The Spanish real estate market was hit in 2007 by a global financial and residential sector crisis. This crisis affected both the investment and the occupier market for several years. Real estate investments dropped by 75% from maximum levels in 2006 at the same time that lettings and rents fell across all sectors.
The Commercial Real Estate market (“CRE”) in Spain was especially impacted by the housing bubble that burst at that time, being Spain’s economy significantly biased towards the construction sector. This fact contributed to unprecedented growth in unemployment, reaching its peak in 2013. Investment in Commercial Real Estate declined sharply given the poor fundamentals (vacancy, rental income and absorption rates), the high country risk premium and the lack of financing from key Spanish banks. As a result, capital values in Commercial Real Estate contracted significantly.
Compared to other European markets where the capital values trend was mixed from 2007 to 2012, at the beginning of 2013 Spain presented highly attractive CRE pricing. As such, since 2013 opportunistic and value-added investors have been undertaking a significant number of transactions executed below replacement cost levels. This phenomenon triggered the return of real estate investors’ confidence in Spain. The sector has also become more professional, with an increase of new players in the market. The occupier market shows signs of recovery, the residential market is stabilising and housing prices are growing significantly in areas such as Madrid, Barcelona or the coast.
Office space has also clearly benefited from the Spanish growing economy. There is an increasing demand for this space, especially in the core and central business areas of Barcelona and Madrid. A sign of growing confidence amongst occupiers is the fact that many tenants look for opportunities to upgrade their space to higher quality as well as to enlarge their floor spaces. Companies tend to search space close to the city centre but its availability is low and, as a consequence, rents are going up. This lack of stock is expected to favour well-located secondary markets.
The crisis has also left a large number of old buildings in need of an exhaustive renovation and refurbishment in the CBD submarkets. This represents a very attractive opportunity for value-added real estate investors.
Concerning the Spanish retail market, it is a highly specialised asset class which has benefited from a progressive recovery in domestic consumer confidence since the second half of 2013. Consequently, interest in acquiring commercial property has increased significantly. The current pricing of retail property is attractive to real estate investors, as prices are higher in other European markets and still well below the 2003-2006 average. As a result, demand for retail investment property is encouraging more secondary and distressed assets on to the market. CapEx is required for specific assets to comply with new regulatory requirements and to reposition them to compete with the new innovative retail schemes. This outlook presents an opportunity for value-added investors who can increase occupancy leveraging on their asset management capabilities.
Regarding the logistics market, it is a high yield segment – although it compressed significantly in the last years in the main submarkets – with a limited inventory of quality assets with a limited investment volume driven mainly by highly specialised real estate investors. Investor confidence in the sector has improved and Spain is attracting equity players interested in purchasing individual properties or portfolios. Although there is a high level of vacancy in all major logistics nodes that has impacted on a substantial fall of rental prices, demand for space is growing thanks to the recovery of the economic sentiment, which is leading to an increase in consumption and warehousing needs. End-users are progressively relocating to new properties, leaving aside the obsolete stock that is anticipated to be refurbished over the long term. Capital values for secondary locations are slightly above replacement cost. This is attracting opportunistic and value-added institutional investors with asset management capabilities within the logistics industry.
The Spanish real estate market appears to have emerged stronger than ever after a difficult setback and the Spanish economy has become one of the most promising economies in Europe.
Meridia Capital strongly believes that the Spanish real estate market currently offers attractive investment opportunities given that both rental income and capital values fell severely during the crisis and that there is still a long way to recovery. Furthermore, the boost in demand for office space in Spanish secondary markets marks a tendency that will be key for future investments.