Hmm, there really do seem to be stirrings in listed property
Vukile raised nearly double the amount it was looking for to fund existing assets in SA and Spanish real estate
Vukile Property Fund’s latest capital raise felt like the stirrings of a bygone phase: setting out to raise R400m from investors, it raked in R700m in an oversubscribed book-build. Property stocks en masse were among the JSE’s worst performers in 2018, but will 2019 be different? Vukile CEO Laurence Rapp explains what they’re using the money toward:.
We’ve been very active in Spain and we’ve built that portfolio now to over €900m. This money is not for new acquisitions, it’s to expand the existing centres that we have.
Equity is, however, expensive capital, it’s perpetual. Is it worth it?
Absolutely. You’ve got to run a property company for the long term. So it’s not a short term earnings boost. It is accretive, but this is about making the assets even more dominant and enhancing the tenant mix. When we see the long term benefits, then it’s absolutely appropriate in our view to fund it with equity.
People are understandably sceptical about SA companies and their offshore forays. How do you not get suckered into a bad deal?
You’ve got to have a look at the way we entered Spain and what we’ve done there. One, we didn’t want to have an asset-led strategy. There have been companies that have done that: they’ve gone and bought an asset, they’re pretty passive in what they do, they use cheap debt and boost their earnings on that basis.
Now, we said we like the fundamentals in Spain and we want to build a business and I hope you can see that distinction. We built a management team that is all Spanish, we’ve got 26 people and the key thing is that we operate as locals on the ground. This is not South Africans flying in every three weeks to say let me try do a deal. Castellana has its own independent board.
If it was a case of me sitting in Rosebank and making a call on whether this is a good property and that’s a bad property, or putting this tenant in, I think there would be room for scepticism. But given the fact that you’re backing a Spanish team with 20 years’-plus experience, then I think the argument is very different. We’ve already built ourselves now into the ninth biggest REIT [real estate investment trust] in Spain in two years.
How’s your Spanish? How do you know to trust people if you don’t speak the language? The good news is that Alfonso Brunet [Castellana’s CEO] is fluent in English and that was a key part of the relationship as well, but I can tell you that before we committed money to Spain I was up and down there very often interviewing and meeting people.
Just as you have to trust my expertise in hiring management in SA – because you can interview a person and you can understand who they are, you look at their experience – so you can do that in another market.
We put a lot of effort upfront into getting the top four people in the team, and that’s done. Mike Potts and I conducted those interviews, we brought Alfonso on and thereafter we relied on Alfonso finding the team.
What we’ve been working in in the last two years is exposing the management team to the SA investor community and so they have the confidence in who is running the assets. I think that was part of where that confidence came through [in the book-build] as well.
Back in SA, Vukile was one of the property companies that agreed to take an equity stake in Edcon, for R37m. Was this the best deal for you?
Edgars still does very significant turnover, R25bn or so. They made some retailing 101 errors, so they lost their way, no question. But now that you’ve got a debt-free balance sheet, reduced the store footprint, and reduced some costs, then I think you’ve given the business a fighting chance to succeed.
The number of jobs that could have been lost would have been a significant below to this economy and I can tell you that all of us were thinking the same way: this is about SA first and doing what’s right to protect the country, and if it means that the funds take a little pain then so be it. I think it’s the right thing that we’ve all done.
There were a few options – why take an equity stake?
What was important for us was to maintain the integrity of the rental base so it doesn’t open the door for another retailer to say: hold on, you gave Edgars a 40% rent reduction, we want one as well. What we’ve done is got a tenant who’s failing and we felt it was responsible to help that tenant in whatever way to survive. It’s in our interest to do so, it wasn’t an altruistic move and therefore we were prepared to invest in it.