Oct 272013
 

ACP Portfolios Newsletter Octubre 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

Disclaimer

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.