Editor’s Choice: Spanish bull re-enters the arena

Strong M&A activity and a string of successful capital raises over the past few weeks are a clear indication that Spain is finally rebuilding its listed property sector which was ravaged during the crisis.

This week Spanish REIT Merlín Properties emerged as the winner in the race to take control of Testa, the €3 bn property arm of Spanish construction giant Sacyr. Merlín has agreed to pay €1.8 bn for the real estate unit, its largest acquisition since listing on the stock market last spring.

The deal will create the country’s largest listed property firm with a gross asset value of over €5.5 bn and combined gross annual rents of more than €290 mln, according to Ismael Clemente, CEO of Merlin Properties.

‘Merlin Properties’ combination with Testa makes the joint entity the undisputed leader in the office segment, the third player in the logistics segment and gives it a relevant position in shopping centres,’ commented Clemente. ‘Testa represents an unique opportunity to capture future growth in the Spanish real estate market and fits integrally with Merlin Properties’ long-term oriented business strategy,’ he added.

Meanwhile construction firm FCC’s major shareholder, Mexican billionaire Carlos Slim, has been given the green light for the acquisition of a 25% stake in Spanish indebted property firm Realia, in a move which effectively trumps an earlier €151 mln offer made by Spanish REIT Hispania.

Slim had already announced that he was planning to take full control of Realia, in which he indirectly owns a total 61% interest through his holding in Realia’s shareholder FCC. In a statement the Mexican businessman said he wanted to clean up Realia and ‘fully develop the opportunities that it has within its reach as a leading company in the sector’.

SWEPT AWAY BY THE CRISIS
Once a major actor on the European stage and a dominant force in the local economy, the Spanish listed property sector has been swept away by the financial crisis over the past few years.

In 2007, the market capitalisation of Spain’s public real estate companies – which included the likes of Martinsa Fadesa, Colonial, Reyal Urbi, Sacryr Vallehermoso, Metrovacesa and Renta Corporacion - totalled some €44 bn. That figure plunged to roughly €5 bn in the following years, a far cry from that of smaller countries such as Belgium and the Netherlands which boast a listed sector of €20-30 bn.

‘The size of Spain’s listed real estate sector has dropped by 80%. It’s a sad story, but it is what it is,’ Merlin's Clemente commented recently.

But the tide has turned following the introduction of a new SOCIMI regime modelled along the lines of the Anglo-Saxon REIT system, which has seen the listed sector splutter back to life. A number of Spanish REITs launched last year, capturing some €3 bn of equity from investors and these have since been under pressure to buy assets.

‘It is very complicated to find the right product because there is a lot of money chasing the same opportunities,’ confirmed Pere Vinolas, CEO of Colonial Inmobiliaria, one of a few listed property companies which survived the credit crisis.

In the first four months of the year, Spanish REITs emerged as one of the most active buyer groups, accounting for nearly a quarter of transactions, according to research from agent CBRE.

Meanwhile, to boost their visibility on the European stage, four big Spanish REITs – Axiare, Merlin Properties, Hispania and Lar España – have become members of EPRA and some have already joined the FTSE EPRA/NAREIT Index, the main benchmark for Europe’s listed property industry.

As put by Merlin Properties’ director Fernando Ramírez, these Spanish companies are ‘rising to the European stage while gaining access to a much wider shareholder base’.

WORKING ITS MAGIC
Indeed, this is clearly evident from the market response to recent capital hikes.

Remarkably, in the capital increase carried out by Merlin in early May, demand for the company’s shares reached over 13 times the amount that was being placed, the company said. The operation – which generated proceeds of €614 mln – represented a major success for Merlin and its manager, Magic Real Estate.

A month earlier, Hispania’s €337 mln capital increase was 2.5 times oversubscribed and closed after only three hours. 'The excellent investor reaction to our capital increase shows how the market trusts Hispania and its capacity to generate more value within its asset portfolio. As of today, Hispania is analysing a pipeline of opportunities with a value amounting to €2.4 bn,' commented Concha Osácar, board member of Hispania.

Appetite for growth is not confined to the new REITs. Former heavyweights such as Metrovacesa and Colonial have a strong incentive for growth as they seek to ride the upward trend forecast for rents in the main cities.

Metrovacesa recently launched €1 bn of capital increases while Inmobiliaria Colonial has clearly expressed an interested in getting bigger. CEO Vinolas recently told PropertyEU that the company is back on the investment trail with plans to invest between €300 mln and €500 mln this year in both acquisitions and development opportunities.

The planned investments will be funded solely from the company’s own equity resources, which have grown strongly after the company tapped the market for €1.3 bn of capital last year.

According to Adolfo Ramirez-Escudero, head of CBRE Spain, the recent developments all point to a new phase in the Spanish REIT sector, characterised by a strong appetite for expansion.

‘The changes to the Spanish REITs have been a big success. We’ve seen the launch of several new REITs, then strong activity on the capital markets with new equity raises, now we are entering a new phase of activity and consolidation,’ said Ramirez-Escudero, who advised Merlin on the acquisition with his corporate finance team.

Commenting on the Testa acquisition, he noted that the takeover by Merlin will eventually result not only in the largest listed property company in Spain but also in the creation of a ‘clear leader’ in continental Europe. ‘This is just a confirmation of the successful development of the REIT sector,' Ramirez-Escudero said.

Given the current appetite for growth, he added, other corporate acquisitions are to be expected this year, although probably not of this size.

The Spanish bull has entered the arena, and who knows, we may see a stampede before the year is out.

Virna Asara
Southern Europe correspondent