OUTLOOK SPAIN: Value-add players to dominate Spanish investment arena

Foreign money continues to drive the recovery in Spain’s property sector but the profile of international investors active in the market is changing rapidly, PropertyEU's Outlook 2016: Europe & Spain Investment Briefing has heard.

For months now, competition for assets has been putting pressure on investment yields while driving values upwards in anticipation of strong rental growth. This means today’s returns can no longer be easily generated from capital appreciation but have to be driven by income, according to Alfonso Brunet Morales-Arce, head of Investment Spain at retail asset fund manager Pradera.

‘The initial driver of foreign capital into Spain in 2013 was the potential for capital return, as prices had corrected significantly during the crisis. But over the past 24 months values have increased significantly while rents have remained in a low range and have started to rise only recently. This means that for 2016 and 2017 most of the return will be on the income side rather than the capital side.’

Rents are expected to gradually catch up with value appreciation over the next two years, giving time to value-add investors active in the market to work out a manage-to-core strategy. They are currently preparing assets for the time ‘core investors will come in’, added Morales-Arce. ‘Spain is no longer such an opportunistic market. The lack of stock has in part been responsible for a relatively fast turnaround in pricing levels and investors’ strategies are adapting to a maturing market. Value-add is the natural way forward.’

Jorge Sena, managing director of Corestate’s Spanish platform, Iberian Corestate Capital Advisors, agrees that ‘the cycle has changed in Spain’. ‘Opportunistic investors looking for a return of over 20% are going to exit the market soon or alternatively look into non-performing loans,’ he noted.

Although the market is no longer suited for distressed players, a mismatch exists between foreign investors’ return expectations and the returns currently available in the market, according to Esther Escapa-Castro, head of acquisition & development at AXA Real Estate Investment Managers in Spain. ‘Overseas players are interested in investing in Spain but they sometimes expect to find a higher return than what the market today is ready to offer.’

For those investors looking for value, secondary locations in Madrid and Barcelona as well as the main regional cities are the only viable option, experts say. ‘The market has become a bit overpriced and it has become difficult to find the right assets in good locations,’ said Morales-Arce of Pradera.

‘Next year other key cities in Spain will be the natural focus for those investors looking for value,’ added Ramiro J. Rodríguez, Economist - International Research at BNP Paribas Real Estate Advisory.