Spain has been the star performer in Southern Europe but now the demand/supply dynamics are such that the best opportunities are to be found in development, experts agreed at the PropertyEU Southern Europe, SEE & Greece Investment Briefing, which was held in London this week at Paul Hastings’ offices in the City.
‘Spain is a booming market but travelling at different speeds,’ said Alejandro Sánchez-Marco, director capital markets, Savills Spain. ‘In the core market there is little opportunity for proper returns, although there is some scope for rental growth. But the best opportunities will come from development.’
While investment volumes keep growing, both office and retail yields are at record lows and continue to compress due to lack of product and high demand. ‘Tight CBD office markets will offer opportunistic investors strong returns from development or refurbishment, because quality space is much needed,’ said Alice Marwick, associate, European research at Savills.
The occupier markets are finally picking up and rents are increasing. Madrid, where there has been a lot of repositioning and refurbishment of buildings in the city centre, is already seeing rental growth of 7% for prime CBD assets.
Both the office and residential sectors offer development opportunities, said Jorge Sena, managing director, CORESTATE Capital Advisors, Spain: ‘We are at the third wave of investments into Spain. First it was NPLs then SOCIMIs, now it is the time for development, the opportunity to create new stock in two traditional sectors.’
As the memory of the financial is crisis still fresh, residential development may be regarded as a riskier investment, he said, ‘but it is a healthy market now and it provides higher returns. My advice would be to join forces with a local partner. Foreign capital and a local developer is a very good combination. It creates a safer, more sustainable market, linking local knowledge with an understanding of market trends.’
At present there is a lot of resi development outside the big cities, financed by local money, while foreign capital prefers city centres. ‘There is a lot of demand for repositioning assets,’ Sánchez-Marco said.
Spain has overtaken all other countries in the region and investment volumes are likely to surpass the historic peak this year, Savills predicts, thanks to continued interest from foreign investors, who represent 62% of the total and invest both directly or through SOCIMIs, the local REITs.
‘Investors cannot find good returns in core sectors, so they now look at alternative asset classes, especially senior living and student housing,’ said Sánchez-Marco.
Student housing is particularly attractive because 80% of existing stock, belonging to public or religious institutions, is totally obsolete, while student numbers keep growing. ‘There is a lot of demand for student accommodation that is in line with international standards,’ said Sena. ‘A new market is being created.’
Student housing is a promising market in Portugal as well. ‘We should think of Iberia rather than just Spain,’ said Sena. ‘The two markets are separate but similar. Portugal is catching up fast and attracting increasing amounts of capital from Brazil, Macao and Portuguese-speaking African countries. The best opportunities lie in residential and student housing.’
