JLL & IESE: Investors Are Willing To Take On More RE Risk

30 March 2016 – Expansión

The increase in liquidity, accompanied by the lack of profitability of alternative assets – such as the bond market – and the volatility of world stock markets all mean that the real estate sector is regarded as a very attractive option for investors. This trend, which was first glimpsed last year, will be maintained in 2016, but there will also be a step up in terms of the risk curve this year. That is one of the main conclusions emerging from a report prepared by the consultancy firm JLL and the business school IESE, on the basis of interviews with 101 investors in the sector, both domestic and international.

More yields / Most investors are looking for value added opportunities in light of the scarcity of prime assets.

The study indicates that the lack opportunities to add value in prime areas and the increase in funding means that investors are willing to take on more risk in their operations in the real estate market, although they continue to analyse the feasibility of these assets and check that they are financeable, given that capital continues to be selective.

In this way, investors have expanded their radars to other less exclusive areas and to buildings that need renovating. One example of how investors are willing to take on more risk with their operations is the purchase, in July 2015, of Telefónica’s former headquarters on Calle Ríos Rosas (Madrid) for €90 million by the institutional investors M&G. The building will be completely renovated and its tenant will be WPP, the multi-national media agency and marketing group.

Similarly, the report detects interest for alternative investments, such as student halls and health centres, as well as an increase in rental prices.

Asset values are on the rise

Following a record year in the commercial real estate market, with investment of €9,200 million, 89% of investors expressed a “high” or “very high” interest in the Spanish market, compared with 10% who expressed a “low” level of interest. In addition, 60% of the investors surveyed consider that the value (of assets) will continue to grow for another 18 months, at least.

The responses to the survey reveal that the typical investment in the commercial real estate market falls in the range of €30 million to €100 million, with a gearing level of between 50% and 60%. The average investment time horizon is less than five years, with an initial yield of between 5% and 7% and an IRR of between 8% and 14%. Offices in Madrid and Barcelona, logistics warehouses and shopping centres are the business segments in most demand. They are followed by retail premises on main streets and hotels, whilst the assets generating the least interest are residential properties and land.

Looking ahead to the future, investors remain alert to Spain’s political situation. The investors surveyed consider that the political uncertainty at home may slow down the upwards cycle seen over the last few years and they express concern regarding the possibility that some local governments, such as the one in Barcelona, are not granting them the permits they need.

Original story: Expansión (by Rebeca Arroyo)

Translation: Carmel Drake

51