International investors take Spain seriously again

There’s something happening in the Iberian peninsula. Spain, an unfortunate textbook example of what happens when real estate growth unrealistically outstrips demand, has spent the last few years putting its house in order. And international investors are starting to take note.
Typically, in a crisis period, a country’s real estate market is dominated by domestic players: those for whom real estate is an “occupational” necessity or who still inherently believe in their territory’s fundamentals. The return of international investors, then, is a reasonable sign of improving economic conditions. Sentiment is a curious thing and both bolsters and reacts to hard data; either way, the foreign funds are allocating money to Madrid and Barcelona and the interest of a few front runners seems to be inspiring rising volumes of equity.

According to Savills latest office report, whilst domestic investors continue to dominate the market in the Spanish capital, German institutional funds have returned to the sector joining the new buyers in this area including South American, British and Canadian parties. The report states that the Madrid office market is ‘beginning to awaken from its slumber’ as it regains activity with Q2 volumes recorded at €155m, far exceeding the €45m recorded over the same time period last year. Half year figures have also increased four fold compared to H112 at just over €200m.
The advisor reports although 59% of deals in H113 relate to Spanish investors this is in fact the lowest volume over the past five years. Deka completed a deal for an office building on the outskirts of Barcelona’s CBD, and Union Investment acquired Hotel Raval; Savills suggests these deals indicate Germans are back in the market. Of the newer entrants, Savills sees the South American investors as most noteworthy due to the cultural similarities. Achievable yields currently stand at 6% but for trophy assets Savills suggests this figure could be lower.
Pablo Pavia, director of investment at Savills, says: “German institutional funds have returned to the commercial property investment market. Deka purchased an office building in Barcelona’s CBD, and Union investment a hotel, also in Barcelona. Their arrival in the Madrid office market is just a matter of time.”

In terms of the leasing market, take up figures have been excellent in H113, following the completion of several megadeals being signed in Q1. However Savills says this is not reflective of the current market conditions, with vacancy rates continuing to grow on second hand space reaching 14% and the number of deals signed dropping by 27% year-on-year and 12% quarter-on-quarter. At the end of June, there was around 1.8 million sq m of vacant space in the Madrid office market, which is a 2% increase quarter-on-quarter. These declines are reflected in rental prices which continue to decrease with the exception of some consolidated areas which are showing signs of stabilising. Achievable rents in the CBD remain at €24.50 per sq m/month with minimum rents registered at €4 and €5 per sq m/month in an office building on an industrial estate.
Gema de la Fuente of Savills research adds: “Rents in the CBD are reaching their lowest level seen in the recession and if history repeats itself, as it did I the mid 90s, rents may well climb slightly at the end of 2013 and 2014.”
The data shows the total volume of new or refurbished space in the pipeline for 2013 will barely hit 90,000 sq m, which is the lowest seen over the past 10 years. Savills report highlights that fewer risky new build projects are being developed and that most speculative projects are primarily refurbished.

For Cushman & Wakefield, this is part of a wider phenomenon where investors – in search of better yields than the compressing (and depressing) values in the hard-fought core markets – are displaying a greater appetite for risk. A new report finds that there has been a marked improvement in the European property investment landscape with growing signs of recovery apparent even in ‘crisis’ hit countries, according to the data crunched by Cushman & Wakefield.
“A change in sentiment amongst consumers, businesses and financial markets is paving the way for a return of stronger activity,” says the report. “Prices in the best areas are already responding, with core yields down over the summer, and this is both reinforcing the market’s positive mood and encouraging new buyers and sellers to emerge.”

Whilst the core favourites are still in high demand, prime supply is typically limited, forcing investors to consider alternative strategies to find stock. Some are chasing diversification to enhance portfolio returns while others are ready to take on risk as they seek out higher incomes or enhanced performance. Many however are opting to target new markets – resulting in a notable upturn in the selection of non-core locations.

Source: Real Estate Europe