Bullish on Spain's Commercial Real Estate
Suárez, José Luis; et al.
Publisher: Jones Lang LaSalle IP, Inc.
Original document: 1st Investors Survey in Commercial Real Estate 2015 - Spain
Madrid's landmark Edificio España sold to a Chinese investment group in 2014 for 265 million euros. The 25-story building had been left empty for years, considered a sad symbol of Spain's irregular fortunes. But thanks to its Chinese investors, the skyscraper will reportedly become a commercial center, hotel and luxury residences all in one.
Now Edificio España is looked upon as a symbol of real estate recovery.
Foreign and domestic investors are bullish on Spain's commercial real estate (CRE) sector -- with hotels, offices, logistics and shopping centers figuring as the most sought-after asset classes. This is according to the 1st Investors Survey in Commercial Real Estate 2015, a new project led by IESE, under the supervision of Professor José Luis Suárez, together with JLL, the international real estate service company.
Surveying the most active players in Spain's CRE market, the report analyzes the responses of 101 key investors -- including a number of private equity funds, multi-strategy funds, real estate private limited companies, publicly traded REITs, family offices and a sovereign fund. Within this group, 65 percent are international and 35 percent are national investors.
A resounding 94 percent of those surveyed said that they currently have "high" or "very high" interest in commercial real estate in Spain. That bodes well for 2015, as the polling was conducted in January and February of this year.
Bullish Market Conditions
This extremely positive investor sentiment comes after a strong year for the CRE market in 2014, when a record 7.4 billion euros were invested in the sector.
Favorable macroeconomic conditions are cited as a reason for continued optimism, with Spain's GDP expected to grow 2.3 percent in 2015, one of the strongest forecasts in the EU. At the same time, debt financing is recovering, while Spanish REITs (called SOCIMIs) are consolidating as aggressive and dominant players in the field.
What Investors Want
Office spaces, logistics centers, hotels and shopping centers were the four most demanded asset classes by investors, with retail warehouses and prime retail ("High Street") following close behind. Residential opportunities and land for development trailed in the polling.
Topping the assets list were offices. The vast majority -- a full 83 percent -- of respondents reported interest in offices, a market dominated by Madrid and Barcelona. Meanwhile, hotels' remarkable performance in the results (favored by 57 percent of investors) is consistent with Spain's surging tourism. Spain is now the third most visited country in the world -- a fact not lost on professional real estate investors.
Details of the Deals
The 16-question survey reveals that the typical investment in Spanish CRE is in the range of 40 to 50 million euros, with a 50 to 60 percent debt-financing level. Investors most typically report having a time horizon for their investment between five and seven years.
Investors tend to target an initial yield of 5 to 9 percent and an internal rate of return (IRR) of 8 to 14 percent.
Looking at other investment variables, more than 70 percent of survey respondents consider the tenant quality a key concern -- seeking "strong" or "very strong" tenant covenant quality. For occupancy rates, they tend to home in on the 70-to-90-percent-occupied opportunities.
Warmer Sentiment, Hotter Market
The positive change in sentiment toward Spain as an investment destination is evident in the evolution of investment policies, the report concludes. On the one hand, "opportunistic" and "value-added" investments now predominate with 64 percent of respondents, who are seeking higher rewards coupled with higher risks. On the other hand, lower risk, "core" and "core plus" investments are in the offer for a solid 34 percent of investors in Spain's CRE market.
Laying out the pros and the cons of investing in Spain, the report lists the market recovery in the "+" field, with the market competition in the "-" field. Some feel pricing is getting overly aggressive, with continued recovery already assumed in the asking prices.
The release of the 2015 report "coincides with one of the strongest investment cycle in the Spanish real estate market," the authors of the report note. This year, CRE looks likely to be a popular investment with the pros, with strategies evolving to fit the changing market.