Sonae Sierra – a finger in every property pie

Text: Chris Graeme Photos: Joaquim Morgado

When most people think of the Portuguese company Sonae, they invariably think of the company as European shopping centre developers and managers, or food distribution retailers through their chain of Continente hypermarkets and Modelo supermarkets.

What they don’t often realise is that Sonae is a massive multinational conglomerate managing a diversified portfolio of businesses in retail, financial services, technology, real estate and telecommunications. And as for its real estate investment arm, there is hardly a real estate pie in Portugal and overseas in which Sonae Sierra doesn’t have a finger in.

Furthermore, 1 in every 23 jobs in Portugal is directly related with the Sonae group as a whole, which contributes around 3.7% towards Portugal’s GDP.

Food retail, health and wellness certainly dominates the company’s share of business operations, representing a 75.01% share of the group’s activities under the company MC (Modelo and Continente).

In fact, MC is the market leader in Portugal with a number of distinctive business segments, which offer a varied range of high quality products at the best prices: Continente (hypermarkets), Continente Modelo and Continente Bom Dia (convenience supermarkets), Meu Super (franchised supermarkets), Bagga (cafeterias/restaurants), Go Natural (healthy food supermarkets and restaurants), Make Notes, Note! (book shops/stationery), ZU (dogs and cats products and services), Wells (health, well-being and eye care) and Dr. Well’s (dental and aesthetic medicine clinics). But MC is also responsible for retail properties management.

Sonae Sierra – an integrated approach to real estate

However, it is real estate that an increasingly important part of the business operated under the company Sierra which pursues an integrated approach, finding solid platforms from which it can create sound investments all around the world. Sonae Sierra was set up in 1989 and is owned by Sonae SGPS Portugal (70%) and Grosvenor (UK) with 30%

At the 10th Real Estate Meetup organised by the American Club of Lisbon and supported by property developers Eastbanc and auditors and financial services company Deloitte held at the palatial setting of the Palácio da Rocha do Conde D’Obidos on 10 July, Luís Mota Duarte, CFO of Sonae Sierra, José Rocha*, Head of Expansion, Strategy and Development at Sonae Sierra, and Ricardo Reis, Real Estate Leader, Deloitte Portugal gave fascinating insight into these facets of Sonae’s business operations and the real estate scene in Portugal as a whole. (*More about which will be discussed in a second article)

Luís Mota Duarte, CFO of Sonae Sierra describes Sierra as asset managers and developers with investment management at the heart of its activities in order to generate value in whichever asset class it owns or manages.

“Asset and property management is core, while development services are also an essential component to our business. We started off as shopping centre developers, which is why people today know us for this, but we are now fully vertically integrated, covering everything in the real estate value chain”.

From a development point of view, Sierra invests a lot of capital with around €4.9Bn invested in the past on developments, mostly in retail (shopping centres), but Sierra has shifted its strategy and today has a pipeline of around €700 million of capital to invest in promising areas, in both Spain and Portugal, in residential, offices, and mixed-use developments.

“We don’t mind investing money from our own balance sheet because investment and risk are in our DNA and the returns are also attractive,” he said, adding that they invest in partnerships to leverage gains”.

Sonae Sierra also provides property management services and asset management for its own investors and third-party investors.

Last, and not least, Sonae Sierra does investment management, meaning managing its own money and third-party money.

“We currently manage around €6Bn, mostly institutional money, but also family office and private individual investor money through new products that we have been issuing and launching”, explained Luís Mota Duarte.

With 20 investment vehicles, all of a different nature, the application of funds can be oriented to a specific segment or sector of real estate, or towards a specific type of return.

Overall, Sonae Sierra has over 30 years of experience operating in 11 countries and employs around 1,000 people, while the Sonae Group as a whole is the largest private employee in Portugal with around 47,000 employees.

The company used to have a lot of retail assets in Germany, which it sold because the retail market is “not very attractive” but it does operate assets in the country and manages a lot of investment funds.

Sonae also exited the sports retail sector overall with the completion of the sale of its 30% stake in ISRG for €300m, generating a €168m capital gain.

Sonae in Brazil and Colombia

Sonae was quite active in the real estate market in Brazil and Colombia with shopping centres development and is the controlling shareholder of the largest shopping centre operator in the latter, and in 2019 opened the Jardín Plaza Cúcuta, the city’s largest mall with a €52 million investment.

Institutional – a partner for business

Says Luís Mota Duarte: “Retail is sill a big part of what we do, but institutionalism is something we try to convey since we are part of an institutional group with institutional governance and practices.

“The way we like to position ourselves is as a trusted and reliable partner for anyone who wants to invest in real estate and what makes us different and should give investors confidence that they can trust us with their money is that we have the experience of many years, across many different countries (35) on all continents, except Australia.

“We are fully vertically integrated so we don’t need to outsource competencies, and more importantly, when we spot an investment opportunity we can bring a team around the table, study it and pursue it,” he adds.

ESG – a solid track-record

Luís Mota Duarte is confident that any mover and shaker in the Portuguese, and indeed European real estate sector recognises the company’s commitment to ESG (Environmental, Social and Governance) standards. “We started on our road to sustainability in 1997 and we have institutional investors who keep us on our toes”, he said. “It’s a ‘must’ as they will only invest in us if we have very good ESG.”

According to the company’s financial report for 2023, Sonae’s portfolio continued to be on track toward its 2032 emissions reduction target, with a decrease of 6% in emissions at the end of 2023. Some 87% of its plastic packaging was recyclable in another step towards its commitment to reach 100% reusable, recyclable or compostable plastic packaging in own brand products by 2025.

Sonae’s retail businesses ensured that 58% of relevant commodities (timber, cattle, palm oil and soy) are deforestation free (sourced from a non-risk country or certified), while 83% of total long-term credit facilities are already linked to Sustainable, Green or ESG performance.

Significant progress was achieved in several diversity dimensions, in particular in gender parity, with 40% of leadership positions held by women at end of the year, while support to local communities continued to increase and reached €33 million in 2023.

Sonae MC and Sonae Sierra – areas of operation

Hotels

One of Sonae Sierra’s promising commercial real estate sectors is hospitality and hotels with Sonae Capital earmarked to manage the operation. Sonae Sierra has recently formed a joint venture with PGIM, the real estate arm of the US insurance giant Prudential and will involve the acquisition of hotels in Spain and Portugal.

It is a partnership controlled by PGIM Real Estate (80%) in which Sierra holds 10%. The company vehicle for this new business area includes the hotels operational management team from Iberian Hospitality Solutions (IHSP) led by Gonçalo Batalha with a 10% shareholding.

The first acquisition of this Sonae Sierra/PGIM joint venture is a hotel project in the centre of Porto with an opening planned this year.

Luís Mota Duarte also referenced other projects in Porto, Lisbon and the Algarve, calculating that this portfolio aims to have €150-€200 million under management within two years.

Given the current unstable economic situation worldwide, marked by inflation, geopolitical conflicts and high interest rates, Sonae Sierra and its investors are looking for added value investments that offer a hedge against inflation while generating cashflow for attractive returns.

“Development is in our DNA and the returns can be attractive, so we invest with partners where there are gains to be made. We also invest in apartments, and on top of that we also provide real estate and development services”, he said.

What this means is providing investment, architecture & engineering, and property management services for clients on the four continents in which Sonae Sierra operates.

“Investment management means managing our money and third-party money, and today we manage €6.6Bn, mostly institutional money, but also that of family offices and individual investors”, revealed Luís Mota Duarte.

Sonae Sierra and CTT

In May 2023, Sonae Sierra and CTT announced that it had created an innovative investment vehicle, The Yield Portfolio, to manage Portugal’s private postal service CTT’s real estate assets. The vehicle covers around 400 logistics, retail and mixed-use properties across the country.

CTT’s strategy to maximise the value of its real estate assets begins with this partnership with this leading entity in the sector, creating economies of scale and allowing dynamic asset management in Portugal and Spain.

The operation initiates a long-term relationship between the two companies and a group of investors and attests to Sierra’s ability to integrate its multiple strengths to build customised investment management solutions around the preferences of its partners, as well as its skills in raising capital, both among institutional investors and in family offices.

The real estate assets held by CTT will be integrated into this vehicle, with the intention that they will continue to be fully consolidated by CTT. The Yield Portfolio comprises 398 assets with over 240,000 square metres of total gross leasable area, with an agreed transaction valuation of €139 million. The portfolio includes real estate assets of different types, namely retail, logistics, offices and others, in prime and secondary locations in Portugal, with 55% of its value concentrated in the districts of Lisbon and Porto.

While CTT will hold the majority of the capital, financial and institutional investors plus family offices will participate in the vehicle through private subscription (in principle up to 30%, including Sierra’s 3.6% stake). This investment will encourage the crystallisation of the value of CTT’s real estate assets and will increase the company’s financial flexibility.

Luis Mota Duarte explained that the operation was “part of the growth strategy of Sierra’s Investment Management business, focused on creating vehicles adapted to the profitability and sustainability objectives of different types of investors”.

Investment management

Through Sonae Sierra, Sonae has clocked up 20 years of experience making customised and strategic investments in line with the requirements of its investors. In 2023 it had €7Bn of assets under management through various investment vehicles (20), as well as having €2.2Bn of managed debt assets.

Much of these assets under management involve the 29 shopping centres in Portugal and others around the world, but also over 100 other assets in geographies as diverse as Europe, South America, North Africa, and Asia.

It partners with some of the biggest and best known names in the investment and real estate market in Portugal and Germany, including such giants as apg, Allianz, AXA Investment Managers, el, Union Investment, bankinter, CBRE Investment Management, nuveen (TIAA), Madison International Realty, Ilmarinen and many others.

Residential real estate assets

Sonae Sierra makes carefully curated investments in a broad range of real estate assets with over 35 years experience in the market.

These include investments in expanding, restructuring and refurbishing properties through a diversified portfolio of investment vehicles according to sector, type and investment. One of these areas is residential.

Mixed-Use Assets

Another investment example is the Mixed-Use Real Estate segment where it has €200 million invested through a Real Estate Investment Trust or SIGI (REIT in the UK).

Mixed-use is a prominent solution for urban regeneration, as it helps deliver smart, innovative and sustainable urban places.

Some of its mixed-use assets under management around the world include CityLife Shopping District in Milan, Italy, Campo Novo, Lisbon, Centro Vasco da Gama, Lisbon, and Centro Colombo, Lisbon.

Logistics Assets

In the logistics sector it has €85 million invested in assets via Alternative Investment Funds (AIF), which includes instruments such as hedge funds. It manages a complete range of assets in the value chain from depots, warehouses and data centres essential for urban areas.

MC, Sonae’s food retail arm was also the first tenant at the Rainha Green Logistics Park owned by Aquila Capital in Azambuja, 40km north of Lisbon in 2022.

Sonae is such a significant player in his segment that as far back as 2015 it even hosted the 10th edition of the ’24-hour Logistics’ an annual educational and teams training event which was held at Sonae MC’s logistics hub in Maia, near Porto.

Office Assets

Sonae has €100 million invested in the commercial real estate offices segment also via Alternative Investment Funds.

In 2023, Sonae Sierra partnered with GFK to develop a sustainable office project in Porto in a €45 million investment, while in 2024 AXA IM joined forces with Sonae to partner in a new Lisbon office that will be located on top of the Centro Colombo shopping centre in Lisbon.

Some the offices in its extensive portfolio include the flagship buildings VIVA offices in partnership with Grupo Ferreira in Porto, Campo Novo in Lisbon, Atrium Saldanha, Lisbon, and Torre Norte Colombo, also in Lisbon.

Food and Non-food Retail

In this segment Sonae Sierra has €370 million invested via Spanish Real Estate Investment Trusts (SOCIMI).

A good overseas example is the acquisition in 2023 by the Sierra German Food Retail Income Fund I of seven supermarkets in that country with an investment aim of €200 million, bringing the total number of assets in the fund to 12.

Luís Mota Duarte says that the German market is of high strategic importance to Sonae Sierra and is aligned with its investments management strategy in Europe. Over the past two years the company has more than doubled the volume of assets managed outside of the shopping centres segment.

In 2023, Sonae Sierra made a Tender offer on Musti, a leading pet care retailer and services provider in the Nordics, with total revenues of €426 million and an adjusted EBITDA of €74m in its 2023 fiscal year. Already in 2024, the consortium led by Sonae secured the control of Musti by reaching 80.65 % of its share capital (on a fully diluted basis).

Also in 2023, MC entered into an agreement with the founding shareholders of Druni (an online Spanish perfume and cosmetics retailer) and Arenal (also a Spanish online perfume and cosmetics retailer) for the merger of these two companies with completion expected in 1H 2024.

Worten

Another retail asset that many people don’t know that Sonae controls is its 100% fully consolidated stake in the electrical, home appliances and electronic goods stores Worten which have proved to be a solid business despite a challenging macroeconomic landscape. The Iberian market grew 3% in this area in 2023.

The company’s turnover reached €1.3Bn in the year, +4.9% y-o-y and a like-for-like (LfL) of +4.3%, with the last quarter achieving sales of €418 million, representing a 4.1% y-o-y increase and a LfL of +3.9%.

Retail Management

Some of Sonae Sierra’s biggest investments (€2.9Bn) are and have been in the retail segment, particularly shopping centres in Greece, Portugal, Romania, Spain and Italy. Additionally, it also has assets in Brazil and Colombia. Overall it manages a vast network of over 7,400 retail outlets.

In Portugal alone, shopping centre assets under management include Centro Colombo, CascaiShopping, MadeiraShopping, GaiaShopping, NorteShopping, and ViaCaterina Shopping to name but a few.

Healthcare and wellness

The Covid-19 pandemic both amplified an interest in healthcare-focused concepts, while complicating access to shopping centres. While restrictions are no longer a feature, the demand for healthcare and beauty formats, healthy food, fitness and general wellness themes have all present clear opportunities for shopping centre owners and managers to improve sales and footfall.

Sonae Sierra is no exception, successfully integrating these concepts into the offer, to drive higher cross-selling effects, while leveraging specific stores as footfall builders.

Shop unit and apartment rental

Sonae Sierra has rented a considerable portfolio of shop units up and down the country in Cascais, Olaias, Carriche, Porto, Lisbon, Barreiro, Caldas da Rainha, Cadaval and Vila Nova de Gaia among other towns and cities.

In residential Sonae Sierra offers a wide range of property services including leasing, property asset operations to ensure strong investment returns, and custom-made property marketing, and property administrative management.

Telecoms

While nothing to do with real estate assets, 2023 was also the year when Sonae acquired a direct stake in telecommunications company NOS (11.30%) for €213m (€3.6527 per share), reaching 37.37% of the share capital in the company (this transaction did not impact the voting rights in NOS attributable to Sonae ).

Sonae Financial Results 2023 in a nutshell

• Consolidated turnover reached €8.4Bn, a 9.2% yoy increase, mainly driven by the growth of MC, which, under a demanding inflationary and competitive context, was able to reinforce its leadership position in the Portuguese grocery retail market.

• EBITDA reached €1.0Bn, +7.2% yoy, fuelled by a strong display in operating profitability, with underlying EBITDA increasing 12% yoy, and by significant value creation in Sonae’s investment activity, underpinned by the disposal of the 30% stake in ISRG.

• Net result (group share) stood at €357m, 6.4% above last year, despite the impact of higher funding costs and tax expenses, as well as an increase in depreciations due to the investment in the expansion and digitalisation of the businesses.

• Free Cash flow before dividends was €187m, in line with last year, leading consolidated net debt to €526m, a record-low level, and to a net cash position of €69m at the holding company.

• Sound financial position across all businesses and at the group level, with significant liquidity available and a comfortable debt maturity profile. • NAV, based on market references, increased +14% yoy to €4.5Bn, driven by higher valuations at MC, Worten and Sierra, coupled with the value created by the sale of Sonae’s position in ISRG.