ANALYSIS: Merlin taps into growing appetite for Spanish equities

Foreign investors looking to enter the Spanish property market are increasingly opting for tax-efficient REIT structures such as Merlin tProperties o make their first move.

In a statement on Friday, Merlin said it plans to issue 150 million shares at a price of €10 a share in what is expected to be the largest flotation in the Spanish market since July 2011, and the third largest in Europe in the past 12 months. The flotation is also understood to be the largest IPO of a REIT ever registered in the EMEA region.

Merlin Properties is a newly created REIT managed by Magic Real Estate, the asset management firm headed by former RREEF executive Ismael Clemente. Clemente aims to raise up to €1.5 bn in an Initial Public Offering on the Spanish stock exchanges.

According to those who track the market, Spanish advisory firm Rodex, controlled by listed group Alza Real Estate, is also planning an IPO at the end of June, aiming to raise around €400 mln. The equity will be destined for purchases of offices (70%) mainly in Madrid and Barcelona, logistics (20%) and shopping centres (10%).

Merlin’s planned IPO follows the listing in March of Hispania Activos Inmobiliarios, which currently has a market value of about €530 mln. The REIT, managed by investment manager Azora, received commitments from a number of cornerstone investors and other players including Quantum Strategic Partners, Paulson and Co, Moore Capital Management, APG, Cohen & Steers and the Canepa group.

Similarly, Spanish family-owned property company Grupo Lar’s newly-launched Socimi raised around €400 mln from the issue of 40 million new ordinary shares at a price of €10 per share. Lar Espania Real Estate Socimi currently has a market value of €417 mln.

‘Recent regulatory changes to the REIT structure in Spain have made these vehicles very attractive and today these structures strongly contribute to the investor-friendly climate that Spain is trying to foster,’ commented Wynn Williamson, a former director of Aguirre Newman and founder of Aura Asset Management. Williamson believes the REIT market’s potential for growth is enormous. ‘Several other Socimis are expected to launch in the next few months,' he added.

In general, market experts are welcoming the recent market activity which is expected to result in higher liquidity as well as a greater level of transparency and solvency. Commenting on the outlook for the Spanish listed sector, Kempen & Co's head of property franchise Bernd Stahli said he is optimistic about the recovery potential of the property market, but added that he expects it to be a rather ‘uneven recovery’.

‘We believe those Socimis that have a well-incentivised, established hands-on management team can exploit the current opportunity to carve out a profitable niche and so deliver good returns for shareholders,’ he noted. 'Key for shareholders in judging any newly created/established Socimis is to identify the right management teams and the alignment of interest.'

Interestingly, the market is seeing the development of two types of REITs. Socimis of the likes of Merlin and Hispania are mainly being used to attract foreign investors seeking to acquire assets or gain exposure to Spain in a tax-efficient manner. Another type of Socimis is the one being launched only to lower fiscal costs. Some investors, traditionally long-term market players with an established portfolio in Spain, see the Socimis structure as a cost-effective way to hold their assets. In fact, Spanish regulations for Socimis require a very low free-float percentage of 5% which effectively allows landlords to transfer assets to these vehicles without giving up control.

As such, a number of groups including Unibail-Rodamco, Pontegadea and Orion Capital Managers have adopted the Socimis model for parts or the entirety of their portfolios. This move is also being studied by several financial institutions in Spain, which are expected to provide the bulk of the product earmarked for Socimis in the near future.