14 October 2016 – Expansión
Residential investment is continuing its upwards trend in Spain despite the political uncertainty that continues to plague the country. In 2016, investment in the housing sector is expected to exceed last year’s levels thanks, above all, to the boost from property developers and private capital, and to the increasingly important role being played by investment funds. According to a report prepared by the real estate consultancy Knight Frank, the volume of residential investment in Madrid will reach €1,000 million by the end of 2016, whereby slightly exceeding the €950 million recorded last year and the €800 million recorded in 2014.
Currently, residential assets account for 19% of all real estate investment, compared to tertiary sector assets (offices, retail, industrial and logistics assets), which account for 81%.
By type of investor, the main players are private equity firms, which account for 36% of all operations and property developers (31%), followed by investment funds (20%), cooperatives (8%) and Socimis (5%).
In its report, Knight Frank highlights that alliances between local property developers, who bring knowledge and management expertise to the table, and international funds, who contribute capital, still represent a “formula for success” in the residential real estate market.
Moreover, this segment hardly sees any opportunistic operations. “Operations of a value added nature, which require investors to assume some of the risk involved in repositioning assets, are the most prevalent, on the basis that most investments have involved buildings that need renovating”, explained the consultancy. In this sense, the Socimis are the big stars of core operations – safer transactions that offer investors lower returns -.
In terms of financing, the report from the consultancy highlights the change that the sector has experienced compared to the years of economic crisis, when the credit tap was firmly shut.
Knight Frank highlights that one of the most significant differences in the new cycle is that financial institutions are not only giving importance to appraisal values, they are also analysing projects before they grant financing.
For the consultancy firm, the major adjustment in the banks’ weighting criteria, following the transformation of the financial system and the new classification of clients and loan to value policies, have caused the default rate to decrease to around 6.5% over the last two years, bringing it to levels more in line with the European average. Nevertheless, Knight Frank points out that Spain has a fair way to go to reach the levels seen in countries such as Germany (4%) and France (4%).
In terms of the alternative to the classic property developer loan financing, the consultancy firm highlights the rise of the Socimis as specialist vehicles and fixed income financing, for example, through bonds.
Original story: Expansión (by R. Arroyo)
Translation: Carmel Drake