Local Property Developers Team Up With International Funds

4 May 2016 – Cinco Días

“The banks are losing market share in the real estate sector, as property developers opt to seek funding from alternative sources, namely funds”. Those were the words of José Luis Suárez, Professor of Financial Management at IESE, speaking yesterday at the Real Estate Conference 2016, ahead of SIMA (Madrid’s International Real Estate Fair), which begins on Thursday. “Construction companies are looking to form partnerships with these funds”, said Suárez.

In recent months, the property developers that have survived the tough real estate crisis, which began in 2008, have been looking for new ways of obtaining resources with which to finance their projects. During the real estate boom period, the banks typically provided financing for every phase of the development, including to purchase land, but that led to a bubble in terms of the prices of those assets. Since then, the entities have stopped granting loans for land, which means that companies are having to fund that first investment using their own funds or other alternatives.

“The funds are financing developments at double-digit interest rates”, said Mikel Echavarren, CEO of the consultancy firm Irea. “The banks are missing out on this business now”, he added. “Those investing in property developments are now opportunistic funds”, he revealed.

These international firms are forming partnerships with developers in lots of different ways. Castlelake, for example, has completed several operations across Spain, by buying land and then teaming up with local real estate companies. Another case is that of Pimco, which is constructing luxury homes on Calle Lagasca 99 together with the Socimi Lar España.

Another veteran property developer, Renta Corporación, which emerged from bankruptcy in 2014, has found an investment partner in the form of the fund Kennedy Wilson for its new projects. In the case of Neinor, the former real estate arm of Kutxabank, it has an €1,000 million investment plan for its new developments thanks to its new owner, the US firm Lone Star.

Meanwhile, Asentia, the former subsidiary of Colonial, has also seen how this type of international investor is controlling its shares. In the case of the listed company Quabit (previously Astroc), KKR has also acquired some of its share capital. Another example is that of InmoGlacier, which has the support of Aquila Capital to construct homes in Madrid.

“These funds are operating by themselves in the market for land purchases amounting to between €15 million and €20 million, they do not have any competition for financing projects. For smaller developments, some companies are using their own funds to buy up land, although then they finance it partially through the banks”, said Echavarren.

This new formula for undertaking developments is helped by the liquidity in the market and the lack of other investments that provide good returns, given that bonds and equities are currently generating very low yields. “These investors are looking for alternative assets, such as the real estate sector”, explained the Professor from IESE, who considers that these alliances between funds and developers are circumstantial. “We must find more orthodox financing structures”, he added.

Original story: Cinco Días (by A. Simón)

Translation: Carmel Drake