The Forcadell National Investment Report highlights the great vitality real estate investment has experienced this 1S 2017. Specifically, retail, logistic, office and residential have been the sectors that have generated an upsurge in investment interest. Spain, France and Germany monopolize the attention of the large market players, national as well as international.
According to the consulting firm Forcadell, real estate investment in Spain is proving to be very active following in the same lines as the 2 previous years. There is an increased investment capacity focused in certain specific assets. Currently transactional closing prices are being challenged to achieve investors’ targets. In Barcelona and Madrid, cities that concentrate 85% real estate professional national as well as international investment, there is a great quantity of capital looking to acquire assets. This is due to the use of private equity, increased by banks which are aiding real estate transactions with structured financing.
Forcadell points out this trend started in early 2015, and according to the Banco de España, banks are currently financing up to 50%-60% LTV. Estimates indicate this percentage shall not be exceeded, unlike previous years where it reached up to 90%.Current conditions allow for a perfect balance and enough comfort margin with financial entities in case there would be any setbacks. Barcelona and Madrid will keep attracting investments as long as assets are capable to fit the investment criteria that this stock of equity requires. Both cities rise to the challenge to Germany, France and are above Italy when it comes to investor appeal while London is not the main investment destination due to Brexit.
Forcadell reflects the tendency in the sector towards a slight but sustained rent increase, while yields have been compressing. Madrid as well as Barcelona have currently a great investor pressure due to inability to find the assets they need.
According to the Forcadell investment report, REITs are increasingly more interested in office investments, and some of them have already specialized in different office segments. The catalan capital has exceed Madrid in number of transactions and volume of total investments in office buildings. This will be a growing trend, especially in those new construction office developments that will be built in a sustainable way, and those that are being restored and located in the centre of the city or in the business districts and that can be transformed into sustainable buildings. As a tendency, regarding rent demand in Barcelona, there has been an increase in the volume of companies as well as in the average of sqm. The average space request in Barcelona has been for surfaces up to 500 sqm, and currently they are also covering up to the 800 sqm-1000 sqm mark. The spaces that Barcelona can offer in the 22@ district have allowed companies to open their office in the catalan capital, something which was not possible before due to the lack of available large spaces not found in the centre of the city. Meanwhile, in the Madrid office market there is available large spaces while the average demand for rental stands at 1.500 sqm.
From a Core Investment strategy, the industrial-logistic sector offers the highest yields, and forecast show this trend will continue despite the downward evolution of yields. Currently there is investor appetite in the market for products offering high yields, especially in logistic products, rather than industrial. The imbalance stems from the fact that in the industrial-logistic sector, investment demand is higher than product availability. Regarding yield evolution, these will continue to stabilise, especially in the 1st Ring, though with a slight downward trend.
In the industrial sector, professional investors’ sentiment is more restrained when opting to trade with these type of products, due to the specific risk they imply. These potential risks are basically valued on the basis of the initial purchase price of the product. Initially, the consumers of the industrial sector are not interested in paying rent for an industrial warehouse in which they originally already have to invest a high quantity of money to set up the warehouse and to buy the plot of land.
With regard to the retail sector, front store premises, especially those on High Streets, together with Shopping Centres, are increasingly consolidating as products which are of great interest to investors. In Madrid as well as in Barcelona City, constructing new developments is not an option due to the lack of available space. It is for that reason that all new projects that are being built are located in the outskirts of both cities. The retail parks, on the other hand, are very interesting products for the yields they offer. Currently, they are being developed in areas of Spain where the estimate is they can attract a 200.000 population, converging at the same time with visitors of several municipalities. Rentals for commercial premises have increased while yields started compressing given the growing investor interest in these real estate assets. Shopping Centres in the outskirts of the cities and retail parks, on their behalf, maintain high yields, which make them particularly attractive for institutional or value added investors. Regarding supermarkets, there are increasingly more rental and “turn-key” transactions being closed with investors, some of which have specialized in this type of product, both in the urban areas and those that are located on the outskirts of the city.
The retail sector in Spain is clearly evolving upwards, and investors sense this situation. Consequently, the forecasts show there will be more investment pressure and a resulting tendency for yields compression
Real estate institutional investors and Family Offices have great interest in hospitality assets. The investment market has seen a positive outcome as this sector has migrated its concept of Management Contract to promoting various types of fixed rentals with variables. This implies that more investors are open to “turn-key” projects or buying buildings given they provide more security. Madrid has a growing and stabilised hotel market, while in Barcelona there is an intense rising expansion, more dynamic with plenty of potential, despite restrictions from local administrations regarding grants for new licenses. In Madrid yields are stabilizing, due to the balance between new product and investment demand, although yields in Barcelona are compressing. Student residences also register a high level of demand. There is plenty of national and international investors interested in this type of product, and now, with local administrative restrictions, they can only be developed in neighbouring municipalities like Sant Adrià del Besos, Badalona, or Hospitalet de Llobregat.
Although the residential market is experiencing a shortage of property, real estate investment has increased. Full building restoration in the city, in Barcelona as well as Madrid, is undergoing a strong investment pressure, entailing an increase in sale prices. Developers are currently looking for the highest yields in promotions, starting by buying land in development sites to build new promotions. It is hardly surprising that property developers should become more active again, since the sector is undergoing renewed activity, unparalleled since 2008. Already since 2016, the search for land has stabilized a well as the new promotions that are already being finished and sold. There are new developments in the suburban zones of Barcelona and Madrid, and buyer loans again are being offered at 60%-70% rates. Overall, there is no housing bubble, but a rise in prices in specific zones.
In the industrial sector, the most sought after land sites are the ones in logistic sectors (1st and 2nd crown) in Barcelona and Madrid. In residential, search for land is centered in Barcelona, and in the centre of the 20 main Spanish cities, in addition to zones for promotions for more than 60 units in the outskirts of cities. In Office, in the catalan capital the 22@ district is still the main reserve for land to build high quality sustainable buildings. In Madrid there is land availability in the Julian Camarillo zone and in the M30 highway area.
Land is once more a coveted good for investment, a product that had been undervalued since 2007, when the crisis was in full blast. This upsurge is a tendency which is expected to continue in the upcoming months. The moment to buy land is now, given that prices will continue to rise further. Options for residential real estate growth are exhausted if the current legislation does not change. Besides the Sant Marti district (22@), Barcelona has a large land reserve in the La Marina del Port, La Zona Franca and Sants Montjuic neighbourhood.
Investment funds have been particularly active throughout the 1st 2Q 2017, especially those from the United States, United Kingdom and France. REITs on their behalf have also played an important part, slightly more understated along the 2H 2016.It is worth highlighting the REIT Hispania, one of the main listed companies in the Ibex 35, has decided to specialize entirely in hotels, opting for investing 90% in hotels in the holiday sector and 10% in hotels located in the urban centres. Certain REITs’ follow the strategy to continue being multi-purpose during some time, while the smaller and newer ones tend to be specialised.
The real estate investment market has reached €6.000m at closing time this 1S 2017.Of this figure, €1000m were traded in Catalunya. It has been confirmed there is a renewed investment interest by national and international market players, who are looking for product in all the sectors in Catalonia, and specifically in Barcelona. Commercial premises and buildings for restoration in prime zones in large cities are the most demanded assets. Taking into account the buyer’s profile, investment funds favour buildings to restore, in offices and shopping centres, and private investors select smaller premises and offices.
Real estate investment has reached a very positive stabilization stage after several years of increased growth, as the forecast in the previous FORCADELL Market Report pointed out. National and international investment funds will continue their intense activity in the Spanish market following the trend of the 2 previous years. London will increasingly move further away from European investments due to their upcoming departure of the European Union, while Spain, Germany and France will continue attracting returns that offer solid fundamentals.