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

Merlin Closes A €1,034M Capital Increase To Buy Testa

16 July 2015 – Expansión

Yesterday, the Socimi Merlin Properties announced a €1,033.7 million capital increase, representing 66% of its current share capital. The operation will allow it to finance the purchase of Testa, the subsidiary of Sacyr, which it has bought for €1,986 million.

The capital increase will have preferential subscription rights and will involve the issuance of 129,212 million shares, with a value of €8 and a premium of €7 per share. Last April, the Socimi chaired by Ismael Clemente closed its first capital increase amounting to €613.8 million, with the issuance of 64,605,999 new shares, to finance the purchase of real estate assets, offices and retail premises.

Merlín debuted on the Madrid stock exchange in June 2014 with a market capitalisation of €1,250 million, at €10 per share. Yesterday, it closed trading at €11.50 per share, up 1.86%, and its market capitalisation amounted to €2,228.9 million. Merlin’s main shareholders, which include UBS, Marketfield, EJF apital, BNP Paribas Asset Management and the fund Gruss Capital, are expected to participate in the capital increase.

The integration of Testa and Merlin will create a real estate giant with assets worth around €5,500 million, gross annual income of €290 million and a market capitalisation of close to €4,400 million.

Original story: Expansión (by R. Ruiz)

Translation: Carmel Drake

Sacyr Sells Its Subsidiary Testa To Merlin For €1,793M

9 June 2015 – Expansión

Strategy / The construction company cleans up its balance sheet with this transaction and improves its financial position, with a view to growing its international construction and concessions businesses.

Yesterday, Sacyr agreed the sale of its property subsidiary, Testa, to the Socimi Merlin Properties for €1,793 million. The group chaired by Manuel Manrique (pictured above right), which has been advised by the bank Lazard, has opted for Merlin’s proposal after rejecting the bids made by other investors such as the US fund Blackstone and the real estate company Colonial.

The agreement forms part of an “accordion operation”, in which Testa will simultaneously make a contribution to its shareholders of €1,196 million, through an ordinary dividend of €527 million and a reduction in share capital of €669 million. Through this transaction, Sacyr and Testa will normalise their balance sheets.

The sale comes just two days before Sacyr’s AGM, to be held on Thursday, where the Chairman of the group, Manuel Manrique, will reveal the foundations of the new industrial plan based on international construction and the development of concessions.

The largest Socimi

Merlin is the largest Socimi (listed real estate asset investment company) on the Spanish stock exchange, with a market capitalisation of €2,208 million and a portfolio of assets worth €2,594 million. The company debuted on the stock exchange on 30 June last year with €1,250 million of share capital from investors such as UBS, Marketfield and Gruss Capital.

Merlin, the real estate company controlled and chaired by Ismael Clemente (pictured above left), wanted to expand its assets with the purchase of a significant stake in a company in the RE sector and set its sights on Testa a while ago. Sacyr’s subsidiary closed yesterday with a market capitalisation of €2,906 million.

Sacyr holds a 99.93% stake in Testa; the remaining shares are listed on the stock exchange. The company has been looking for a partner for several months, to inject capital into its subsidiary. The search for an ally led Sacyr to consider an IPO of Testa’s shares aimed at institutional investors in order to strengthen its subsidiary’s balance sheet. The initial objective was to place 30% of the shares, but the construction company increased the option to 100%, once it had assessed the appetite of investors.

Merlin has more than enough financial muscle to handle this operation. In April, the company announced a capital increase amounting to €613.7 million. The real estate company, which earned €19.2 million during the first three months of 2015, has already invested the €1,250 million it secured from its debut on the stock exchange.

Testa owns real estate assets valued at €3,180 million, according to the most recent appraisal completed on 31 December 2014. Its properties include the Torre Sacyr, in the Cuatro Torres Business Area in Madrid, and Diagonal, 605 in Barcelona. It also owns two office buildings on Paseo de la Castellana, at numbers 193 and 83, where the construction group has its headquarters. Furthermore, it is the owner of several shopping centres in Malaga and on the Balearic Islands, and also owns residential blocks for rent. In 2014, Testa recorded turnover of €187.9 million.


Original story: Expansión (by R. Ruiz and C. Morán)

Translation: Carmel Drake

Merlin Makes A Proposal To Buy A 30% Stake In Testa

20 April 2015 – Expansión

Strategic alliance / The listed real estate company, which is increasing its share capital by €614 million, has made a proposal to the construction group Sacyr to acquire 30% of its subsidiary, which will also become a Socimi.

The scarcity of well-located real estate has led many investors to design imaginative solutions in order to invest. That is the case of Merlin Properties. The largest Socimi (listed real estate investment company or ‘sociedad cotizada de inversión en activos inmobiliarios’) on the stock exchange, with a market capitalisation of €1,714.6 million and an asset portfolio worth €2,417 million, wants to increase its assets through the purchase of a significant stake in a company and it has focused its attention on Testa, the equity subsidiary of the Sacyr group.

Testa is almost entirely owned by Sacyr (99.93% stake). The remaining shares are listed on the stock exchange. For the last few months, the company chaired by Manuel Manrique has been looking for a partner to inject capital into the subsidiary. The search by its ally eventually led Sacyr to propose a public offering of shares (OPS or ‘oferta pública de suscripción’) aimed at institutional investors in order to strengthen Testa’s balance sheet. The goal is to place 30%.

Although the stock exchange placement has already been proposed, the possibility that Merlin will acquire that percentage for around €500 million and become the preferred partner in Testa is gaining momentum, according to sources close to the process.

Both companies would lead the real estate company’s new phase, whereby Sacyr intends to convert Testa into a Socimi and so benefit from the tax advantages afforded by that company structure. This option would also allow Merlin to acquire a stake in Testa and comply with the regulations that permit Socimis to own subsidiaries or stakes in other companies of that type.

Merlin’s interest in acquiring a stake in Testa has not put a stop to the OPS for the moment. The amount of the transaction, whereby the construction group would end up controlling a 70% stake, is valued at around €500 million, according to various analysts.

The Socimi chaired by Ismael Clemente, has more than enough financial muscle to handle any transaction. On Wednesday, Merlin announced a capital increase worth €613.7 million. The real estate company will complete this transaction less than a year after it was first listed on the stock exchange, since it has already invested the €1,250 million it secured on its debut in the market. Now, the Socimi, owned by UBS, Marketfield and Gruss Capital, is evaluating new investments amounting to €2,000 million. “The company has a portfolio of projects and potential investments amounting to approximately €1,950 million, of which €170 million correspond to assets and investments being analysed on an exclusive basis or as part of a due diligence process; and another €1,780 million relating to assets and investments in the analysis phase”, says the company in an admission prospectus for the new shares published yesterday in the CNMV. The capital increase will carry preferential subscription rights and will take place between 18 April and 2 May.


Testa owns real estate assets worth €3,180 million, according to the latest appraisal performed as at 31 December 2014. These include the Torre Sacyr, in the Cuatro Torres Business Area complex in Madrid and Diagonal, 605 in Bacelona. The company owns two office buildings on the Paseo de la Castellana (in Madrid), at numbers 193 and 83, where the construction group has its headquarters. Moreover, it owns a number of shopping centres in Malaga and the Balearic Islands, as well as residential housing blocks, which it rents out. In 2014, it recorded a turnover of €187.9 million.

Original story: Expansión (by R. Ruiz)

Translation: Carmel Drake