RE In 2016: Office Bubble & Housing Propped Up By Banks

14 December 2015 – El Confidencial

With forecasts that: economic growth will range between 2.5% and 3% (compared with the Euro zone average of 1.5%); interest rates will continue at their historical lows for the foreseeable future; alternative assets will generate minimal yields; and there will be a strong correction in prices following the burst of the bubble, the Spanish real estate market has all of the ingredients to make it the star investment next year and the socimi boom is there to prove it. But the experts warn that the market is being split in two, with some parts already returning to their pre-bubble levels, and others no longer declining in an artificial way, but which may continue to decrease before increasing again.

The area of the market where the bubble signs are the greatest is the office segment, which the Anglo-saxons called “commercial real estate”. In this market, there are already segments that are situated at bubble levels in Spain”, says Ramón Zurutuza, Investment Director at the fund Gruss Capital. “Prices of €9,000/m2 and €10,000/m2 on the Castellana are almost the norm. Where will it end? There are already “mini-bubbles” in certain segments of the market”, he adds. The recent sale of Torre Espacio by Grupo Villar Mir at these prices is the paradigm of this trend.

Nevertheless, beyond these specific examples of excess, the office market is the segment that domestic and international investors like the most given that, specifically, these operations show that there is significant demand, willing to pay high prices for the best assets and that they may offer significant returns to investors. That is what the managing agent of Santander thinks; it maintains that “in the office market, we see potential for a recovery in rental prices”, according to its Director of European Variable Income, José Antonio Montero.

Santander: the residential sector is being propped up by the banks

Nevertheless, this firm is very reluctant to recommend investments in other segments, especially in the residential sector. And it is there that it makes a striking warning: “There is no end-demand in the residential sector, and the demand that does exist is the result of the (favourable) financing conditions being offered by financial entities, in other words, the ease with which loans are being granted”. This means that it is the banks themselves that are sustaining this market by granting cheap mortgages, but there is no real end-demand yet.

There is no unanimous consensus about this market, but the majority of the experts agree that it is too soon to be investing in it, given that there is no sign of an imminent recovery in prices. In fact, some of the specialist firms maintain that the market has not finished its adjustment and needs to undergo a new period of price decreases, given that end buyers are still asking for discounts from sellers.

In this way, the financing facilities being granted by the entities to purchase their own properties are supplementing that additional discount, which is what lies behind Santander’s warning. Something that, on the other hand, was also a sign of the real estate bubble.

Socimis are in favour, but investments should be made with caution

In any case, the market consensus recommends investment in the sector, with the Socimis as the preferred vehicle, rather than listing on the stock exchange. In fact, it is highly likely that the Ibex Committee will decide to include the largest Socimi, Merlin, in its selective index for the Spanish market this week. However, not all of these companies are the same and investors should be taking into account the assets and business model of each Socimi when it comes to choosing one.

Thus, Zurutuza advises that investors choose Socimis that own assets such as hotels and offices with added value, those that are of higher quality and lower risk. He also recommends paying attention to corporate governance – the separation of the chairman and CEO, a strong board that controls operations, etc. – and taking care with those companies that are raising capital to invest in assets that are no longer cheap.

Original story: El Confidencial (by Eduardo Segovia)

Translation: Carmel Drake