Unibail-Rodamco-Westfield. “So you’re only able to buy smaller, peripheral stuff. In Spain, we can buy bigger assets that dominate their catchment areas.”
Still, Muller has no plans to sell the French malls — not yet anyway. “We have spent a lot of money in France and the growth will still come through — but it will take longer than expected.”
We have spent a lot of money in France and the growth will still come through — but it will take longer than expected
— Justin Muller
A solid bet
Paul Santos Robson, senior retail director for real estate research firm CBRE in Iberia, says the investment case for retail property in Portugal and Spain appears more promising than elsewhere in the EU. He points to the most recent GDP growth forecasts in the region: 1.9% and 1.8% for Spain and Portugal, against an EU average of 1.4% (see graph).
“Economic and consumption growth is expected to outperform that of the euro area over the next three years, partly due to the region’s low dependency on Russian oil and gas.” That’s meant consumer pockets in Spain haven’t been hit as hard as other EU countries by rapidly rising utility bills.
Consumption growth will also be underpinned by the region’s “extremely” resilient labour force, with wage increases typically outpacing inflation. A strong rebound in foreign tourist arrivals, which last year surpassed 2019 levels for the first time (85-million in Spain and 18-million in Portugal), and lower e-commerce penetration will further support sales in brick-and-mortar shopping centres, says Robson.
In addition, Iberia has a relatively low retail supply of about 350m² per 1,000 people vs more than 4,000m²/1,000 in the US, about 1,850m²/1,000 in the UK and 500m²/1,000 in France.
Iberia is also one of the few regions in the world where retail sales and foot count have already surpassed pre-pandemic levels, a trend that is evident from the latest trading metrics in Lighthouse’s four Iberian malls (all sized between 48,000m² and 67,000m²).
The Salera Shopping Centre is a case in point. Bevan Williams, head of asset management at Lighthouse, says Salera’s sales turnover for the year to end-March reached a record €131m, which is 14% ahead of 2022, and 46% higher than the €90m achieved in 2019. Annual foot count recently breached 8.9-million (up from 8.2-million in 2019), which is the highest number since Salera opened in 2006.
Though Torrecárdenas had a slow start after it opened in 2018 with growth stalled by the pandemic, it has staged a strong comeback. According to Williams, sales turnover for the year to end-March is up a hefty 48% on pre-pandemic levels and foot count is 5% ahead of that recorded in 2019. The mall has zero vacancies, with several retailers looking to expand existing stores.
Torrecárdenas’s extensive fashion offering includes all the brands owned by retail giant Inditex — Zara, Massimo Dutti, Bershka, Pull&Bear, Stradivarius and Oysho — as well as H&M, Mango, adidas, Parfois, Jack & Jones, Springfield, Foot Locker, JD Sports and Alvaro Moreno.
It also boasts the only Primark store — one of Europe’s most popular fast fashion chains — in Almería. “Primark customers are known to drive up to an hour to visit a store. So you’re capturing a far bigger catchment area if you have a Primark in your mall,” says Williams. Starbucks also recently opened a shop at Torrecárdenas — the only one in the region.
Similarly impressive trading metrics are evident at Forum Coimbra, Lighthouse’s only Portuguese shopping centre. The mall is perched on a hilltop with scenic views across the university town of Coimbra, halfway between Lisbon and Porto. Though the smallest at 34,000m² (excluding a 17,700m² privately owned hypermarket), Forum Coimbra is Lighthouse’s most lucrative asset with the highest trading densities (sales per square metre) across its portfolio at an annual average of €4,311/m². The mall is also its highest value asset at €190.9m.
Gross sales reached a record €152m in the year to end-March, 19% ahead of 2019 levels, which Williams notes was one of the strongest retail years in Portugal’s history. Now, Lighthouse plans to spend €12m to extend the centre.
There’s also lots of new residential development happening in decentralised suburbs to cater for increased housing demand, which in turn is driving sales and foot count at out-of-town shopping centres
— Nesi Chetty
At H2O, gross sales are 14% ahead of pre-pandemic levels. Williams says H2O, which Lighthouse took transfer of two months ago, is the only Iberian mall with a vacancy count, albeit a relatively small 3.5%. “It needs a bit of love,” he says, as the previous owner underinvested in the mall. “But it’s the one Iberian asset we believe has the biggest growth potential.”
Lighthouse will spend €10m on asset management initiatives, including replacing floors, upgrading the surrounding gardens and lake and tweaking the tenant mix. A 3,368m² Primark store will open in late August, which Williams says could lure up to 1-million more shoppers a year.
Investors buy in
Meanwhile, it seems investors are already buying into Lighthouse’s Iberian story, believing it is on track to deliver the more predictable returns that fund managers favour.
Despite earnings growth coming under pressure, which saw dividend payouts drop about 17% in the 12 months to December (from €3.25c to €2.70c a share), Lighthouse’s share price has rallied 60% since its five-year low of 500c in October. That’s double the 30% increase in the Sapy over the same period.
Nesi Chetty, head of listed property at Stanlib, rates the Lighthouse management team highly. “They’re opportunistic and won’t overpay for assets, which is key,” he says.
Chetty believes Iberia is an attractive region for retail property investors, given stronger GDP growth prospects and a more pronounced rebound in retail spending and tourism than in some parts of Europe.
“There’s also lots of new residential development happening in decentralised suburbs to cater for increased housing demand, which in turn is driving sales and foot count at out-of-town shopping centres,” says Chetty.
Independent property analyst Keillen Ndlovu believes Lighthouse is a good diversifier away from Eastern Europe and the UK, the regions that most JSE-listed Reits have exposure to. “The UK has not been a success for the South African listed property sector in general. And while Eastern Europe continues to do well, the sector is overexposed to the region.”
Ndlovu says Lighthouse’s strategy to sell Hammerson shares at yields of about 5% to buy higher-yielding assets in Spain and Portugal at yields of 7%-8% makes sense. “The company will gain exposure to better growth opportunities and full control of the assets, income and strategy, which the market prefers to holding a passive stake in another listed entity.”
But Ndlovu is uncertain when Lighthouse’s French investment will bear fruit. “Though it has a glamorous and wealthy economy, France is a mature, stagnant and bureaucratic market,” he says.
Also, Ndlovu says the free float is quite low given that more than half the shares are held by Resilient, De Beer and other directors.
Ann-Maree Tippoo, portfolio manager at Ninety One, agrees that Lighthouse is a stock to keep an eye on but adds a note of caution. “We like the change to a streamlined strategy that favours directly held retail assets. But we still need to see the acquisition of the Western Europe assets translate into performance, and the Iberian focus looks set to support this.”
How much share price upside is left in the short term remains to be seen. Analysts say the stock is not cheap and trades at a dividend yield of about 7%, below the sector average of 10%. As Tippoo points out, given the relatively narrow discount to NAV at which the Lighthouse shares are trading (less than 2% at last week’s levels of about R8 vs a sector discount of closer to 30%), “the stock could be considered fully priced”.
* The writer was a guest of Lighthouse in Iberia
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