15/04/2014 – Expansion
Real estate market in Spain revives and thrives as there are both investor´s interest and golden opportunities. Especially REIT companies (or Socimis by their abbreviation in Spanish) start to gain ground and are already becoming the main players in the stock exchange market. It is expected that they will gradually alternate the sector. The question is, are they really the perfect investment?
The Socimis feature several characteristics that may influence Spain´s real estate market. First of all, they shall invest at least 80% in urban property for rent and shall divide 90% of the return among their shareholders, as well as 50% of benefits obtained from asset and holding transfers.
Beyond the vehicle there is a firm strategy: to take advantage from the economic circle by buying cheap, receiving good yield from the rent and after few years, when the market recovers, selling the property. Moreover, Socimis offer very attractive fiscal cuts, such as the Corporate Tax exemption or considerable returns.
Property sector boosts the stock exchange again
Since November, four Socimis have become listed: Entrecampos with €126 million capitalization and Promorent with €7.2 million that appeared on the MAB (Spain´s Alternative Stock Market), as well as Lar España which raised €408 million on the Continuous Market. Also, Hispania became listed as a real estate firm with €567 million capital but this company initially rejected requirements that a REIT must meet in order to obtain greater flexibility.
These four Socimis were the first to start the game and it is predicted that many more of them will appear on the stock markets this year, even up to 20. Other real estate trusts are waiting to become listed and the preparation process is already pretty advanced. For example, Merlin Properties that disposes of a thousand of BBVA´s offices and initial capital of between €1-1.5 billion or the Socimi created by Pearl Group, Sun Group and Drago Real Estate that offers 1.500 offices of Santander valued at around €2 billion.
Which players will bet on a Socimi?
The Socimi structure does not attract attention of vulture funds that want to buy at bargain prices to sell rapidly, but rather of more conservative investors who plan a longer stay. For example, the funds that acquired banking property servicers. Or those who would create a spin-off firm to give a way out for a part of their portfolio through a Socimi. This is also a suitable option for family offices that could enjoy the fiscal benefits.
But this vehicle will be open for all types of investors: from large to small, foreign to domestic, etc.
How does a Socimi work?
Gonzalo Bernardos, vice-rector and expert in real estate from the University of Barcelona, explains that the Socimis aim at buying at low prices, obtain good yields from leasing 80% of the property and rotate the remaining 20% to obtain extra capital gains.
He also points out that there are two variants of creating a Socimi. Thus, a company can be already owning houses and seeking investors who contribute with capital. The other option is to raise capital first and then buy.
Obstacles for estate agents
One of the problems that creation of a Socimi may provoke is the requirement for 80% of urban assets for lease. Moreover, the property shall have minimum tenure of 3 years (acquired assets) or 7 years (assets promoted by the firm).
Also, specialists from the sector agree that in spite of the fiscal benefits, Socimi structure is still complex for Spaniards and demands a lot of experience. What is more, stock in Spain is highly disperse and this hampers lease management.
Risky but attractive investment for small businesses
According to Bernardos, even though the value of a Socimi should be stable, the market never allows that so this investment might pose certain risk. However, as Borja Goday from KMPG España assures, they are good option for small investors that wish to enter the real estate market.
Will the Socimis drive rental market?
Now, the obligation of possessing 80% of property for lease turns out to be an incentive for the market. José García Montalvo, Economics professor from the University of Pompeu Fabra says that at the beginning of the recession lease and ownership stood in proportion 12:88. Right now the rent represents 18% and is likely to rise up to 25% in 4-5 years.
However, Bernardos claims that the lease is going to decline as “at present, there are plenty of houses for rent in Spain and many people waiting to buy. Due to the general assumption that the housing prices have hit the bottom and lending is bound to return, probably the purchase will supersede the rent”.
One shall watch developement of the Socimis over the forthcoming months to become convinced whether or not the REITs are the remedee for ailing Spanish market. As Goday adds, “the Governement of Spain shall continue to improve this kind of vehicles”.
Original article: Expansión (by B. Amigot)
Traslation: AURA REE