Crisis Makes Spain Change Perception of Tenancy

4/12/2014 – Cinco Dias

In its ‘Rental Market X-Ray’ report, intermediary firm Alquiler Seguro assures that ‘presently up to 40 per cent of our clients are owners and tenants at the same time’.

This is one of the reasons why lease has been gaining popularity over the last, tough years of recession. ‘While in 2006 and 2007 only households unable to pay a mortgage or foreign newcomers rented flats in Spain, today’s tenant’s profile has changed as renting a home became the first option for, to give an example, young people aged between 25 and 30’, CEO of a leading real estate firms said. With a new office in the Basque Country, his company has just grew to 24 establishments in Spain.

Experts say the main lessons the crisis gave to the property market is to forget that ‘homes never depreciate and renting equals to throwing money down the drain’. ‘Both specialists and citizens realize that leasing a dwelling does not restrict labor mobility but so does a mortgage’, Alquiler Seguro’s CEO Antonio Carroza remarked.

Lease-supporters give as an argument high returns obtained from such an activity. In best cases, the owner receives a 4 to 5 per cent ROI, while just a year and a half ago the figures oscillated between 2 and 3 per cent.

On the other side, and according to the aforementioned report, within the 12 Spanish provinces where Alquiler Seguro has presence, empty homes total at 1.4 million. Barcelona leads in this ranking (283.155), followed by Madrid (263.279) and Valencia (214.002).

However, sources from the company pointed out that ‘not all of these properties are suitable for rent due to being second residences or not meeting basic letting requirements’.

In regard to arrears in urban renting, the study states general trend goes up encouraged by the crisis. Again, in Barcelona it hit highest with a 22.76 per cent upsurge, then it shot 21.45 per cent up in Malaga, and in Valencia by 18.54%.

Further on, the research outcome shows that in Alava, Biscay, Gipuzkoa, Pamplona, Valencia, Alicante, Malaga, Valladolid and Zaragoza perform best as ‘balanced’ markets with almost non-existent gap between demand and supply rates. The gap has been measured by an indicator designed by Alquiler Seguro itself and it compares local supply of homes for rent and searches of potential tenants within a determined area.

Thus, Sevilla is the only province where the indice points to the floor (0.57), meaning a tired market with oversupply and little demand what causes prices to dip. On the other end one may find Madrid and Barcelona (over 1.50), where just the opposite happens and therefore rental prices steer upwards.

 

Original story: Cinco Días (by Raquel Diaz Guijarro)

Translation: AURA REE

Morgan Stanley: Merlin Properties May Reap Millions For Its Executives

28/10/2014 – El Diario

Generosity of the renumeration scheme adapted by the executives of Merlin Properties, a Socimi (Spanish REIT vehicle) listed on the stock exchange on 30th June, has drawn attention of investment bank Morgan Stanley. The entity reckons the incentive system may have ‘a tremendous impact on the final profitability of its shareholders’.

In the latest report published this 13th October, the U.S. bank calculates the renumeration the nine directors of the firm could rake in. According to the estimations, the amount may rise to €117 million over the next three years: €43 million in 2015 and €37 million both in 2016 and 2017. A long shot across the board, with figures not seen even during the bonanza times in the real estate sector.

The beneficiaries who will receive an average of €13 million per capita will be the president and the CEO of Merlin, Ismael Clemente (who by the way said back December that absolutely nobody paid taxes in Spain, pictured), Finance and Transaction director Miguel Ollero, head of Investment David Brush and other six key executives.

Further on, the report states it is fairly benevolent of the company to strive at a price of 11.6 euros a share (22% higher than it is today). Morgan Stanley also points out that although the compensation scheme involving stock options ‘initially encourages investors’, in mid-term the ‘management could take a considerable part of the final return’ in the detriment of the stakeholders.

The bank highlights the directors’ compensation is ‘directly linked to the total return of a shareholder’ and the incentive is executed within a five-year term.

In any way, the Socimi’s Net Asset Value (NAV) is expected to shoot up in the upcoming years as a result of  the acquisitions carried out by the firm recently and those still awaiting closing.

Not in vain, Morgan Stanley takes into account a highly optimistic scenario showing a 20% annual return.

Once Merlin Properties gives back 8% to its investors, the board of directors may start receiving their bonuses, equalling to up to 60% of their fixed monthly income.

The U.S. bank foresees that at some point the stakeholders might want to renegotiate the bonus scheme and they might be successful in that venture.

‘Our experience shows that the behavior of the managers tends to be shaped by the incentives and therefore we notice emerging risk of Merlin increasing its asset base more than it would do if the bonus scheme was different’, says Morgan Stanley.

Deeper in the study, the entity assures that such a system brought to executives of Land Securities and British Land €520 million (£410 million) in only two years, while Unibail-Rodamco directors earned €429 million, to name few extreme cases. These companies are much bigger than Merlin which currently ranks the third in Spain in terms of stock value, just behind Testa and Colonial.

 

Original article: El Diario (by Antonio M. Vélez)

Translation: AURA REE

Today’s House Rental Posts 5% Investment Return

24/09/2014 – Cinco Dias

Disgraced since the beginning of the financial crisis, the real estate sector in Spain has been recovering trust of investors over the last year. The property bubble burst, though, opened a door for a sustainable investment model: buy-to-let which turned out to be affordable and profitable for a private investor disposing of necessary funds.

Alvaro Alonso, director of real estate advisory firm Irea assures that, currently, this is the most interesting option for this kind of investor. Thanks to relatively low prices, the return on investment in residential assets has increased from 2% – 3% few years ago to 5%. Also, rentals make a good alternative for State bonds or equities, he says.

Now is a great time to invest in property. There are plenty of small and medium conservative investors who had deposits, fixed-income or funds and now they wish to turn to the real estate market, confirms Fernando Encinar, research director at Idealista. If you buy a home for €100.000 and rent it for €500 per month, it gives you a gross return of 6% and 5% net. It is not a high return but perfect for a cautious investor. The return doubles the State bonds, he illustrates.

The market abounds in the product, a quality one, and there is a margin to negotiate prices, above all when you pay in cash, explains Mr. Encinar. In fact, 83% of all property purchases in the first half of the year were paid in cash. The datum comes from a recent report by Tecnocasa which furthermore states that 28% of these acquisitions were done with view to renting the dwellings. This type of buyers usually opt for a 60 square meter home priced at €95.000 on average.

However, cheaper and also pretty lucrative seems to be buying a garage. As per the data compiled by Idealista, return from this investment hits 5.8% in provinces like Almeria but it falls to 4% in Barcelona and to 3% in Madrid.

Depending on size and location, retails may bring up to 11.2% profits in Cordoba and around 7% in large cities. Some of the commercial properties facing the street have not decreased the prices, remarks Miguel Fuster, investment director at CB Richard Ellis. Instead, he points at the office market as the most juicy in terms of ROI.

Analysts agree that due to decline in population, high unemployment rate, lack of financing and foreclosure oversupply, rental is the most secure option nowadays, let alone the demand for lettable property has doubled during the recession.

As the prices have gone down and they are reaching the rock bottom level, buying a property positions an investor to benefit from rise in prices. There will be no bump, but the return will be improving gradually, portends Ernesto Tarazona, land and residential executive at Knight Frank.

HOMES

Purchase of a dwelling to intend it for rent brings a 6.4% return in Lleida, 5.7% in Gran Canaria and around 5% in Huelva or Alicante. In Madrid, the ROI posts 4.3%, while in Barcelona 4.1%, informs Idealista.

GARAGES

Much cheaper, the garages give back 5.8% in Almería and 5.5% in Pamplona, Santa Cruz de Tenerife or Tarragona. In Madrid 2.9% and 4% in Barcelona.

RETAILS

Today, this is the most lucrative investment with 11.8% returns in Malaga and 7% in big Spanish cities.

Irea analysts warn that as a result of a tremendous surplus of housing, purchasing at low prices gives no guarantee for safe renting. Certainly, Madrid and Barcelona are always secure, as well as university cities like Granada, Santiago or Salamanca.

Renting requires experience, effort and skills in terms management and knowledge about the area, tenant privileges and agreement warrants, adds CBRE.

Another key choice at the moment of acquisition is the vendor. The sector strongly recommeds the offer of banks but also tells the quality of the product is not the first class.

When it comes to the property sold by developers, for the new construction homes one often has to wait for two to three years before being able to rent them.

Finally, an investor can buy from private sellers who might be additionally feeling pressure to sell before the end of the year, as from 2015 on the Government is going to raise the Personal Income Tax for home vendors, especially in case of properties acquired before 1994. The tax burden involved in a house sale can go up from 200.000 to 30.000 euros more. Thus, to sell still this year, slashing prices is inevitable.

 

Original article: Cinco Días (by Juande Portillo)

Translation: AURA REE