Formulas To Capitalize On Construction Sector Recovery In Spain

29/12/2014 – Cinco Dias

The housing market has completely transformed since the burst of the housing bubble; it has gone from what had long been an investment sector to avoid to one that is now giving way to new business models with interesting opportunities for private owners as well.

“2015 is going to be, as it has been since 2014, a good time to buy properties to rent,” says Julio Gil, president of the Real Estate Studies Foundation (EIF), who argues that with an average annual return of 4.5%, residential leasing has become “a much more controllable investment for a small-scale investor” and more advantageous than deposits, given the drop in interest rates to historic lows, or equities, and the ups and downs in strong market volatility.

From his point of view, moreover, this approach allows the individual to benefit from the progressive rise of the rental market — the crisis has reduced the traditional preference for homeownership among Spaniards — exploiting the gap left by large buyers.

Experts envisage new business models with investment opportunities in the housing market

Some international investment funds that have been entering the Spanish market over the last year and a half have also chosen to purchase residential property to lease, e.g. Blackstone that acquired 1,860 homes to rent in the Municipal Housing and Land Company of Madrid, or Azora and Goldman Sachs, who bought 2,935 homes from the Housing Institute of the Community of Madrid (Ivima). However, most have opted to implement this strategy in the tertiary sector.

“The prospects for rent growth are somewhat feeble, while still observing an upward trend in prime-location office rents” highlights a recent report from the real estate consulting firm Knight Frank, pointing to Madrid as one of the rising markets with returns ranging from 5.5% to 8% depending on the type of asset.

This market, however, is not off-limits for the small investor. Despite the stagnant results being seen throughout the first quarter, a handful of investment companies in the real estate market, the so-called REITs, have begun trading during this year. These investment vehicles, which spend 80% of their resources on investing in rental property, are exempt from taxes and their shareholders are only taxed on the dividends they earn.

“Their main targets are prime-location offices and shopping centers, although renting houses and hotels is also on their business plans,” states the latest UBS outlook report, noting that at its base scenario, “The annual return for investors will be in a range between 7% and 10% over a three to four years timeframe, a competitive return even compared to the broad Spanish equity market.”

In terms of prices, Swiss bank experts point out that the price of housing in Spain has fallen between 30% and 40% from its previous highs, a decline despite which “the price of houses in Spain is not cheap”.

In light of this development, they expect further reductions of between 1% to 3% in the coming year and price stagnation in subsequent years. Given this situation, on the whole, UBS notes that it sees no investment opportunity in the Spanish residential sector except the rental market.

Thus investment in housing in the wait of a strong appreciation in the medium term is what all consulted experts dismiss at any rate. With that in mind, real estate transactions are still associated with obtaining a mortgage loan for individuals without large financial resources.

Obtaining a mortgage is a path paved with requirements due to a persistent credit crunch but it is beginning to pick up on the bank windows with deals nearing Euribor plus 1.5% variable interest, and a close entanglement with the bank. The conditions are often particularly advantageous on still strong housing properties, appropriated by banks and SAREB and appearing on their balance sheets. A possible opportunity for those who decide to take advantage of the construction sector recovery in the new year.

Original article: Cinco Dias (by Juande Portillo)

Translation: Aura REE