Real estate investment in Spain to nearly double in 2014, says C&W

The recent rush of global investors into Spain is putting pressure on prime yields and lifting investment volumes in the country to pre-crisis levels, according to C&W’s new head of Spain, Oriol Barrachina.

Investment in Spanish commercial real estate is expected to hit €2.2 bn in 2014, up from €1.2 bn last year. The figure, which compares to a historic record of €3.5 bn in 2007, is an indication of the extent of the recovery taking place in the market and the rise of Spain as a new destination for global capital.

‘The same investors who only 18 months ago would rule out Spain as an investment market are now looking for opportunities,’ commented Barrachina of C&W.

Investors’ perception has changed very rapidly after the macroeconomic picture improved, sweeping away concerns about the country’s solvability. Most recently, China’s Dalian Wanda Group has entered the market with the signing of the country’s largest single-asset deal so far this year. The privately-held group forked out €265 mln to buy one of Madrid's highest towers from lender Banco Santander.

Located at Plaza de España, one of Madrid's main squares, the 117-metre high scheme was bought by Santander in 2005 for €389 mln from listed property firm Metrovacesa. It represents the Chinese conglomerate’s first foray in the Spanish market.

MEXICAN WAVE
Also, Finaccess, an investment manager owned by shareholders of Grupo Modelo, one of Mexico's largest firms, closed the purchase of the IBM headquarters in Madrid from Morgan Stanley Real Estate Funds. Finaccess paid €130 mln for the building, which in 2006 was bought by MSREF for €230 mln, an indication of the extent of the re-pricing taking place in the market after the onset of the financial crisis.

Market fundamentals are promising, according to C&W’s Barrachina. ‘We are seeing a gradual improvement in office take-up while rent adjustments have already come to an end. In fact, the market is starting to see some rental growth for very specific product while tenants’ incentives are gradually disappearing for best-in-class assets. In some cases, investment transactions are already reflecting the rental growth forecast for the coming quarters,’ he added.

Prime office yields in Madrid are expected to drop sharply by year-end, from 6% at present. Yields in Barcelona have already seen a decline of 25 basis points and these falls look likely to accelerate before yields stabilise next year. C&W’s Barrachina is forecasting yields at 5% and 5.25% in Madrid and Barcelona respectively by the end of 2015.

So far, opportunistic investors have dominated the market although core and value-add players are also looking to join the game. ‘There is a wrong perception that only opportunistic players are looking in Spain – largely for bargain deals. On the contrary, there is a lot of demand for core product, and we are expecting a return of core and core plus investors. The reason why this has not happened yet is the lack of supply of this type of product. If you are the owner of a fully-let office building in the central business district of Madrid, you do not want to sell at today’s values, and not event for a small premium, because today’s prices represent a 40-50% correction to five years ago, and you would be missing out on the expected rental growth.’

Commenting on the market outlook, Barrachina pointed out that a major issue - but also a big opportunity - is the continued lack of development activity. ‘Because of market uncertainty and the lack of financing, there has been virtually no development over the last three to four years. Today however there is a window of opportunity for new development redevelopment or refurbishment as credit is becoming more and more available,’ Barrachina noted.

Madrid’s official vacancy rate of 12% does not fairly reflect the market’s need for office space, he added. 'The bulk of vacant stock is represented by outdated buildings in locations which no longer meet tenants’ requirements,' Barrachina said.