Some Tips Regarding Lease Renegotiation

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Apr 072013

“Renegotiating a lease is easy”. The country is in recession, office vacancy is rising and many landlords and developers of shiny new buildings delivered with much pomp somewhere in the late/middle noughties are getting to breaking point.

So, all a company director needs to do is get his assistant, secretary or head of maintenance to email or call the landlord and suggest the rent be reduced by a decent sounding percentage. The landlord will inevitably say yes, and the following month’s P&L will show that the cost cutting drive is working.

But are we really getting the right deal? What if the landlord says no? (stubborn short sighted lessors who can’t bring themselves to accept reality abound even today in the Spanish commercial property market).

Is there a plan B? There’s little point in threatening to move if the costs involved far outweigh those of staying and stomaching the passing rent. In cases where there are still 18 months or more left on the lease (Spanish leases are generally 3 to 5 years maximum mandatory periods), the cost of leaving is high (even if the new landlord is offering an ample rent free period). If you add to this the moving and fit out costs, the alternative could well be so prohibitive as to force a humiliating retreat.

Consider therefore the following:


  • Location: Where do we want to be? Do we really need to stay in the town centre or can we move to a suburban office location with better buildings and an opportunity to dramatically reduce the rental obligation, rather than shave a nominal percentage?
  • Space: What is our real space requirement? Many small and medium sized companies occupy space because it’s there and not having undertaken a detailed space planning study. Modern office floors also tend to be more efficient, meaning that part of the saving we could achieve in a new building is via space reduction.
  • Future growth projections: It is true that most companies are not yet thinking about expansion of staff and consequent space requirements, but at some point in the future this will be an issue. One question to ask is can we get flexibility in a new office building? Landlords of high vacancy buildings are often more prepared to accept flexible space occupation, or reservations of contiguous modules or floors for specified periods of time.
  • What are the options in our current location? If the existing location is the only one that works, then we need to be very clear as to the availability, rents and other concessions in the area. If there is nothing suitable, this will inevitably condition the approach we make to the current landlord.


Once we are clear of the precise requirements and alternatives available to us, it is wise to develop a strategy for how we go about approaching the Landlord.

Do we call the Landlord first and give them the chance to negotiate terms?  This may be recommendable if there is a good historical relationship. However, in other cases, it may be more advisable to start making some noise so that the landlord is aware of the risk of losing a tenant before the call is made.

If a Landlord hears through a third party that his tenant is looking at alternative properties, it is more likely that they will make the first move. You are in a stronger position if the renegotiation is proposed first by the Landlord.

Do we do it ourselves or do we send a messenger? I refer for example to a company or professional who will represent you in the negotiations with the Landlord and in the search for alternative premises. As a professional in the sector, I would always advise this option, but the arguments for and against are for another discussion.

Contract Detail

It’s not necessarily just the short term rent that we should be focusing on. A renegotiation is an opportunity to review the overall conditions of a lease that was perhaps signed by a predecessor or agreed under very different market circumstances, years previous.

Clauses such as mandatory periods, renewals, rent reviews, guarantees etc., stepped rents and even a new rent free period may all be worth revisiting.

Like in any negotiation, it’s not about winning every clause. We need to put ourselves in the position of the Landlord. What matters to them? In many cases the answer will be “commitment”, the longer we can commit to a revised lease, the better deal we are likely to get.

The likelihood that the office letting market is going to improve significantly in the next two to three years is low. And for once it appears that players on all sides of the table are tending to agree.


These are just some initial thoughts when, as an occupier, you are considering trying to get a rent reduction. Don’t wait until the lease is about to expire, plan with good time and make sure you have a clear alternative that you are prepared to carry through if you can’t reach agreement.

8th April 2013

The spanish property market comes to life

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Oct 272013

ACP PORTFOLIOS Newsletter October 2013

2013 has seen a dramatic increase in investment activity from international investors into the Spanish market.

What a difference a year can make. In the summer of 2012, the market was paralyzed on account of the crisis of confidence in the Euro Zone countries and doubts about future of the Euro itself. This, after 4 years of almost no activity as the whole real estate sector in Spain behaved like a rabbit caught in the headlights.

Economic and Political Fundamentals

There is little in the Spanish economic and political climate that one can point to as a catalyst for this change. Unemployment continues to rise with the latest OCDE previsions suggesting it will reach over 28% by the end of 2014; government debt to GDP ratio which was a little over 60% in 2011 is now at record levels above 90%; and it is also very unlikely that Spain will reach its revised deficit targets for 2013 or 2014.

Meanwhile on the political front, Mariano Rajoy’s governing conservative party faces continuing accusations over funding in a snowballing expense scandal, and the Catalan government is seeking a referendum in 2014 for independence from Spain.

What are the drivers for this increase in activity?

So why then, amidst all the turmoil is the news that foreign investment activity in real estate has risen dramatically since April?

Since the height of the euro crisis (Summer 2012), the Madrid Stock Exchange (IBEX 35) has risen by over 65% to 10,000 (October 2013); the country risk premium has fallen from >600bps to around 238bps and the Euro has remained strong. This would appear all based more on investor sentiment than on economic fundamentals. There is a sense of confidence in the prospects for the Spanish economy has returned as well as for the wider European economies.

This confidence appears to have filtered through to the real estate market as equity starts to flow again.

Other factors include:

  • A growing acceptance of the new pricing reality on behalf of vendors after 5 years of “Denial”
  • Accumulated provisions imposed on property valuations on bank balance sheets
  • The creation of the “bad bank” (SAREB) operational from January 2013
  • Local and regional governments’ need for equity
  • High levels of liquidity amongst international institutional investors, private equity and hedge funds
  • The perception of overheating values in other markets such as Germany and UK


A broad spectrum of deals in 2013

What is perhaps more surprising is the variety of property related deals we have seen.

It was anticipated that at some point the hedge funds and private equity groups that have been hovering for years would start to acquire portfolios of assets and debt from the banks. Yet curiously these portfolio deals have been limited during the recent flurry of activity to date. The majority of “headline” values of portfolios have been in the region of 100M€ and have included a significant element of “financial engineering” with actual equity commitments significantly lower.  This contrasts to the scale of the “problem” in the banks and SAREB.

  • H.I.G. Capital acquired a majority share  51% of close to 1000 residential units in a JV with SAREB at a total value in the region of 100M€
  • Banc Sabadell agreed a syndicated deal based around a financial instrument of some 950 units at a reported volume of approximately 90M€ with a consortium of investors.
  • Baupost have acquired approximately 1000 properties with an estimated value of 100M€ from BBVA

However, there are currently a number of portfolios from SAREB under sales processes which are of significantly larger volumes.

Meanwhile there have been several agreed acquisitions of the banks’ debt servicing companies as investors seek to develop platforms from which to take a slice of the huge future pie. In the summer Catalunya Caixa agreed the sale of CXI to Kennedy Wilson /Varde; Bankia agreed the sale of Bankia Habitat to Cerberus and the TPG acquisition of the majority stake in the Servihabitat from CaixaBank is also currently about to be completed. Furthermore, Santander and Popular have announced the proposed sales of their in-house debt/property service providers.

Local and regional governments have also been active. A fund managed by AXA REIM acquired a 13 building sale and lease back portfolio from the Regional Government of Catalunya for approximately 170M€, and close to a 10% yield. The Madrid Regional government sold approx 3000 social housing units to a Goldman Sachs’ fund for 201M€, whilst the Madrid city council closed a similar deal with Blackstone for 1860 units in a deal volume of close to 130M€. Further local and Central Government deals are anticipated.

Finally, there have been several core and value added single asset deals in the commercial real estate sector. El Corte Inglés department store sold Plaza Catalunya 23, Barcelona at reportedly around 100M€ to IVA Capital Partners; German funds GLL Partners and DEKA acquired leased assets accumulatively  worth some 50M€ in prime central Barcelona; and Intu/CPPIB acquired the regional shopping centre of Parque Principado in Asturias for a reported 160million€. Whilst in a value added deal of approximately 50M€ Meyer Bergman acquired Serrano 60 in Madrid from CaixaBank.

Looking Forward

Whilst the kick start we have experienced over the past six months is unquestionably good news for the property sector, it is still only a drop in the ocean, given that the top 5 Spanish banks had a combined gross exposure of 113billion€ to bad debt and repossessed properties as at 2012 and the SAREB a further 50billion€ on its balance sheets.

The banking sector is still concentrating most effort on “retail” via the sale of individual units and this will remain an important part of the banking sector strategy.

SAREB is under financial pressure to balance its books and achieve sales. At the same time the wider banking sector is endeavouring to clear balance sheets in the short to medium term. Therefore, the “wholesale” approach to foreign funds will be an essential part of any viable strategy.

Another factor in the market is that the once domestic dominance of the major PROPCOs  such as Colonial, Metrovacesa, Realia, Sacyr Vallehermoso will all be “net sellers”.  This “gap in the market” will potentially create significant opportunity for foreign investors in the commercial property sector. A number of sales processes are underway.

Similarly in the commercial sector, a number of funds that invested in Spain have been in recent years in perpetual “roll over”; however, many of these will need to liquidate and return money to investors in the near future.

On the assumption, of no underlying shocks to the economy occurring, the current trend of deal activity is anticipated to increase.  Despite, a relatively stagnant underlying economy in terms of growth prospects etc, investor confidence is likely to be bullish “that the worst is over” which will drive activity in the market.

October 2013


This document has been prepared for information purposes only, and does not constitute in whole or part, a contract. No responsibility to third parties is accepted. The present document may not be published nor quoted in documents, declarations or circulars, nor communicated to third parties without our prior written consent. Whilst the document has been prepared with the utmost attention to detail, we cannot guarantee the veracity of the information, and therefore this document is subject to errors and omissions for which we accept no responsibility.

Spanish REITs (SOCIMIS) – Are They a Solution to Spain’s Property Crisis?

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Apr 012013

The revised legislation (effective 1st January 2013) for the creation of Spanish REITs (SOCIMIs) has been widely welcomed in investment circles both in Spain and the international community. Hardly surprising, considering that the original legislation introduced in late 2009 resulted in a grand total of “zero” SOCIMIs formed in three years.

So what was the problem? Well first of all, one of the principal attractions of a REIT in most countries is that the income is not subject to corporation tax, and rather the participants themselves are taxed on the dividends received. This concept was apparently inconceivable to the original legislators. Granted the corporation tax was set at the reduced level of 18%, but this was patently not good enough to convince anybody to take the leap.

There were of course other issues which have also been revised in an effort to render more attractive the creation of SOCIMIs. These include the option of going public on the Alternative Investment Market (MAB); the reduction of the minimum capital requirement to 5M€ from 15M€; the reduction of the minimum number of properties from 3 to 1; the right to 100% finance from the existing 70%. All these measures were brought in to create a more flexible system, thus allowing for smaller REITs and a lower cost structure.

But this article does not purport to detail the legislation itself, but rather to question whether SOCIMIs are an adequate response to Spain’s current real estate nightmare?

Let us therefore analyze those groups and property owners who may be considering creating a SOCIMI.

In the first instance, Spain’s most pressing issue lies in the close to 300.000M€ held either on the balance sheets or on the loan books of (read bad debts) of the banking system. How can SOCIMIs help solve this problem?

Not greatly, if you consider that a large percentage is land for development (or “not for development” the hard truth will largely prove in the coming years), and projects under construction, there is not much in the way of income production on the horizon. REITs are of course principally designed for income producing portfolios.

OK, but what about the increasing emphasis on the residential rental market? There must be REIT potential there?

“Yes” is the answer. If that is, you’re happy with a pretty low return. Residential rentals are still comparatively low in Spain and in the boom years (when capital values had admittedly gone crazy) would yield a return of between just 2% and 3% p.a. Today, in spite of significant falls in capital values, and an increasing demand, (largely through necessity), for rental accommodation, that return may be around 4.0% – 4.5%, hardly attractive enough to entice investors in their droves back into the quagmire of Spanish real estate.

So what of the large Spanish Property Companies (Metrovacesa / Colonial …) who do have quite substantial commercial leased portfolios, offering potentially higher yields. This appears to be an avenue worth exploring. Except that most, if not all of these once upon a time “kings” of European real estate, are carrying such heavy accumulated losses that they won’t need to pay corporation tax for years to come. So why bother to bake a complicated cake if you can’t taste the main ingredient?

Moving on…. There is a lot of talk that the first REITs may come from local Family Offices interested in gaining greater tax efficiency on their existing portfolios. Undoubtedly the new legislation would suggest that this could be the case. After all, you can now create a SOCIMI with just one asset and a value of around 5M€. As I understand it, however, one of the principal ideas of REITs is to give the little man a chance to invest in property without having to hand over life savings, and not as a way for the wealthy to pay lower taxes. I cannot see that small family office based REITs will either be attractive to the little man, and more to the point, I cannot see Family Offices releasing much in the way of free float to invite 3rd party investors into their very private environment.

Another option and potentially much more probable is the conversion of large portfolios of retail properties which have been sold in sale and lease backs over the past 5 years or are being prepared for such end. In many cases these are sold by banks to international consortiums of funds. The banks gain much needed liquidity. The buyers, in turn have generally engaged in a strategy of “buy wholesale, sell retail”.

This was fine in the early part of the recession, when private investors still believed that buying your local bank branch was the safest investment on the planet. Yet after a promising start, sales of individual units have inevitably slowed down as the banking sector is drawn further and further into question.

Thousands of high street units will close over the coming years under pressure from a combination of consolidation of brands, the internet and European Union mandates. This will push many landlords either into agreeing amicably to cancel leases or into complex litigation.

The problem is that a SOCIMI based on this type of asset will likely face similar problems of credibility and concentration of risk.

That said, this does seem to be the likely way forward for the creation of the early Spanish REITs. It is of course not only banks, but potentially supermarkets, high street chains and hotel groups.

Beyond that, I believe that we will start to see the creation of organic SOCIMIs developing specialist or mixed use portfolios over several years.

So back to the original question of whether SOCIMIs will be a solution to Spain’s property crisis. The answer, I believe is “No”. As with most conversations on the Spanish property market these days, the conclusion is that it’s not the demand that’s a problem but the product and the pricing.

SOCIMIs are however a very welcome initiative for the long term sustainability of real estate investment in Spain, long after the storm has passed.

1st April 2013