Vukile Property Fund’s strategy to aggressively grow its exposure to retail properties over the past five years is starting to bear fruit.
The company has transformed into a specialist retail-focused fund, as its recent acquisitions of township and rural shopping malls across SA have added R2.3 billion to its property portfolio value.
Vukile’s direct property portfolio of office, retail and industrial properties was valued at R15.7 billion with retail properties representing 70% for the year to March 31 2016.
“At 70% we are now moving into the domain of being a specialist retail fund and the portfolio is looking healthy with its composition,” said Vukile CEO Laurence Rapp at the company’s results presentation.
The company’s total property investments including listed securities (its 26.1% stake in the UK and Western Europe focused Atlantic Leaf Properties and a 31.2% stake in Western Cape-based Fairvest Property Holdings) were valued at R16.7 billion during the period under review.
When Rapp joined the company in 2011, Vukile’s R5.35 billion worth property portfolio at the time had a 50% exposure to retail properties. Rapp said Vukile is well on track to grow its retail exposure from 70% to over 90% in the next year. It has three ways of getting there: through its recently announced deal of swapping office and industrial properties worth R2.4 billion for Synergy Income Fund’s retail properties, the sale of its government tenanted buildings and the completion of two big ticket shopping mall developments.
Building scale
Vukile is a shareholder in the development of two regional shopping centres – the 50 000 square metre Thavhani Mall in Limpopo and the 44 662 square metre Springs Mall in Gauteng – that are both expected to be completed in 2017.
The company also concluded the shopping mall acquisitions of Nonesi Mall in Queenstown, Bedworth Centre and Batho Plaza in Gauteng and Moruleng Mall in the North West at a cost of R1.2 billion.
Shopping malls in township and rural areas are believed to be defensive and perform better than larger ones in urban areas. Vacancies across Vukile’s property portfolio reduced from 4.6% to 3.9% – levels last seen in 2010. It achieved an average contractual rental escalation of 7.6% and 33% of its leases are due to expire in 2020 and beyond.
Grindrod Asset Management’s chief investment officer Ian Anderson says Vukile delivered a commendable set of results given the tough economic backdrop. “Vukile’s retail portfolio appears to be performing extremely well with… an average increase in trading densities (a key metric to measure the performance of the retail sales) of 7% (excluding East Rand Mall).
“Management’s repositioning of the portfolio over the past four years appears to be bearing fruit and should lead to stronger distribution growth when the domestic economy finally recovers,” Anderson told Moneyweb.
Although Vukile’s stock has underperformed the market in recent months, Rapp said positioning the portfolio to be overweight in retail might drive the rerating of the company’s stock. Vukile’s stock has delivered a total return of 0.53% so far this year compared with 6.82% for the FTSE/JSE SA Listed Property Index at the time of writing. Vukile was trading at a forward yield of about 9% on Thursday, which is attractive compared to the sector’s average of 8%.
Going offshore
Another part of Vukile’s strategy is to grow its offshore exposure following the company’s foray into the UK and Europe through buying a stake in Atlantic Leaf Properties in August 2015. Vukile might conclude direct property deals in broader and Eastern Europe and the US and its mandate is broader than the retail properties. “It’s about finding the right partner to conclude offshore deals,” Rapp explained.
A big draw card for local property funds that have recently concluded deals internationally is that acquisition yields exceed debt funding costs. In most European countries, deals can be funded at interest rates below 5% while acquisition yields are up to 8%. While in SA it’s a negative yield spread, as the cost of five-year debt is more than 10% while acquisition yields are typically in the 7% to 8% range.
Vukile declared a 7% growth in dividend payouts to 146.3 cents and it forecasts similar growth next year. An analyst who refused to be named said a company like Vukile, which is acquisitive, should be posting dividend growth in excess of 10%. “You would hope for better dividend growth next year than the forecast 7%,” he said.
