The science of the World Cup

Why Spain crashing out of the World Cup almost certainly means those getting excited about investing in the country’s real estate are right to be so. July 2014 issue

Whoever said that national sporting success is heavily linked with GDP growth obviously never considered Spain and football. In that particular case, the exact opposite seems to be true. Basically, the more that Spanish people are spending or earning or the more goods and services the country produces, the worse its national team is. Putting it the other way around, the worse its GDP growth is, the better its national football team performs.

Don’t believe me? Back in 2002, the Spanish economy was doing just fine, growing at 2.7 percent, but its football team couldn’t win any major competition. That year, it got knocked out in the quarterfinals at the World Cup. In 2004, the economy was doing even better – GPD growth was 3.3 percent – but the Spain team fired blanks at the UEFA European Championship and didn’t even get out of its group. In 2006, GDP growth equaled 4.1 percent, but it was no further than the round of 16 for the team in yellow and red at that World Cup.

In 2008, however, everything changed. Things were tough for everyone certainly but, for Spain, its years of property expansion caught up with it. That year, GDP growth slumped to 0.9 percent and – guess what? - the Spanish team starts winning. It won its first major tournament in decades, the European Championship, that year. Then, as the economy got worse, the success just grew. In 2010, GDP growth went to almost nothing and, low and behold, Spain wins the World Cup. In 2012, GDP went negative to -1.6 percent and Spain retained its title as European champion.
What has all this got to do with real estate? Well, in case you haven’t spotted it, Spain currently is the hottest real estate market on the planet. By that, it is meant that investors from Europe and even the US – where opportunistic deals have become harder to come by – are very, very interested in it and there are increasing examples of deals and funds happening down there in southern Europe. Just in the last few weeks, Patron Capital announced the formation of a €400 million fund called Meridia Iberian Real Estate Fund, into which Patron will contribute around €250 million and its country-partner Meridia Capital will kick in up to €150 million.

Meanwhile, it was reported last month how Spanish cooperative banking group Cajamar was in talks to sell its property management unit to US investment firms, with Reuters suggesting that Apollo Global Management and Cerberus Capital Management were in the running to buy the unit. In addition, Spain’s Group Lar and Ivanhoé Cambridge once again are reported to be putting the Islazul shopping mall in Madrid up for sale after withdrawing the property earlier this year when the top offer peaked at €185 million, far less than the €220 million the pair apparently wanted. Indeed, it is a clear sign that some owners of Spanish assets fancy their chances of selling into a strong market more than ever.

All this activity and focus on Spain is prompting one big question: Should people be investing there? Indeed, it was a question posed by Eric Adler, chief executive officer of Pramerica Real Estate Investors, to representatives of Allianz, TPG Capital and AXA Real Estate at the European conference of the Association of Foreign Investors in Real Estate last month. Tom Arnold, head of Americas real estate at the Abu Dhabi Investment Authority, sounded skeptical as he talked about “all this money getting raised and it needs a reason to go somewhere.” Adler, perhaps to get the debate going, didn’t sound too bullish either as he pointed out Spain wasn’t that big of an economy in the first place. 

Well, certainly not like Germany is. Allianz has some assets there, according to Olivier Piani, the insurance company’s global real estate chief, but he gave the impression there are better risk-reward ratios in places outside of Spain for an outfit that needs to meet liabilities. He also sounded a general note of caution for much of Europe as he observed the disconnect between rental values and rising capital values in Continental Europe. 

Dennis Lopez, AXA’s global chief investment officer, sounded cautiously positive about Spain as he pointed out that his firm returned to investing there last year, when it bought 13 offices in Barcelona let to the regional government for €172 million. 

For my money, though, TPG’s de facto head of real estate, Kelvin Davis, hit the right note. He called it a peripheral country but certainly not a small one, given its population of 47 million. He said countries like Spain were now finally showing signs of stabilization and perhaps even pockets of job growth amid an export-driven economy that points towards GDP growth and, all the while, property asset values are still deeply depressed. “At least we have found that, if you find places in the cracks and don’t just try to invest in the market itself, it can pay off,” he said. “We are going to find places where complexity, distress and illiquidity create opportunities” in a country tilted to the upside as far as growth is concerned.

So, back to the World Cup. Spain has just crashed out of the competition, not even getting through its group stage. If one looks back to the national team’s success and its inverse relationship with GDP, I’d bet on the local economy doing really well. Indeed, it is forecast to grow 1.2 percent by the end of the year and 1.8 percent in 2015. Just don’t bet on Spain winning any major football tournaments anytime soon.

Source: PERE