JLL: Hotel Investment Exceeded €2,650M In 2015

12 January 2016 – Expansión

2015 was a record year for investment in the hotel sector, driven primarily by Spanish buyers. The Canary Islands and Madrid were the stars in terms of location. Last year, 143 hotels were sold in Spain worth €2,650 million, which represents an increase of 65.6% compared with 2006, the previous record-breaking year; and more than double the investment volume recorded in 2014 – €1,180 million.

Spain was the third most popular European country for investors, behind the UK and Germany, according to a report by the consultancy firm JLL Hotels & Hospitality Group. And Spanish investors returned to the spotlight, thanks to the improvement in the domestic economy. In 2015, 74% of total investment was made by domestic buyers, compared with 58% a year earlier.

In this regard, the Socimis were the great discovery of the year. Merlin and Hispania, the two largest Socimis by market capitalisation, spent €965 million on hotels, whereby accounting for 36.4% of the total volume invested in Spain.

In terms of Spanish investors, the Socimis and investment funds were followed by Spain’s hotel chains, which accounted for 13.5% of total investment. The Catalan hotel chains H10 and Hotusa were the most active in 2015. They were followed by private investors, such as family offices, which accounted for 8.9%.

In the meantime, overseas investors accounted for 26% of total investment in Spain, with buyers from France being the most active – Accor’s acquisition of four Novotel hotels was a key deal – behind those from Germany – IFA paid €48 million for two properties in the Canary Islands – and Hong Kong – Mandarin purchased the Ritz in Madrid, together with the Saudi group Olayan-.

By type of investor, the funds increased their weight significantly during the year, specifically, up from 30.4% to 53.6% of the total. Hotel groups and private investors lost steam, in contrast to the real estate companies, which recorded a slight rise.

The Canary Islands accounted for 29.6% of total investment, benefiting from the upturn that Spain’s tourism industry is experiencing at the moment due to (political) instability in other competing countries in the Mediterranean. 31 hotels were sold there in total, primarily as a result of the partnership between Meliá and Starwood Capital, as well as due to the creation of Bay, the first pure hotel Socimi, by Barceló and Hispania.

Recovery

Madrid was the second most popular destination, accounting for 23.5% of total investment. The price paid for the Ritz hotel – €778,000 per room – was the highest recorded in Spain. Half of the operations involved five-star hotels and 43% involved four-star hotels.

Occupancy rates have improved in the Spanish capital, but the average price there continues to fall below its pre-crisis levels.

In the Balearic Islands, hotels worth more than €445 million were sold – 16.8% of the total – , above Barcelona, where 14 transactions worth €340 million were signed – accounting for 14% – above all, involving four-star properties. Despite the moratorium imposed by the mayoress Ada Colau, the Catalan city is the country’s leader in terms of profitability and the outlook there is positive.

Another trend in 2015 was the sale of hotel portfolios. 78 of the 143 hotels that changed hands belonged to a larger batch. This year, more operations of this type are expected, albeit smaller in value; and overseas Socimis and investors are expected to play a more active role. According to JLL, investment in 2016 could reach similar levels to those seen last year.

Original story: Expansión (by Yovanna Blanco)

Translation: Carmel Drake

Banking Sector: RE Hangover Continues To Undermine ROE

28 October 2015 – Cinco Días

How to improve profitability has become the great challenge for the Spanish real estate sector now that the chapter involving the clean up of toxic assets from the banks’ balance sheets is coming to an end. The (sector’s) return on equity (ROE) has decreased by 6.8 basis points over the last six years, to 5.3% at the end of 2014, mainly due to the higher capital requirements demanded as a result of the clean-up process. But the current low yields, which will never return to their pre-crisis levels, are due not only to the near-zero interest rates, which are slashing margins, or to the scarce flow of credit. The real estate hangover from the long financial restructuring process is also weighing down heavily on the ROE.

According to AFI’s calculations, the sector has accumulated non-performing assets amounting to €238,000 million – including doubtful loans and foreclosed assets – which are generating zero yields and are consuming capital and provisions. In short, they could be reducing the sector’s annual profitability by up to 5.4 percentage points.

AFI says that some of these assets are actually generating negative returns, due to the management and maintenance costs associated with them. And the company calculates that if they were sold at their net book values – even ignoring the fact that some assets may be accounted for at higher than market value – and the liquidity obtained was reinvested in loans to households and companies, then “the sector could achieve an average annual return of 3% and moreover, it would save the provisions associated with those assets, which we estimate represent 10% of their net book value”. AFI added that this saving would result in around €13,000 million, a result that would finally release the burden of these assets, which still represent 8.8% of the sector’s balance sheet.

Modest expectations

The firm emphasises that “in order to improve returns, we need to accelerate the digestion of these unproductive assets”. However, its estimation of the improvement in Spanish banks’ ROE in the coming years does not exceed 6% or 7%.

AFI also points out that the decrease in the ROE in recent years has not been greater mainly thanks to the ECB, whose policy has allowed financing costs to be lowered and high capital gains to be generated on fixed income portfolios. Even so, it warns that the carry trade profits on these portfolios are not going to be repeated and it adds that unrealised gains on fixed income portfolios have decreased by more than 50% in 2015, due to the sales that have already been made and the valuation at market prices. “Therefore, the sector now needs to look for recurrent sources of profitability”.

Original story: Cinco Días (by Nuría Salobral)

Translation: Carmel Drake

Investment Opportunities in Real Estate

25 May 2015 – Expansión

The real estate sector is becoming more attractive as an investment. It’s time to buy, especially in the exclusive neighborhoods of large cities and in some areas situated along the coast. Renting is a profitable option as well.

Real estate investment is gaining luster. More and more experts say the market has bottomed out and now is the time to start buying.

Apartment prices, which fell by 50% on average since the boom of the real estate sector, are experiencing a clear stabilization process that shows some signs of recovery. Tinsa, the appraisal company, highlights Barcelona, ​​Palma de Mallorca, Malaga and Burgos as the cities that experienced year-on-year price increases between 0.1% and 5.4%, over the first quarter. On average, prices have picked up by 3.3% in the first quarter, according to the appraisal company, reflecting more optimistic data.

Keys to Buying Properties

Price

Housing prices have fallen by almost 50% on average since the housing boom. They have bottomed out and their seven-years decline came to an end in 2014.

Location

Property location is indeed important, as the most sought-after properties are in the center of big cities and certain areas along the coast.

Financing
Mortgage lending has been revived, having increased by 29.2% in February and expected to remain on an upward trend throughout the year.

But beware, experts warn that although there are opportunities to invest in, not all are worthwhile, as there are still homes being sold at above market price. However, in popular areas, waiting more to buy property may be a mistake, as apartments will become increasingly more expensive and receive more offers by interested buyers.

Location is key. The most profitable places to invest in are the best areas of large cities, especially Madrid and Barcelona, as the most exclusive coastal areas, like Costa del Sol. For example, the annual gross return on a 100-square-meter apartment in a prime location in Madrid is around 5.2%.

Banks are selling  over 150,000 properties through their websites. Currently, discounts are less aggressive than during the crisis and there are many more vacation homes available. The steepest discounts are to be found outside ‘prime’ locations, but are the most difficult to turn profitable.

Profitability

Currently, one of the most recommended strategies is buying to rent out. For the president of the Foundation for Real Estate Studies, Julio Gil, “today the purchase of housing for rent is one of the best alternatives for small investors, given the risk-return trade-off.”

One can get an average return of 4.7%. In the case of commercial space, one can obtain a return of around 7%; office space – 6.4%; and parking space – 4.6%, according to a report by Idealista.

These returns are well above the 1.6% offered by the Spanish Treasury on 10-year bonds. Meanwhile, short-term government securities (12-month) are below 0.5%, on average, according to the Bank of Spain.

One aspect that reflects the revival in the real estate market is mortgage lending. It rose 1.6% in 2014 and reached 203,000 mortgage loans, coming out of its seven years of decline. In February, the improvement has been drastic, with a rise of 29.2%. However, the figures are still far from an equilibrium point, which, according to the Valuation Society, stands at around 450,000 per year.

Financial institutions are optimistic and say new credit will rise this year, as do analysts from Moody’s. They believe the increase in mortgage lending will drive demand in the real estate sector, which in turn could help increase property prices.

Financial institutions are aiming to attract customers and gain their loyalty in this recovery phase. Most banking deals are made with a variable rate. The best deals have a fixed differential added over the Euribor rate – between 1% and 1.75%. In addition to the differential, it is important to also note that in some cases there is an opening and cancellation fee, while in others not. Moreover, each entity usually requires a minimum monthly income of between 500 and 5,000 euros. In addition, in almost all cases, hiring other products such as insurance, pension plan or a credit card is required.

Interest rates from 2.4% to 5.5% in fixed-rate mortgages

How to Reduce Risks When Renting a Home

Realtors, housing rental companies, insurance companies and public institutions offer customized products for homeowners who want to make their contracts ironclad before renting out their property. If you are seeking security and to limit risks as much as possible, you can choose the option that best suits your needs.

For instance, the “Plan Alquila” (Rent Out Plan) in some regions, such as Madrid, manages and acts as an intermediary between homeowners and tenants. The service requires a one-time payment of EUR 190.43 (VAT included), regardless of the years they have been renting. It includes free insurance for the first year, covering all possible non-payments. From the second year onward, owners must purchase insurance on their own if interested. Real estate companies often offer a special service which, among other things, includes the verifying the solvency of tenants. This prevents renting out to defaulting professionals.

They also tend to apply a client filter that reduces the risk in renting out. In some cases, they work with companies specializing in offering insurance services tailored to customer needs. The cost to the owner is usually a percentage ranging between 3% and 6.5% (depending on what is included) on the lease income. You can also purchase insurance directly from insurers. For an average rent of a thousand euros per month, the annual cost would be between 466 (Caser) and 478 euros (Mapfre), according to the simulator of the specialized company, Arrenta.

At this annual price, the insurance policy covers the collection of unpaid rents and even on-time payment in case of tenants  defaulting. It also covers damage by vandalism of up to 3,000 euros, in most cases with an exemption of at least 300 euros. Some insurance services take into account urgent home repairs. Insurance packages are tailor-made and the final price depends on particular characteristics and price at which the property is rented.

Original story: Expansión

Translation: James Leahu

Now Is The Time To Invest In Housing

11 May 2015 – Expansión

The real estate sector is taking off / The real estate sector is becoming more attractive for investment purposes. Now is the time to buy, above all in the exclusive neighbourhoods of the large cities and in certain areas along the coast. Renting generates good returns.

Real estate investment is gaining lustre. Increasingly, experts are saying that the market has bottomed out and now is the time to buy.

House prices, which fell by 50% on average from (the heights of) the property boom, are experiencing a clear process of stabilisation and are now showing signs of gains in some places. The valuation company Tinsa highlights that Barcelona, Palma de Mallorca, Málaga and Burgos are the cities that experienced the highest inter-annual price increases during the first quarter, of between 0.1% and 5.4%. On average, prices rose by 3.3% during the first quarter, according to Sociedad de Tasación, reflecting even more optimistic data.

But beware, the experts warn that although investment opportunities exist, not all investments are good – many homes are still valued above market price. Nevertheless, in the most sought after areas, waiting to buy could be a mistake, since homes will be more expensive and there will be more people interested in making bids for them.

Location is key. The most profitable areas to invest in are the best areas of the large cities, especially Madrid and Barcelona, as well as the most established coastal enclaves, such as the Costa del Sol. For example, the gross annual return on a 100m2 home in a prime area of Madrid is around 5.2%.

The banks have more than 150,000 properties to sell through their websites. The discounts (they are offering) are less aggressive than during the peak of the crisis and there is an extensive supply of holiday homes. The most pronounced reductions are located outside of the premium areas, but homes in those regions are more difficult to monetise.

Rental returns

One of the most recommended strategies at the moment is ‘buy to let’. According to the President of the Foundation for Real Estate Studies, Julio Gil, “buy to let is currently one of the best alternatives for small investors in terms of return and risk”. You can obtain an average return of 4.7%. In the case of retail premises, the return that you can obtain increases to 7%; for offices, it amounts to 6.4%; and for parking spaces, it averages 4.6%, according to a report from Idealista.

These returns are significantly higher than the 1.6% offered by a 10-year Spanish treasury bond. Meanwhile, according to the Bank of Spain, average returns on 12-month deposits are below 0.5%.

One of the elements that reflects the reactivation of the real estate market is mortgage lending. It increased by 1.6% in 2014 to reach 203,000 loans, whereby turning the tables on seven years of decline. The improvement was even more dramatic in February, with an increase of 29.2%. Nevertheless, the figure still falls well below the equilibrium point, which is 450,000 (mortgages) per year, according to Sociedad de Tasación.

The financial institutions are optimistic and say that new credit will increase this year. Analysts at Moody’s ratings agency agree. They consider that the increase in mortgage lending will improve demand in the real estate sector, which in turn may help to increase property prices.

The financial institutions have already launched (campaigns) to secure clients and obtain customer loyalty during this period of recovery. Most of the offers from the banks are variable rate products (mortgages). The best deals have spreads of between 1% and 1.75%. However, it is important not to focus on the differential alone, since in some cases opening and cancelation fees apply, whereas in other cases they do not. Moreover, each entity usually requires a minimum income, which varies from one to another (from between €500 to €5,000 per month). Furthermore, in almost all cases, the banks require borrowers to purchase other products such as insurance and pension plans or (to commit to a minimum) credit card spend. Meanwhile, interest rates on fixed rate mortgages vary from between 2.4% to 5.5%.

Original story: Expansión (by C. Rosique)

Translation: Carmel Drake

Hilton To Double Its Presence In Spain In 3 Years

14 April 2015 – Expansión

Growth / The US hotel giant, which is the second largest chain in the world, operates eleven hotels in Spain and is now backing its own growth in Madrid, Barcelona and Sevilla.

Hilton is redoubling its commitment to Spain. The US hotel giant, which is the second largest chain in the world by size (with 4,115 properties and 678,630 rooms at the end of 2013, according to the ranking published by Hotels magazine) manages nine hotels in Spain (66% through franchise agreements).

In addition, Hilton owns two other hotels, which are due to be incorporated into its network imminently, including the Reserva del Higuerón complex (in Málaga). Hilton will take over the reins there this summer and will thereby return to the Costa del Sol after (an absence of) more than 40 years.

“Our model is based on management; investment is undertaken by a partner, and it has been difficult to finance projects in Spain in recent years, but now the market is starting to open up and we have always been very interested in it”, says Simon Vincent, President of Hilton in EMEA (Europe, Middle East and Africa) and a member of the chain’s Board of Directors.

“The market in Spain is very fragmented, but we believe that opportunities exist for refurbish existing hotels and incorporating them into our network; furthermore prices are beginning to recover”, he adds.

In terms of the numbers, Vincent’s objectives are clear: “Doubling our size in Spain in two or three years would not be unreasonable, since that is what we have done in Turkey”. In Europe alone, Hilton operates 353 establishments and will incorporate a further 447 hotels (into its network) over the next three years. Barcelona and Sevilla are both on its priority list, but its primary focus in Spain will be on Madrid. “We were the first international brand (in Madrid), when we opened the Madrid Castellana Hilton in 1953 (today the Intercontinental) and the capital city is a high priority for the group and all of its brands”, he says.

At this stage, a priori, Hilton has ruled out forming an alliance with a local partner to accelerate its growth, like Marriott did with AC Hoteles in 2010.

Market consolidation

Vincent is very familiar with the travel sector; he has two decades of experience working for groups such as Opodo – today part of the eDreams Odigeo group – and Thomas Cook. He considers that if Spain lacks a large hotel group of its own, then “that is because the market is regional with strong (local) brands, which is precisely one of its strengths”. Nevertheless, “over time, there will be consolidation in the industry and the tour operators will want to participate and control the experience they offer their customers”.

In terms of the emergence of Socimis (Sociedades Anónimas Cotizadas de Inversión Inmobiliaria or Listed Real Estate Investment Companies), which are similar to REITs in the USA, the executive belives that “they may help to professionalise the sector, because that is how the funds that invest in hotels work”.

In his opinion, “the key (to success) in the hotel sector is size at the global level. For Hilton, the most important objective is not to have a presence in as many countries as possible, but rather to bring the greatest number of customers as possible to those countries through our (its own) system”. This is demonstrated by its loyalty program, which has more than 40 million users.

With 12 brands, Vincent argues that Hilton’s success is “based on our ability to convert revenues into profitability and growth, because our brands are in very high demand”. Thus, 19% of the hotels that the chain will open around the world over the next few years will bear one of the Hilton’s own brands. Nevertheless, the door is open to new brands as well. “We think that there is still space (in the market)”.

Over the medium term, Hilton’s route map includes increasing its scale and enhancing its geographical diversification and the appeal of its brands, as well as promoting the digitalisation of its content, and expanding its distribution channels.

Hilton recorded revenues of (US)$10,502 million and profits of (US)$673 million in 2014 and predicts further growth again this year, both at the operational level, as well as in terms of its share price, which is currently trading at $30.38/share. According to Vincent, “we are very happy with our IPO, the foundations of our business are solid and the market acknowledges that”.

Original story: Expansión (by Yovanna Blanco)

Translation: Carmel Drake

Rothschild Launches Fund To Invest €400M In EU Hotel Sector

13 April 2015 – Expansión

The wealth management specialist creates a real estate (investment) vehicle.

Edmund de Rothschild, the group that specialises in the management of large fortunes, is breaking into the hotel sector. Aina is the name of the real estate fund that Rothschild has launched with the aim of purchasing four- and five-star hotels, (of between 90 and 150 rooms and between 150 and 450 rooms) in Europe.

Managed by Jaume Tapies, the former Chairman of the international network Relais & Chateaux, Aina is seeking to raise more than €400 million, and more than half of that amount will relate to debt. The roadmap predicts the signing of around 20 transactions with an average value of around €20 million to €25 million.

Aina has identified 29 cities of interest, due to their potential for tourism and business, where there is no excess supply or barriers to entry. The list includes two Spanish cities, Madrid and Barcelona, and two others may join them, namely Sevilla and Bilbao. “Spain is a priority country and now is a good time to invest there, as well as in Italy and Portugal, and in the major capital cities such as London, Paris and Amsterdam”, says Tapies.

Aina, whose investment plan will take two years to complete, has a process open with institutional investors to secure €200 million in funding, which is about to close. Edmund de Rothschild will be responsible for the administration and custody of the funds. The minimum investment required to participate is €1 million. The fund will have a life of seven years and the investment period will be three years. The gearing ratio will range between 40% and 50% of the total portfolio value, and on an exceptional basis, may reach up to 60% for a single asset.

Profitability

The strategy also centres on risk diversification. One single hotel may account for 25% of the investment, at most, and no single country may account for more than 40%. On the other side of the scale, profitability will also be high, at 15% p.a., based on the profitability of the rental income and the potential for the increase in the value of the assets.

The fund will focus on finding properties with discounts of between 25% and 40% of their market value. Subsequently, it will increase their values by between 25% and 30% by redesigning their operating models and will obtain a similar percentage from the sale of these properties to investors that have lower long-term profitability requirements.

So far, investors from Spain, South America, Australia and Asia have all expressed their interest in participating in Aina.

In addition to the management team led by Tapies, Aina has an advisory board, which includes, amongst others, Charles Petrucelli, former Chairman of the travel division of American Express; Antoine Corinthios, former Chairman of Four Seasons in EMEA; and Jean-Jacques Gauer, for Chairman of Leading Hotels of the World.

Gabriel García is also advising the fund; he owns the Hotel Orfila in Madrid and is the Chairman of Relais & Chateaux in Spain.

Original story: Expansión (by Yovanna Blanco)

Translation: Carmel Drake

Celio Plans To Open 10 New Stores In Spain In 2015

20 February 2015 – Modaes

The French menswear company Celio is looking for new opportunities in the Spanish market with a clear message from the group’s head office: generate profitability. The company, which closed 2014 with sixty stores in Spain, has set an overall goal of generating profits in all of the countries in which it has a presence. In the context of the chain’s development in Spain, Celio will open ten new stores this year, mainly using the franchise formula; it is also looking for new opportunities in Madrid and Barcelona, where it wants to open two flagship stores before the end of 2015.

Celio was created in France in 1982 by the siblings Marc and Lauren Grossmen; the pair also own the womenswear chain Jennyfer. The company, which currently has a distribution network of more than 1,200 stores across 65 countries, opened its first outlets in Spain in 1985, although it was not until the year 2000 when the company created a subsidiary in the country, led by Abel Núñez, from Adolfo Domínguez.

The Spanish branch of Celio, which has a distribution network comprising 60 stores in Spain, closed 2014 (on 31 January 2015) with sales of €42.7 million, an increase of 4.2% on the previous year.

“The message from head office is that the mantra for the global business is: generate profitability in all of its stores”, explains Antonio Pirruccio, Head of Expansion at Celio in Spain. “To achieve this, we have hired a new Head of Stores for the Spanish subsidiary, who will be in charge of budgets, analysis and sales forecasts by product family for Celio’s stores in Spain”.

Celio, which recently appointed Guillaume Motte, from Jennyfer, as the new Chairman of the group, says that Spain is its third largest market in terms of turnover. “This year we have increased our contribution to total revenues, so we can see that the chain is working well in this market” adds Pirruccio.

Last year, the company launched a new strategy for the Spanish market, focused on the opening of flagship stores on the country’s main (high) streets. The chain opened a store on Gran Vía in Bilbao last June, in premises that previously housed the womenswear chain Blanco and has a retail surface area of 300 square metres.

Celio has also launched a process to search for premises to open flagship stores on Gran Vía, in Madrid, on Paseo de Gracia or in Portal de l’Angel in Barcelona, and in the south of Spain, where Celio is considering opening stores in Malaga and Sevilla.

“Another goal at the group level is the reorganisation of Celio’s portfolio of stores in all of its countries (of operation), which is why we are currently renegotiating rents and relocating shops that are not profitable”, explains Pirruccio. Celio plans to open ten stores in Spain, of which at least eight will be franchises.

Original story: Modaes

Translation: Carmel Drake