Spain’s RE Sector Gets Ready For A Wave Of Mergers & Sales

5 June 2017 – El Confidencial

(…). The race has begun to become the largest real estate company in Spain and Merlin is leading the ranking with a clear advantage over the second-placed contender, Colonial. Its purchase of Testa, for €1,800 million, and the subsequent merger of the Socimi led by Ismael Clemente with Metrovacesa, accelerated a consolidation process that wasn’t expected to happen until this year (but which was instead closed in 2016).

That unchecked move by Merlin forced Colonial to play its own hand, which, in turn, revolutionised the entire second tier of Socimis, which saw the Catalan group aiming directly at them with its purchase of 15% of Axiare, an operation that Colonial justified as a financial investment, but which the whole market, including the affected company itself, interpreted as the first step in a larger operation.

To defend itself, the Socimi led by Luis López de Herrera-Oria decided to call in the classic army of investment bankers and lawyers, with whom it has started to analyse all available options, including the possibility of buying up more assets to grow in size and somewhat complicate a hostile operation by Colonial. It is even entertaining entering into another type of corporate deal with a new, trustworthy, high-profile investor.

And it is here that the market has now started to place its bets, aware that the process of concentration amongst the players has started. “An agreement with Hispania, for example, would be a game changer. As would the acquisition of a significant logistics portfolio, because that would be a type of asset that would discourage Colonial from proceeding. Axiare could also consider acquiring one of the Socimis on the MAB created by funds that have already completed their investment cycle in Spain and that are interested in started to sell”, said sources at a corporate operations firm that asked to remain anonymous. (…).

“The catalysts that are defining the consolidation process are size and specialisation. There are going to be a lot of corporate operations, everyone is talking to everyone, but the basis on which moves are going to be made are: what type of Socimi does each vehicle want to be and their need to gain in size”, said Antonio Sánchez-Recio, Partner and Head of the Real Estate Sector at PwC. (…).

What’s more, in the midst of this consolidation process, the market is going to start to enjoy more freedom to sell assets. From now onwards, the three years that the Socimi framework stipulates that the vehicles must hold onto the assets for to safeguard their tax benefits, start to come to an end, and so, a torrent of asset rotations is expected to begin, which will also help each vehicle to specialise further in what it wants to be.

For example, at its recent Investor Day, Lar España Real Estate revealed that it plans to start to sell assets and, specifically, it is looking to put its logistics properties up for sale, as it wants to continue specialising in shopping centres.

Although the Socimis have been the ones to fire the starting gun on the concentration process, the M&A wave is going to affect the entire real estate sector, in other words, significant movements are also expected between property developers and servicers. (…).

Lone Star would have preferred to wait (…), but in the end decided to bring forward Neinor’s debut on the stock market to March 2017. Castlelake may well take a similar step with Aedas, the real estate company that it created from the ashes of Vallehermoso, as it shares with its competitor the fact that it has been able to buy up land during the hard years of the crisis.

“All of the real estate companies that have funds as their controlling shareholders, which invested during the period 2011 to 2013, as well as those that are owned by the banks, are the first in line to be sold, merged or listed on the stock market”, said Francisco López, Partner at Lift Global Value Fund.

Heriberto Teruel, National Director of Corporate Operations at CBRE, shares this view. He talks of the concentration process happening in three areas: “Firstly, we have the corporate operations between the Socimis; secondly, and in parallel, we are seeing the debuts on the stock market and the mergers of the property developers; and thirdly, the servicers, where we will see both concentrations (Lindorff already purchased Aktua from Centerbridge) and repurchases of these vehicles by the banks to create their own real estate companies, in line with the move that Popular is trying to undertake”. (…).

The banks are also behind Metrovacesa Suelo y Promoción, Testa and URO, three companies that still expected to generate more news in terms of corporate operations. (…). In the same way, the funds that backed Spain when all of the other investors were fleeing the country, such as Blackstone and Autonomy, are also going to try to take advantage of the context to generate returns from their Socimis (…).

The show has only just begun.

Original story: El Confidencial (by Ruth Ugalde)

Translation: Carmel Drake