Foreign investors looking to enter the Spanish property market are increasingly opting for tax-efficient REIT structures to make their first move.
Foreign investors looking to enter the Spanish property market are increasingly opting for tax-efficient REIT structures to make their first move.
Later this month, Spain’s long moribund listed property sector is expected to see the launch of the third initial public offering since the start of the year, more than any other European country so far in 2014.
Merlin Properties, a newly created property company managed by Magic Real Estate, the asset management firm headed by former RREEF executive Ismael Clemente, has announced it expects to become the largest listed Spanish REIT, known as SOCIMI, by market capitalisation following its upcoming IPO. Merlin's team would include David Brush, former head of RREEF and Brookfield Asset Management in Europe, as chief investment officer.
The company intends to raise over €600 mln and will use part of the proceeds from the IPO to acquire a 'fully leased, high-quality Spanish real estate portfolio'. The remainder will be used to finance its expansion through the acquisition of commercial property in the Iberian region, with a focus on prime assets in Spain's main cities and, to a lesser extent, in Portugal.
Merlin’s planned IPO follows the listing in March of Hispania Activos Inmobiliarios, which currently has a market value of about €530 mln. The REIT, managed by investment manager Azora, received commitments from a number of cornerstone investors and other players including Quantum Strategic Partners, Paulson and Co, Moore Capital Management, APG, Cohen & Steers and the Canepa group.
Similarly, Spanish family-owned property company Grupo Lar’s newly-launched SOCIMI raised around €400 mln from the issue of 40 million new ordinary shares at a price of €10 per share. Lar Espania Real Estate Socimi currently has a market value of €417 mln.
‘Recent regulatory changes to the REIT structure in Spain have made these vehicles very attractive and today these structures strongly contribute to the investor-friendly climate that Spain is trying to foster,’ commented Wynn Williamson, a former director of Aguirre Newman and founder of Aura Asset Management. Williamson believes the REIT market’s potential for growth is enormous. ‘Several other SOCIMIs are expected to launch in the next few months,' he added.
In general, market experts are welcoming the recent market activity which is expected to result in higher liquidity as well as a greater level of transparency and solvency. Commenting on the outlook for the Spanish listed sector, Kempen & Co's head of property franchise Bernd Stahli said he is optimistic about the recovery potential of the property market, but added that he expects it to be a rather ‘uneven recovery’.
‘We believe those SOCIMIs that have a well-incentivised, established hands-on management team can exploit the current opportunity to carve out a profitable niche and so deliver good returns for shareholders,’ he noted. 'Key for shareholders in judging any newly created/established SOCIMIs is to identify the right management teams and the alignment of interest.'
Interestingly, the market is seeing the development of two types of REITs. SOCIMIs of the likes of Merlin and Hispania are mainly being used to attract foreign investors seeking to acquire assets or gain exposure to Spain in a tax-efficient manner. This also includes players such as Anchorage Capital Partners from Australia, which is believed to be the frontrunner in the race to acquire a prime mixed-use asset for sale on Castellana, Madrid's main avenue. Anchorage has reportedly offered €145 mln for the asset at Castellana 200, but asked for an eight-week delay to have enough time to set up a REIT structure to close the deal.
Another type of SOCIMI is the one being launched only to lower fiscal costs. Some investors, traditionally long-term market players with an established portfolio in Spain, see the SOCIMI structure as a cost-effective way to hold their assets. In fact, Spanish regulations for SOCIMIs require a very low free-float percentage of 5% which effectively allows landlords to transfer assets to these vehicles without giving up control.
As such, a number of groups including Unibail-Rodamco, Pontegadea and Orion Capital Managers have adopted the SOCIMI model for parts or the entirety of their portfolios. This move is also being studied by several financial institutions in Spain, which are expected to provide the bulk of the product earmarked for SOCIMIs in the near future. It is understood that both Banco Sabadell and BBVA are studying the establishment of such structures, with Banco Sabadell in particular said to be considering the listing of its €1 bn BS Inmobiliario Fund as a REIT.