Although Spain's GDP is growing faster than in other European countries, some fundamentals are lagging, making it difficult to justify red-hot property pricing, writes PropertyEU Deals editor Cormac Mac Ruairi.
Deutsche Bank's investment arm made a big splash in Barcelona during the summer by acquiring the Diagonal Mar shopping centre from Northwood Investors for €495 mln. Explaining the rationale behind the largest Spanish shopping centre transaction for years, Deutsche Asset Management's Carlos Manzano-Cuesta emphasised it was all about the strength of the prime asset, which has delivered an outstanding cash-flow performance since it opened in 2001, and 'even throughout the economic crisis it was more resilient than other Spanish peers'.
Diagonal Mar is an asset that most investors would jump at the chance to buy. But the crux of the matter is that there are few of these types of super-prime assets left on the market. Most were snapped up cheaply by the group of opportunistic players like Northwood during the deep recession that started in 2008, and were subsequently sold on at a premium to institutional investors entering the market amid an economic recovery. Spain is now a fully ‘recovered’ economy, market experts agreed during PropertyEU's Spain briefing at the Barcelona Meeting Point real estate fair in October.
'The Spanish economy grew by 3.2% in 2015 and the same level is expected again this year, tapering off to between 2.2% and 2.5% in 2017,' said Ramiro Rodríguez, an economist at BNP Paribas Real Estate Advisory. But there are still challenges, he noted, the main ones being continued high unemployment levels, budgetary constraints and the emergence of populism on the political front. In addition, the European Central Bank’s monetary policy has pumped a lot of liquidity into the market. ‘But the flow is now dwindling and this may be a challenge two years down the line,' Rodríguez cautioned.
Market mismatch
A post-crisis record €8.8 bn of Spanish real estate changed hands in 2015, and while the lack of large M&A and super-prime sales will cut this year’s total, investment prices are getting hotter and hotter. Lagging fundamentals are creating ‘a misalignment’ with the galloping recovery of the capital markets in real estate, according to Gregg Gilbert, head of Iberia at opportunistic investor Benson Elliot.
'We and other investors acquired Spanish assets a couple of years ago which have worked out well and should continue to do so. Currently, though, it’s a little more challenging due to the range of factors outlined and due to other actors coming into the market.' Comparable property assets can be acquired in Germany or the UK at either the same or a higher yield than on offer in Spain. ‘I’m not saying that it’s right or wrong, but it’s harder to defend,' Gilbert said.
On the other hand, most of the funds managed by AXA Investment Managers – Real Assets are keen on Spain, said the firm's Iberia chief Esther Escapa-Castro. The general perception is, she said, that it’s a good moment to invest in Spain. ‘The market is getting hotter and hotter so quickly that any business plan needs the recovery to go to the fundamentals at a level that is not there yet,’ Escapa-Castro commented. ‘If the recovery of the fundamentals doesn’t come or comes at a different pace, the returns will be compromised.’
Optimal rental values
Christopher Hütwohl, managing partner of Valid Real Estate Strategies, agreed the much talked-about Spanish recovery was only half the story. 'A few years ago we had great expectations about the recovery and there were projections which have only partially come true.' Hütwohl agreed that there has been sigificant yield compression in Spain. ‘It’s true that yields are very aggressive and if you compare them to London, Paris and Germany you might even find them at par at first look.’ But he noted Germany and the UK were definitely mature markets, while there was room in Spain for further improvements in rents, which plummeted during the recession. According to Hütwohl, the best rented buildings have yet to reach their optimal rental levels. ‘In Spain the best assets are probably on a par with 1992 rents so there is still room for growth, and that I believe is not the case in Frankfurt, London and Paris.'
