spain tops recovery league in europe

outlook spain
subsection
madrid office and mall yields tighten
SHOPPING CENTRES MAD
OFFICES MAD
GERMAN 10 YR BONDS
SPANISH 10 YR BONDS
investment volumes on the rise
RETAIL
OTHER
INDUSTRIAL & LOGISTICS
PIPELINE
609
9.000
7%
8.000
6%
7.000
5%
3.591
430
6.000
4%
5.000
3%
4.000
2.000
1%
1.261
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
1688
214
117
5.879
4.289
3.818
1.000
2004
1030
389
605
2.889
3.000
2%
0%
OFFICES
€MLN
10.000
8%
2006
2007
2008
381
120
1670
508
1.199
1116
960
803
1074
2009
2010
2011
2012
2013
2.288
Source: : CBRE Real Estate & Bloomberg
2727
259
370
222
924
82
930
1912
2428
Q3 2014
Source: : CBRE Spain
full house in madrid for the last of propertyeu’s 2014 outlook briefing series
spain tops recovery
league in europe
Spain is well positioned to benefit from the anticipated influx
of US and Asian capital into Europe’s recovering economies
By gordon darroch
S
pain’s revived real estate market will continue to
be one of the leading destinations for investment
capital as Europe’s recovery gains pace. The retail
sector in particular has benefited from greater investor
confidence, although most of the drive is coming from
equity as lenders are still reluctant to offer attractive LTV
ratios, mindful of the way the market imploded after 2007.
These were some of the key points to come out of PropertyEU’s final Investment Briefing for 2014 on the outlook
for Spain, held in Madrid in early December.
Vanessa Muscara, senior research analyst at M&G, Prudential’s UK and European fund management arm, said
Spain was well positioned to benefit from the anticipated
influx of capital into Europe’s recovering economies. ‘Our
view is that the next wall of money will be into Europe
42 |
no.
10 - december 2014 - january 2015 |
propertyeu magazine
as a result of the economy picking up,’ she said. ‘Once
the capital market story feeds in for the next 12 months or
so we’re looking at taking advantage of the rental recovery and taking long-term bets on that. Within that context
Spain is very exciting.’
In the last 24 months investment volumes have grown
rapidly in response to strong demand. The first three
quarters of 2014 have already seen significantly higher
levels of investment than any year since the peak of 2007.
Mikel Marco-Gardoqui, head of capital markets for Spain
at CBRE, pointed out that the number of transactions was
at an all-time high, but the 30-40% drop in capital values
has kept volumes below 2007 levels. ‘I would say that
we are in the early stages of the recovery,’ he said. ‘We’ve
seen this happening during the last 24 months – prob-
ably since [ECB president] Mario Draghi said he would do
whatever it takes to prevent the public debt destroying the
EU member states. That was the start of the confidence
coming back to the Spanish market.’
Although Spain has already started to see yields falling as
capital spending increases, Marco-Gardoqui expects the
trend to continue. ‘You may think, I’ve missed it and the
market has already changed and the prices are no longer
attractive. I would say completely not, because the third
chapter would be the recovery and that is happening.’
Question marks remain about whether lending can keep
pace with the highly active equity market. The current
market is dominated by foreign equity, particularly in
coastal areas such as Marbella, because of the scarcity of
financing for domestic investors. Institutional capital has
started to flow in from China and Korea, while Singapore
and Australia are expected to follow suit. Muscara argued
that the presence of considerable numbers of cash buyers
in the market made a return to the unsustainable growth
of the pre-2007 era unlikely, with markets such as the UK
and Germany seeing average LTVs below 80%. ‘In Spain
it’s 50 edging up to 60 at the moment on loan to value,
with spreads like 18 months ago, going down to about 300
bps and edging down.’
Moreover, said Muscara, Spain is well positioned for
the expected flow of investment capital from the US, as
rents start recovering from 2016. ‘Spain is right at the
top of the list of the recovery play in Europe. It’s right up
there after CEE and the Nordics as the next one to recover. Once yields come down, because they’re still looking
good value compared to government bonds for example
[…], M&G is looking at the rental recovery to kick in in
the medium term.’
Spain’s retail sector has taken over from logistics as the
focal point of the market in the last year as the recovery
strengthens. Investment opportunities have been more
plentiful in the secondary market because most prime retail space is held by large specialist funds which have no
incentive to put their most valuable assets on the market.
‘There is a big polarisation in the market between prime
and secondary,’ said Mario Verdyguer, senior manager
with property consultancy Apartners Consultores Inmobiliarios. ‘I think that tendency will continue in 2015. You
have to pick out what you are buying because not everything is going to work. You need local knowledge and you
need to be sure of what you’re doing.’
Regional shopping centres
Recently there has been a clear move to dominant regional shopping centres in cities such as Valencia. Deals such
as Merlin’s purchase of the Marineda City centre in La
Coruna and Oaktree acquiring the Gran Via de Vigo shopping park reflect this trend. The challenge is to translate
investment capital into increased sales and footfall. While
dominant regional shopping centres with clear catchment areas, a strong socio-economic profile and steady
sales are an attractive prospect, many retail centres, especially those constructed during the boom years, are likely
to become obsolete in the medium term.
Patricio Palomar, director of offices advisory and alternative investments for CBRE Spain, said there were signs in
the last four months that the market was diversifying. ‘For
the last four months we have seen some transactions in
the Valencia community, small shopping centres of less
than 25,000 m2, and we have seen some transactions in
the south of Spain as well that were not really appealing
in the past to investors. So we have seen some transactions, not only in the prime market but in the secondary
market as well.’ The picture is similar in the office sector,
where private investors, insurance companies and large
propertyeu magazine
|
no.
10 - december 2014 - january 2015 | 43
Roger Hensman
Advisor, WP Carey uk
Mikel Marco-Gardoqui
Head of Capital Markets, cbre Spain
Ian Morgan, Senior Director
Alvarez & Marsal Real Estate
Spanish institutions dominate the scene and there is little rotation of prime stock. At the same time, the secondary market is entering a period of rationalisation. ‘There
is definitely over-supply and over-extension and some of
it will have to go,’ said Marco-Gardoqui. ‘Investors are
saying they like the current momentum of the Spanish
market in retail, offices an industrial, there is capital to be
invested and we will benefit from a drive to quality. There
is a lack of quality stock, good opportunities, Grade A office buildings and dominant shopping centres that will
allow an increase in sales.’
Difficult debt market
The challenge for Spanish investors is that debt finance
remains hard to come by. Banks are reluctant to lend for
projects outside Madrid and Barcelona, where international investors have a strong presence and foreign equity
finance is driving growth. Domestic investors are having
to look to the secondary market where lending is more
challenging and assets are heavily amortised, making
them unattractive to REITs and other income-dependent
investors. ‘Madrid and Barcelona are by far the main markets, but investors are diversifying in terms of sectors and
looking at other places,’ said Marco-Gardoqui. ‘Bilbao, the
Basque country and Valencia are definitely places with
strong fundamentals. Those are good secondary cities
which are definitely going to be on the radar. They are liquid enough and there is rotation.’
The residential sector in Spain is facing new challenges
as a result of international investors arriving on the scene
in the last 10 to 12 years. At the same time, buyers have
become more discerning in terms of the product they are
acquiring, particularly as many of the developments from
the boom years were built rapidly with little concern for
buyers’ requirements. Anglo-Saxon money is flowing into
the market, as demonstrated by Cerberus and Orion’s recent acquisition of the Sotogrande development in Cadiz,
44 |
no.
10 - december 2014 - january 2015 |
propertyeu magazine
vanessa muscara, senior research
analyst M&G real estate
but the overall picture is complex and development opportunities are tight in a market where home ownership
stands at more than 80%.
‘Spanish developers should change their way of thinking
from developing projects to be sold to developing them to
be let,’ said CBRE’s Palomar. ‘The rental market in residential will come to Spain and be much, much stronger
than it is now. We are so far from the German trend, for
example, and at some point we will converge on that. We
need to be prepared for that.’ Spain’s coastal areas offer
opportunities to build new stock that meets the demands
of international buyers, some of whom bought retirement
properties 10 to 15 years ago and whose requirements have
evolved as they grow older. But international investors in
general are held back by the risks attached to fractional
ownership and large claims. The six-month period for
reps and warranty insurance under Spanish law is relatively low for institutional investors and might be more
attractive if it was extended to three to five years to cover
contingent liabilities.
Regulatory reforms
At the same time, regulatory reforms in the last year in
areas such as corporate insolvency have triggered a wave
of activity from investors, according to legal specialist Alfonso Fernandez-Puebla, a partner with Gomez-Acebo &
Pombo. ‘I think the news has been good: they’ve helped
with debt-for-equity transactions. There have been recent
changes to corporation income tax that will be significant,
and all the different double taxation treaties are being renegotiated. The one which has been very significant in
Spain in the last 10 years, with the Netherlands, is under
negotiation, and all the different treaties are being standardised across Europe.’
For all the videos from the Madrid Outlook Briefing go to
bit.ly/Madrid2015Outlook