Wheeling and dealing hots up

South African companies have a dismal track record of offshore expansion, especially in the retail sector. But local real estate players, shopping centre owners and developers in particular, have generally bucked the trend, with Vukile Property Fund’s foreign foray into Iberia a hugely successful case in point.

The real estate investment trust (Reit) — which owns 35 shopping centres in South Africa, including landmark township malls such as Dobsonville Mall in Soweto, Daveyton Mall on the East Rand and Mall of Mthatha in the Eastern Cape — has made plenty of moolah for shareholders since it expanded into Spain in 2017.

Its first acquisition was a portfolio of nine retail parks — no-frills value centres — bought at the time for R2.8bn through its Spanish subsidiary, Castellana Properties. Back then Vukile, under CEO Laurence Rapp, was the only South African property counter that chose southern Europe for its offshore expansion. At the time most of its peers were venturing into the UK, Australia and Eastern Europe.

The former investment banker’s contrarian move has paid off handsomely. The value of the portfolio has since grown more than tenfold to R30bn — no easy feat, given constrained access to capital and other challenges created first by Covid and later by higher-for-longer interest rates.

A festive season trading update released earlier this week shows that Vukile continues to unlock value in its Iberian mall portfolio. Sales in the Spanish centres increased by 7.3% year-on-year in November and 3.2% in December off an already high base set in 2024. Foot count rose 4.3% in December (excluding the Bonaire Shopping Centre acquired in March). In Portugal, sales grew by 9.5% and 1.5% in November/December while foot count was up about 3% over the two-month period (excluding Alegro Sintra, the only Portuguese asset not managed by Castellana.)

Vukile is now stepping up its European expansion, clinching several deals in recent weeks. Late last month, it sold its inaugural Spanish portfolio of nine retail parks for €279m at a 13% profit to Ares Management — incidentally the company from which the portfolio was bought in 2017. The plan is to invest the proceeds, together with the R2bn capital raised from shareholders in 2025, in larger and higher-value shopping centres.

Last week, Vukile already announced the acquisition of Berceo Shopping Centre in Logroño in northern Spain, a dominant 50,000m² centre anchored by major retailers including Zara, Primark and MediaMarkt. Vukile bought 70% of the mall for €101m at a 7% yield. That comes after it spent nearly €370m last year to bag Bonaire Shopping Centre, the largest mall in Valencia, and Forum Madeira on the Portuguese island. Its Iberian portfolio now includes 11 malls in Spain and five in Portugal, making Vukile (via Castellana) one of the region’s largest retail property players.

Earlier this month, it also acquired a 35% stake in Pradera, a pan-European retail asset manager and investment fund with a team of more than 100 people who manage €5bn of retail assets across 10 countries.

Rapp tells the FM it is working on two more shopping centre acquisitions in Spain, which he refers to as “one of the hottest real estate markets in Europe”.

Vukile is also negotiating another deal in South Africa, after it spent R600m to buy 50% of Durban’s Chatsworth Centre in December. Rapp stresses Vukile won’t have to raise any new equity to fund the pipeline. “We now have a large cash pile to deploy into these deals,” he says.

Rapp argues the sale of the nine retail parks comes at an opportune time, with prices rising as more institutional investors allocate money to European retail assets. He says the recent deals are all accretive from day one. “It speaks to our ability to not only allocate but also recycle capital timeously without any slippage.”

Rapp estimates the value of Vukile’s Iberian assets will soon breach R40bn. He’s also keen to enter another offshore jurisdiction but remains tight-lipped about the details, except to say: “We’re still doing our homework.” Potential markets include the UK, Italy, Germany, France, Poland and Türkiye.

Referring to the Pradera acquisition, Rapp says the deal shouldn’t be seen as Vukile shifting focus into third-party asset management, but rather as a strategic move to support expansion into more European markets through direct property acquisitions.

Vukile has been a great example of clever asset allocation and recycling ... and continues to make bold and big decisions

—  Keillen Ndlovu, analyst

“The Pradera stake buys us the capacity and ability to enter other markets. The company has a big team on the ground with deep local insight, which will help with deal flow.”

The market has clearly been supportive of Vukile’s offshore expansion trail. In the past 12 months, its share price has rallied more than 40%, breaching a record high of R26 last month. The stock has also been one of the JSE’s best-performing Reits over three and five years and is now trading comfortably ahead of its 2018 peak of R22.

Vukile is one of the few South African Reits trading at a premium (6%-7%) to its NAV, which at first glance suggests it is expensive.

However, analysts agree there are still plenty of reasons to buy the share. Curwin Rittles, investment analyst at Metope Group, says Vukile continues to offer value at current levels. “We don’t believe valuations are stretched relative to the company’s medium-term growth potential.”

Rittles notes recent deals highlight improving liquidity in the Iberian market as well as management’s ability to actively manage the portfolio through the cycle. “We place particular value on teams that can exit assets as effectively as they acquire them, given the importance of this discipline in driving sustainable growth.”

Independent property analyst Keillen Ndlovu agrees Vukile is still a buy. He says it’s no surprise that the stock is trading at a premium to NAV vs the Reit market’s average discount of about 5%, given its above-market earnings growth prospects.

Vukile expects earnings growth of about 9% for the year to end-March vs a sector average of 5%-7%. “Vukile has been a great example of clever asset allocation and recycling. It never rests on its laurels, has timed transactions well and continues to make bold and big decisions, locally and internationally,” says Ndlovu.

Still, there is the risk that expansion into other European countries may not be as lucrative as the Iberian foray. Referring to Vukile’s niche competitive edge in Iberia, Ndlovu says: “I hope Vukile doesn’t lose its focus and spread itself too thin.”

But, he says, the upside is that the 35% acquisition in Pradera should provide additional market intelligence on any new markets targeted by the Reit.

Golden Section Capital MD Garreth Elston shares this sentiment. He says expansion into additional European markets introduces execution risk. “However, the use of short-dated funding, equity conversion mechanisms and partner-aligned structures will mitigate potential balance sheet strain.

“In short, for investors seeking durable income growth with a credible capital allocation track record, Vukile still justifies a meaningful weighting, provided expansion remains selective and high-quality Spanish and Portuguese assets continue to anchor earnings quality.”

Elston concedes that investors who haven’t yet bought Vukile may have missed out on the early phase of its postpandemic recovery. Still, he argues the stock’s outlook should be assessed on the quality of its forward earnings guidance rather than its backward-looking price performance.

“Vukile’s valuation case has shifted from a rerating story to an execution one, based on active and accretive portfolio management.”