Setting a global example amid challenging times

Setting a global example amid challenging times

Luis Mota Duarte, CFO, Sonae Sierra, values sustainability as a core element of the company’s culture

 

How would you sum up the ‘key ingredients’ that Portugal boasts that make it such a competitive destination for commercial real estate investors?

In my opinion, Portugal is an attractive market for foreign investments mainly due to the following three main reasons. Firstly, Portugal offers remarkable stability. It is a very stable country from a social and political point of view, which is sometimes underestimated or viewed differently abroad. From a social point of view, we tend to be very peaceful. If you look around you hardly see any demonstrations of violence on the streets compared to movements in other European countries. This stability can also be witnessed through the political scope, as our governments tend to be relatively stable and compliant with European rules. If you are a real estate investor with a long-term view, this is a factor you should look for and that exists in Portugal in a very evident way.

The second main aspect has to do with pricing. Usually foreign investors attribute a market risk premium to Portugal, because it is a southern European country on the periphery from Latin origins. These risk factors, however, do not materialise in practice, which means that normally prices in Portugal are at a discount to what they are in other countries. For example, an asset in Portugal is generally cheaper than an asset with the same attributes in Spain. If you understand that this risk premium is just a pricing mismatch, you can find a deep market of attractive opportunities in Portugal. This arbitrage opportunity is correcting now as more and more money flows into Portugal, but the gap is still significant. Our country is also less mature from a real estate point of view. There are many sectors that have not reached the level of maturity that they could have. Many of these sectors were growing pre-COVID and will continue to grow going forward. The Portuguese market is also much less institutionalised and has a higher degree of fragmentation, which also means more opportunities.

The third point which has developed recently is the legal, political, fiscal framework which has become more real estate friendly. The first significant change was the introduction of golden visa scheme. The second one was the creation of REITS Regime, which was introduced last year. Both are not yet a well-developed framework as it is in Spain and other markets, but finally there is a fully transparent real estate vehicle which investors in Portugal can invest in. That itself should serve as an attractive factor for foreign and retail investment. The Portuguese Parliament introduced a very shopping centre unfriendly measure, for which there is no precedent in Europe. Whilst this is extremely punitive, unnecessary and exaggerated, we see this purely as a short-term mistake, reflecting the COVID-19 volatilities and not necessarily a representation of the Portuguese parliament’s view on foreign investment in Real Estate.

 

Sonae Sierra was awarded the ‘Bronze Stevie Award’ in the ‘Covid-19 Response Categories’ category, under the ‘Most Valuable Corporate Response’ subcategory, in the 17th edition of the ‘Annual International Business Awards’. The company was distinguished for the execution of the program ‘Coronavirus Pandemic – Enhancing and reinventing retail real estate operations’. What can you tell us about the innovative approach applied in this response and the results that it yielded?

There are many different aspects to talk about here. COVID-19 hit us quite hard. Today, most of our portfolio is composed of shopping centres across many different geographies, and earlier this year we reached a point where virtually all of our shopping centres were closed. At that point in time, the whole company went into an ‘all hands-on deck’ mode, in terms of workforce, but also in terms of brainstorming and coming up with many different solutions that could help all our stakeholders. Our first priority was making sure there was a safe environment at our properties, ensuring that customers could shop without feeling in danger. Secondly, it was about implementing measures for tenants so they could feel that their employees were able work and operate safely. Thirdly, it was our own people being safe when operating inside the centres. Furthermore, the large investor base that we currently have, with over EUR 2 billion under management, had to receive the necessary information in a transparent, timely and consistent manner, to ensure that they had full visibility in terms of what was happening and the decisions that were being taken, particularly as some were so material that they required full and proper discussions.

The way we responded to COVID-19 so well was thanks to our communication with tenants, investors, shareholders and government authorities. This took a lot of discipline and maturity. The way our staff portrayed a knowledgeable, calm and structured approach was outstanding, allowing us to take the best decisions for all the stakeholders, with a long-term perspective in mind. Communication was transparent, daily and consistent. In terms of innovation, the key distinctive factor was to have safety as the core pillar of everything we were trying to do. One measure we are particularly proud of, was when we developed a partnership with a Portuguese marketplace, named ‘Dott’, to allow all our tenants to sell online. This was achieved in a record time, just within 10 days. This way, all our tenants could sell online for free straight away. The take up from tenants ended up not being very high, but the infrastructure and the setting is there for tenants to use and leverage their omnichannel strategies. We then also tried to facilitate everything that we could to provide our visitors with more purchasing options, in order to avoid contact, but still having access to our shops. We created some pick-up and delivery points, while we had people delivering items from the stores at specific places in our parking space.

 

What are your projections when it comes to Portugal’s foreseeable outlook?

Despite the common market view, which mostly applies to the Anglo-Saxon markets, we are very positive for shopping centres. We do not think that COVID-19 lead towards a revolution in this industry, as it just accelerated an imminent evolution, for which we were already preparing. We just have to be quicker now in key aspects, such as the creation of an omni-channel network at our centres, merging digital sales channels with flagship-destination stores, the introduction and widening of a health & wellness offering, as well as bringing sustainability and mobility to our centres in a much more visible manner.

COVID-19 has also accelerated the rethinking of total store space by retailers, as they continue to focus on increasing their space on very specific core locations. This means that prime and core shopping centres will be increasingly key for their omnichannel offering. We have recently been making a movement of focusing our portfolio on core shopping centres so we were predicting this, and we are ready for this change. Shopping centres are still an asset class with much value for the long term, however there will be an evolution in their offerings.

 

In your 2019 company report Mr. Fernando De Oliveira mentioned that the group’s focus has been on identifying solutions that meet market trends. With the three key building blocks of this focus being on investment funds, services to external clients and selective developments. Could you please discuss in more detail what this entails and how it leads the group to finish its 30th year anniversary with some of the company’s highest levels of growth?

These three pillars represent the key focus of our strategy. Coincidentally, we were in the middle of an exercise of a strategy revision when COVID-19 hit. This way, we were able to use the COVID-19 experience to review our long-term strategy, where these three key building blocks continue to play a key role. In terms of investment funds, what we see is that we have a lot of expertise and track-record in terms of managing, developing and investing in real estate. We have seen many investors that are looking for yields, particularly in these low yielding environments we are currently in, seeking a safe pair of hands to invest their savings into safe and low volatility investments. We have a unique track record and experience in managing investments for institutional and private wealth investors. We believe that this is a key area we can grow and deepen further, by partnering with our customers.

This is an area we want to grow in. Today, we have a SOCIMI in Spain and a SIGI in Portugal. We are also managing EUR 3.5 billion’s worth of shopping centre funds with institutional investors. This is an area where we have a great track-record and a differentiating advantage. We would like to bring to this market the democratisation of real estate ownership. If you are a small investor you are usually not able to invest in liquid instruments, particularly as a real estate usually requires a significant investment.

However, if you are able to provide investors the opportunity to invest in transparent vehicles, such as REITS, you can much more easily make meaningful investments and get the exposure you want from a large property with strong transparency, governance and liquidity aspects. We firmly believe we have the skills and competencies to be much more successful than we have been in the past.

The second pillar is services. Historically, Sierra has been very much focused on developing. We have become world class when it comes to property management and development of shopping centres. Whilst we have been using these competences for our own portfolio, we are looking to use these competences to provide a service for our customers. We have shifted our mindset going out, as we provide the same services we provide internally, to external clients. Not only do we provide the standard packages, but we also supply the market with a differentiated offering, including solutions of sustainability, ESG, market intelligence and transaction-type services.

The third pillar is around selected development. Our DNA is based upon developing shopping centres; however, we see this as a more selective opportunity now, focusing on selected developments in Latin America, Brazil and Colombia. We also want to leverage on our successful history as a developer to expand to other sectors. We expect to invest materially, in the coming five years, in mixed-use real estate assets, such as urban regeneration, across Europe.

 

The groups collaboration with Bankinter has culminated in the launch of the first Portuguese Real Estate Investment and Management Society (REIT). We have witnessed one of the first acquisitions in the recent acquisition of five supermarkets in early August. Could you discuss the success in Spain in the lead up to launch and the investment aims through this vehicle?

We created a SOCIMI in Spain in 2017, alongside Bankinter, which combined key skills form both parties. Bankinter has a very good private wealth network and we have world class real estate know-how. Our arrangement is based on these unique skills. On more practical terms, Bankinter does the distribution and fundraising and we do the management of the funds and assets. We have now an almost EUR 400-million listed fund, getting very good feedback from investors. Its resilience to COVID-19 was quite impressive, being the result of a very diversified pool of assets that include a very large component of grocery real estate assets. If there is one asset class that did well during COVID-19 is food retail, a large part of our portfolio both in Spain and Portugal.

The Portuguese SIGI was the natural next step. Bankinter has a strong, albeit smaller, network in Portugal, which is growing, and the Portuguese real estate market presents a significant opportunity for yielding investments.

 

The future of retail will be shaped by two main trends, namely the impact of digital technology and sustainability orientated innovation. From an operational point of view, to what extent is the group integrating a digitalisation strategy into its new developments going forward?

Every shopping centre today, has to have a digitalization strategy, which includes not only the digitization of the shopping centre but also the integration with the tenants’ own digital strategy, to create one coherent seamless digital environment.

We have three elements that feed into a shopping centre. When we develop any real estate asset, the development team deals with the project and construction phases, and thinks in terms of business and investment opportunity. Then the property management team studies how to best manage the tenants within that scheme. Thirdly, the innovation team works in very close proximity with the property managers and the development team, to ensure that what we are testing on a daily basis in terms of innovation is at the forefront of the asset. It is the combination of these three aspects together that create an end result which is very dynamic, resulting in a future-proof offering. Coincidentally, as we speak, we have an international digital expert assessing some of our centres, with a mission of challenging us with the most appropriate digital innovations that we can bring to the within.

 

Construction sustainability is no longer just a flag, but a necessity and a condition for doing more and better business. Energy efficient designs and better-quality construction are becoming requirements and a condition for the business. Sonae Sierra have been long standing pioneers in this area. The new Sonae Tech Hub has been branded the most sustainable office building in Portugal. Could you share with us how sustainability permeates throughout the groups different operations and what will be the specific function of Tech Hub?

The Sonae Group as a whole has sustainability and ESG as a key part of its strategy going forward. If you look at the communication that the Sonae Group as a whole does, it includes two main aspects. One is diversity and gender equality, and the other is around sustainability. Sonae Sierra has been doing sustainability initiatives since 1999 and is typically focused on the following main areas: emissions energy, water consumption and waste recycling. Since 2002 we have reduced water consumption by 35 percent, decreased electricity consumption by 54 percent, GHG emissions by 82 percent and waste recycling increased from 16 to 66 percent. It is a gradual progression, but it is well within our core. When we look at the environmental aspects, we cannot be complacent, so our construction tends to be environmentally friendly. We also play a key role from a social point of view, in addition to our social activities where we try to proactively help the most in need. The development of real estate has itself a meaningful social impact. For instance, a shopping centre with 200 stores, on average, generates about 2000 direct jobs that we create through the investment we made. If you multiply this by the number of shopping centres we have developed, our social impact has been very meaningful.

From a governance point of view, we tend to be quite advanced. Since we work with institutional shareholders, everything we do from a governance point of view is very institutionalised. In addition to a variety of committees, checks and balances, which are very rigorous, the whole infrastructure is setup to provide our shareholders and investors a transparent and fully aligned decision-making process.