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Andy Schofield

Re-thinking Spain: Time to prepare

This year has seen Spain edge back onto investors’ radar. Eurozone exit fears appear to have all but evaporated and concerns are now re-focused on the economic and real estate fundamentals.

This year has seen Spain edge back onto investors’ radar. Eurozone exit fears appear to have all but evaporated and concerns are now re-focused on the economic and real estate fundamentals. Although it is too early at this moment, investors are nevertheless sensing that there will be a narrow window of opportunity to invest once economic growth resumes and sentiment swings in the opposite direction. There is certainly no shortage of equity looking to target the country, particularly from US private equity firms, but also Sovereign Wealth Funds and a number of German funds. This does not mean we should expect a deluge of transactions in 2013, but there should definitely be an improvement compared with last year’s slim pickings. Not a single shopping centre transacted in 2012, but we will see a few brought to market in the first half this year and hopefully this will add some welcome transparency to pricing.

Assessing current pricing is guesswork, but most agree that the very best shopping centres would trade for 6.75%. There are, however, not too many of these crown jewels to go around, indeed many are held by long term investors. The jump in pricing from the “best” to the “good” centres is significant, arguably to 8.5 or 9%. Likewise, prime retail parks start at 7.75% and rise above 10% if compromised in some way. Long-leased high street retail trades at yields comparable to those in Paris and Hamburg, with shops typically passed from family office to family office. Private equity firms also appear willing to support the market for prime offices in Madrid and Barcelona. Overseas investors whom assume Madrid to be a bargain basement are often left sorely disappointed to find bargains do not exist; vendors are simply unwilling to sell prime office assets below a capital value of €6,500 to 7,000 per sq m. While bigger lot sizes offer more opportunity for overseas investors to access the prime office market, they can expect to pay yields of c.6.25%. If investors want higher yields, they have to turn their sights to the out of town office market where vacancy is high and rents are under siege.

So is it time to re-think Spain? The economy is still contracting and little growth is expected over the next few years, certainly not enough to generate an improvement in the labour market. Meanwhile, retail sales are plummeting and unemployment is rising, all making for some rather depressed retail fundamentals. But the introduction of the bad bank SAREB and wider banking reforms have at least improved confidence in the health of the financial system and the government is making good progress in lowering the deficit (now at 6.7% from 9% in 2011) and on labour market reform. Forecasters expect stabilisation of the economy in 2014, although real estate fundamentals across asset types will remain tough for years, securing good product at the right time is likely to deliver capital growth as pricing returns to long run averages. Investors need to be prepared now as the most opportune time to invest is likely be ahead of the economic recovery; the market is already at or close to the trough and there is an opportunity to make the most of the limited competition before most institutional investors arrive in 2014.

Andy Schofield

Andy Schofield

Director of Research

Andy's biography