Intu bets on Spanish rebound with purchase of shopping centre

The Spanish property market‚ which analysts say the JSE has no exposure to‚ has shown declining total returns since the end of 2010 in line with economic conditions. However‚ Intu expects Spain's economy to return to growth next year and believes the country offers opportunities to create a quality business of scale.

Intu's chief executive David Fischel said the acquisition of Parque Principado Shopping Centre established the company's presence on the ground in a country where there may be considerable growth in the regional shopping centres.

Intu and the Canada Pension Plan Investment Board (CPPIB) announced the joint acquisition of the 75‚000m² centre in Oviedo‚ northern Spain‚ for a combined price of €162m before transaction costs.

Based on net income of €11.7m‚ the centre's net initial yield is 7.2%. The joint venture intends securing bank financing for about 50% of the value of the centre - which is anchored by stores such as Primark‚ Zara‚ H&M and Mango.

Focused on UK

Intu‚ a major developer and landlord of UK retail properties‚ already has interests in Spain through another joint venture for pre-development activity on three major sites - in Malaga‚ Valencia and Vigo.

Fischel said Intu would look to extend its relationship with CPPIB‚ which was a major and highly regarded global investor.

Intu said it was investigating the creation of a special purpose investment vehicle for its Spanish activities‚ such as a Spanish real estate investment trust.

The company said that following a difficult period‚ the Spanish economy appears to be stabilising and expectations are for a return to economic growth from next year along with private consumption growth from 2015.

Spanish mall developments

Spain was one of the few major European countries without a committed pipeline of prime mall developments. Intu says there is limited investor competition, which provides a contra-cyclical opportunity to buy large‚ high quality centres at historically low prices.

According to the latest IPD Spain annual property index‚ released in April‚ the Spanish direct commercial property market showed a negative 2.1% total return in 2012‚ consisting of 5.7% income return and negative 7.4% capital growth. The retail sector's total return was minus 2.2%.

Investec Asset Management's research analyst Peter Clark said Intu saw potential value in the Spanish market compared with the UK‚ and the market offered it another avenue for growth.

While the company has a £1bn capital expenditure pipeline in the UK over the next 10 years‚ outside of that‚ there are very few opportunities to buy large‚ dominant centres in the UK so this is the growth that they are pursuing.

According to Clark, the centre itself was very small in the life of Intu. He said the mall was not extremely cheap and there were a whole lot of macro headwinds in Spain that had caused rental declines across the market during the past few years.

Although rentals in the centre had grown by 2.8% annually‚ outperforming the Spanish market‚ Clark said he thought there may still be rental pressure there.

"I was surprised that the cost of financing they could get for the centre was about a 6% Euro debt rate. I would have thought they would have been able to get funding lower than that‚" Clark added.