A resurgent economy, low valuations and rich returns are attracting billions of Euros to the Spanish real estate market.
Last month, a report released CBRE rated the Spanish capital as the sixth most attractive market in the world for real estate investors, ahead of cities like Paris, Los Angeles and Hong Kong. A couple of months earlier, Knight Frank’s European Breakfast poll revealed that 27 percent of over 150 investors identified Spain as their preferred investment target for the next year.
Keeping pace with the optimism, investments of billions of Euros are pouring into Spain’s real estate. For instance, in the first half of this year, investment volume reached close to EUR 1.3 billion in the two main markets of Madrid and Barcelona – the highest for the first half of a year since 2006 and 85 percent higher than the amount for the same period last year. While over EUR 970 million was invested in offices in Madrid, which virtually doubled the figure registered in H1 2014, over EUR 320 million was invested in offices in Barcelona, 50 percent more than the EUR 213 million registered in 2014.
Among the worst affected during the global financial crisis in 2008 and on a long road to recovery for almost five years, Spain’s economy turned a corner in early 2014 and has been making steady progress since. Performing positively for seven consecutive quarters, the European country’s current GDP growth rate stands at an impressive 3.4 percent and the forecast for the future is upbeat.
Closely linked to the economy, the fortunes of Spain’s real estate market have also followed a parallel trajectory. “Construction and real estate are one of the most important economic drivers. The crisis was devastating and we began seeing recovery only 18 months ago. Values dropped by as much as 50 percent and yields plummeted,” says Humphrey White, Partner Head of Commercial, Knight Frank Spain.
The change in trend towards more economic growth since last year has renewed investor confidence in Spanish real estate. “Spain has come to be seen as one of the key markets to take in to consideration for its asset allocation processes. Overseas investors, whether institutional or private, have been analysing investment opportunities primarily in the Madrid and Barcelona office markets,” says Pelayo Barroso, Research Director at Aguirre Newman, a Madrid-based consultancy, adding that residential real estate in the metro cities comes a close second on the investors’ shopping list.
According to a forecast in Knight Frank’s Global Cities 2016 report, office rents in Madrid will register an increase of 22 percent by 2018 – the highest in the world. Prime CBD office rents have already risen by 20 percent over the past 18 months, but still remain nearly 35 percent below the 2007 peak.
Not surprisingly, Madrid is attracting the attention of investors from across the world. “Besides those that have traditionally been in the market, the Spanish office market is now seeing the entry of many first-timers, including American, Canadian, South American, Arab, Israeli, Russian and Chinese investors,” says Aguirre Newman’s Barroso. Grade A office buildings are in big demand and have a queue of investors lined up waiting to snap up prime real estate. “The problem is that we are now facing a shortage of quality products. The majority of the office buildings belong to long term holders like insurance firms and families, due to which the market in Madrid is very narrow compared to other European office markets,” says Knight Frank’s White.
After six years of adjustments, prices (EUR/sqm) achieved in the Madrid and Barcelona office markets are at record lows, after decreasing by approximately 50% compared to levels prior to the crisis. “Capital values are at 15 year record lows and a very long way off the maximum levels achieved in 2007. The potential price increase (EUR/sqm) in the two main office markets in Spain, via rental growth and yield contraction is highly appealing, given the relative lack of opportunities in other international markets,” says Barroso.
The improved attractiveness of the Spanish investment market compared to other European markets and the expected recovery in the short and medium term have meant that significant funds have flowed in. On the other hand, two additional factors have also helped to increase investor capacity – first, extraordinarily low interest rates have meant that investors are looking for alternatives to fixed income sovereign and corporate bonds and second, the entry of tax-friendly SOCIMIs on to the playing field, who are bringing in big investments across the Spanish real estate spectrum.
“In the residential sector, we see the best investment properties in prime locations of Barcelona, especially the city centre. Here the demand has already lead to a shortage in inventory,” says Christoph Toelle, Managing Partner – Barcelona & Costa Brava, Sotheby’s International Realty, adding that residential prices have been rising steadily over the past few quarters – a trend which is likely to continue in the near future.
In the retail sector, both footfalls and sales have been increasing in dominant shopping centres for six consecutive quarters, although the increase of rental levels is expected to be slower than that of offices. “Retail in Spain is now more attractive to value-added investors, as big shopping centres have already been purchased and dominant-regional ones are now on the market, which need a reposition management strategy,” says Knight Frank’s White.
There also continues to be a great deal of interest in the logistics investment market, with various deals being closed over H1 2015, reaching a total investment volume of EUR 408 million. “There are deals in the pipeline that are expected to be completed over the coming months and which will increase the total investment volume considerably,” says Aguirre Newman’s Barroso.
In terms of location, besides Madrid and Barcelona, the cities of Bilbao, Valencia and Seville are attracting investors afresh. “We recommend our investors to invest in anything related to tourism since that makes the investment independent from the Spanish economy,” says Sotheby’s Toelle, adding that besides value appreciation, investors in select properties can earn good returns through tourist rentals.
The SOCIMI surge
Five years in the planning and fine-tuning stage, the Spanish equivalent of real estate investment trusts (REITs) finally took off in a big way earlier this year. The Sociedades Cotizadas de Inversión en el Mercado Inmobiliario, or SOCIMIS – locally referred to as cash boxes – are pumping billions of Euros into the Spanish real estate market, driving a surge across the board – from offices and retail to hotels and housing. Funded by institutions as well as high net-worth individuals, both Spanish and international, leading SOCIMIS like Lar Espana, Hispania Activos and Merlin Properties are picking up controlling stakes in Spain’s top real estate companies and cornering prime properties with long-term rental potentials. “The SOCIMIS are perfect for international investors seeking platforms with strong local footings,” says Aguirre Newman’s Barroso.
Golden Visa: Residency through real estate
An initiative to encourage individual investments from foreigners, the ‘golden visa’ scheme gives permanent residency of Spain to investors who buy property worth EUR 500,000 and above. Amended in July this year for easier issuance, the scheme is increasingly becoming popular among investors who not only qualify for Spanish residency, but also get access to all countries across the Schengen region. While cash-rich Chinese and Russian investors are leading the charge in securing the ‘golden visa’ through real estate investments, the scheme is catching on with investors from other parts of the world who are keen on a European lifestyle.