Forcadell's new National Investment Report analyzes the evolution of the different professional real estate sectors, as well as offering a 24-month outlook. Focusing specially on the markets of Madrid and Barcelona, but with an overall European context perspective, the report points to the type of products that have more potential in each sector mid to long term outcome.
According to the new National Investment report of the Forcadell consulting firm, in these recent years in Europe there have been a series of events, both political and social, that have greatly influenced real estate investment, such as Brexit or the Paris attacks. Most investment funds look towards Southern Europe and favor the Spanish Market for its appeal and degree of its maturity, which contrasts with the limited legal security in Italy and the inexperience of Portugal. Spain's capital gains are difficult to find in other parts of Europe due to the country's current stage of economic growth.
Africa´s potential is also worth taking into account, a continent where a small percentage of its population is increasing its income and may have a prominent role in real estate investment in the future. More specifically, Barcelona and Madrid are starting to receive more investment capacity than availability of attractive assets, therefore prices are starting to increase in those type of properties. The majority of investors in Madrid come from the center and south of America while Europeans and Asians tend to favor Barcelona. In this sense, there is a positive evolution of investment in both cities although with caution to follow closely its development in the next 42 months since there is a real risk of market overcrowding for an excess of money looking to be allocated. A sign that the real estate investment market is increasingly attractive to the various market players is the interest shown by insurance companies and institutional funds, usually oriented towards low risk operations.
Forcadell reveals the great challenge faced in Madrid and Barcelona regarding quality sustainable office buildings. Neither of these cities has enough stock to supply companies that opt within their corporate policy, for the environmental responsibility. While quality labels such as LEED, BREEAM and DKV prove compliance with the regulations, less than 5% of office buildings in both cities provide them. The new buildings that are being built already do according to these regulations. The office market is interesting for investors while very few owners are willing to sell.
Forcadell's investment report also states that it is expected that Barcelona will increase the number of large surface buildings, while Madrid will experience a strong building restructuring in the Central Business District (CBD) to make them more sustainable. Those buildings that do not conform to sustainable regulations will end up being demolished or converted to other uses. Both in the Madrid office market and in the Barcelona market it is expected that the profitability will continue to be compressed progressively. The most competitive investors will be the ones who take the best assets while the others will choose to invest in another type of asset or they will operate in other Spanish cities. Space rearrangement will also become increasingly important, since the buildings will evolve towards efficiency and sustainability, opting for being more dynamic.
In recent years, according to Forcadell, large institutional investors and Family Offices have opted to invest in the industrial-logistic sector, as it is one of the most sought after product for professional investors. Investment in logistics, as a trend, will continue to grow starting to put downward pressure on yields. Logistic assets have become a Core product. The safer the logistics market, the lower the rents.
As noted by the consulting firm, the industrial product stands out for continuing to offer very high returns in combination with a high risk, compared to other sectors, although they began to gradually decline about 3 years ago. It is expected that within 2 years, when the logistics sector stabilizes, institutional investors will be encouraged to invest in industrial products. Industrial assets offer great security and are soon expected to be incorporated into portfolios. This upward trend of the industrial sector is a consequence of the good evolution of the economy and the willingness to open new business opportunities within the investment market.
According to Forcadell, one of the few real estate investment assets that has not suffered a steep decline in rent or vacancy rate (availability) are the commercial premises located in prime streets, according to the Forcadell report. In a period of falling investment, these premises are considered a safe haven and have less volatility. Shopping centers, meanwhile, are today one of the major players in real estate investment in Spain. Beginning in 2013, large operations that had been standing for 4-5 years in the main Spanish cities began to be reactivated. In 2015 and 2016, these shopping centers were re-marketed, generating capital gains of more than 25%.
Another outstanding retail product, as pointed out by Forcadell's investment report, is medium-surface parks. They are usually very well connected following the strategy of Catchment Area (area of influence), located near one or several large cities. Midsize parks are becoming a very interesting product for large professional investors because of their low construction costs. For this reason, it is expected that in Spain these type of parks will increase significantly in the coming years. Another great trend is the Flagship Stores. In fact, Madrid and Barcelona have already entered the league of cities where the main retailers want to have theirs. On the other hand, the medium and large supermarkets sector has also gained its space as a product of interest to large investors. These assets will increase their profitability, compared to the rest of retail products, because higher amounts are invested and there is a higher risk.
Hospitality is one of the sectors that, according to the report of Forcadell, focuses the interest of the investors in spite of the lack of opportunities in the market. In the center of Barcelona there is no space or licenses to promote new assets, a fact that is causing an increase in prices. In Madrid, although there is no license moratorium, it is also registering high prices.Tourist resorts, on the other hand, are closely linked to the concept of Leasing & Management Contract. Between 2010 and 2016, this trend changed to Leasing Contract but nowadays it has returned to the type of their initial management. Investors who focus on the product of student residences are scarce since it is a very specialized sector. The residences are usually located in lands for facilities which entail that it the land be used for any other type of activity. This nuance affects them since they don’t have the same value as other products, when in future can be reconverted to any other use.
According to the Forcadell report, this sector is characterized by two types of investment: the local leading long term investment companies and Value-Added Property developer companies. Currently, there is a high demand for both in Barcelona and Madrid. Much of the Property developers’ claim is of foreign origin, while, in general, the leading long term investment companies are usually local. In Barcelona this is the investment sector that generates more revenue. In Madrid it is also giving good figures although being a larger city, there is a greater variety of product to invest, where the office sector stands out since it has a greater importance in the capital of Spain. In this sense, Residential product in Barcelona, more than in Madrid, is considered for investment, especially in Value-Added cases. In both cities, investors opt to purchase in centric zones to market them later and obtain capital gains in the short or medium term.
Interest in the purchase of land occurs, as the consulting firm points out, when it is no longer possible to carry out transactions with Core or Value-Added products because there is no more product available and the reconstruction is no longer cost-effective. This is when Land focuses investors’ interest that opt on real estate developments starting from scratch. The restorations are usually cheaper and faster than the construction the building, which entails the management of paperwork, licenses, etc. Currently there is a very large demand for developable land ready to build and the forecast is that when this is no longer possible, this demand will be channeled towards the management of developable land or future developable land. In the case of Barcelona, due to its geographical characteristics, it is difficult to find land since the options are limited. Most of the available developable land ready to build is at 22 @ area and is land intended for office use. The value of land, which reached its maximum in 2007, is seeing its price rise as it is a scarce commodity and with increasing demand. Nowadays, land transactions, mainly in residential, office and logistic, are being registered again.
REITs have had an impressive activity since 2014, as pointed out by Forcadell, and although officially they are considered local companies, almost entirely their Private Equity (venture capital) is of foreign origin, specifically from investment funds. Its aim is to obtain capital gains and profitability by acting as managers of large volumes of money from funds. REITs can be considered as the big players of the investment market and through them there is the possibility to allow transactions of funds with no representation in Spain.
According to the Forcadell report, the real estate investment market in Spain has reached € 14,000M at the end of 2016, a very positive result for the sector. In recent years specialisation regarding Capital Allocation for type of product has been observed.Madrid has taken a strong side for the office sector and large shopping centers while in Barcelona they have opted for logistics, Hospitality (hotels and similar uses) and residential, for its profitability and for being a multifaceted city (fairs, tourism , Business, cultural activities, etc.).
As stated in Forcadell's Investment Report, after a very good 2015 and 2016, the growth of the professional investment market in Spain will stabilise in 2017 and 2018. The big players are inactive in London, while Paris is raising many questions with the evolution of its politics and its economy; Italy, on the other hand, is a domestic market since its real estate market is less institutionalized, and some of its banks were rescued by European institutions; and the US currency is less predictable. Spain's macroeconomic improvements have been largely effective, consequently today it has investment growth expectations, positioning itself just behind Germany.