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«The macroeconomic risks which weighed down the market up until 2013 were finally be left behind in 2015»
Just one year ago, in this same report, I asked myself when Real Estate fundamentals would finally recover. We were talking about two extremes: from refusing take positions in Spain until mid-2013, to the Real Estate investment record reached in 2014.
We were therefore able to confirm that the Real Estate sector would experience real growth in fundamental variables over the following two years.
Without a doubt, the macroeconomic risks which weighed down the market up until 2013 were finally be left behind in 2015. The gap between the real and financial economy, which was very wide in 2014, narrowed significantly in 2015. With GDP growing at around 3.2%, double the euro zone average, the volume of Real Estate investment in Spain once again exceeded the already record-high figures of 2014.
At the beginning of 2015 we also listed eight reasons why we thought real growth was going to take place in the Spanish Real Estate sector. It is now time to look back and see if real recovery is indeed under way.
Spain offers the right conditions and market volumes to receive investors which up until 2013 had sought refuge in the UK, Germany or France.
In this case, our expectation was met in full. The volume of investment reached in 2015 exceeds even the best figures recorded in 2014, since at the end of the third quarter, with €10.8 billion invested, this volume has already exceeded the €10.2 billion invested in all of 2014. Around 37% of this figure came from foreign investors. If we also include investments made by SOCIMIS, which are considered to be Spanish investors even though the majority of their capital comes from abroad, the investment volume reaches 76%. The strong growth of the Spanish economy in 2015 and the positive forecasts for the coming years leads us to believe that interest and activity in the sector will continue to be high in 2016.
The Spanish Real Estate market may follow in Ireland’s footsteps with regard to reactivating occupier demand for properties, real growth in rents and the start of new developments.
Encouraged by the positive trends in their economies, both Ireland and Spain have indeed captured the attention of investors in the last two years. In the Real Estate sector, some areas such as that of offices have grown even faster than in Ireland. However, prime office rents in Madrid and Barcelona are on the right track, with increases of between 7%-10%, respectively, over the last year. Office contracting, the key to the recovery of rents, improved significantly in 2015 (up 40% in Madrid and up 90% in Barcelona at the end of the third quarter) and is expected to continue increasing in 2016. High Street rents also rose between 5%-10% in prime Real Estate areas in Madrid and Barcelona, while in the logistics market the upturn has already taken place in the best areas of Catalonia, and the same is about to happen Madrid. The shortage of high-quality supply in all sectors, after almost a decade with barely any speculative development, and growing demand is an ideal breeding ground for once again starting new developments in 2016.
«The gap between the real and financial economy, which was very wide in 2014, narrowed significantly in 2015»
Madrid and Barcelona are considered to have the highest Real Estate growth potential among European cities and rental growth in both cities could range between 25%-30% until 2018.
Rents have in fact begun to take off in 2015 but there is still a wide margin for growth in most sectors. For example, according to our projections, Madrid and Barcelona are two of the European cities that will have the highest growth in rents, between 20%-25%, over the next three years.
Over the next few years there will be a greater entry of core and core-plus capital which will complement the spectrum of opportunistic investors.
Various parameters indicate that this promise was fulfilled last year. For example, at the end of September, 46% of the total volume of Real Estate investment made in 2015 was carried out through SOCIMIS, compared to 26% in the previous year. It should not be forgotten that these companies have funds available to create value and make investments in assets that need to be repositioned. We have also seen an increase in transactions led by European insurance companies and institutional funds compared to previous years, investing 30% of the total up until the third quarter of 2015 compared to 19% in 2014.
The arrival of capital was not only based on the short-term opportunity offered by the markets as a result of the shift in cycle or yield compression (return).
Yields were quickly corrected in 2014, between 100 and 150 basis points compared to 2013, and therefore the en masse arrival of capital in 2015 did not respond so much to the opportunity to generate profit through yield compression as to the opportunity to do so through rent increases as a result of the shift in cycle. At the end of 2015, yields were very close to record-low levels and, therefore, since there is still significant rental growth potential, the Spanish market is expected to continue to be very attractive to international investors in 2016.
Out-dated stock available represents an opportunity for investors that intend to use CAPEX to provide added value to their existing assets and to new developments that allow the product to be adjusted to demand.
Owners are increasingly able to see the clear benefit of investing in the renovation of their buildings. In this regard, in 2015 we saw not only how renovated buildings were leased earlier or even pre-leased, but also that the highest rents were agreed upon precisely for renovated and/or higher-quality buildings. In view of this, a significant increase was observed in the number of office buildings under renovation, especially in Madrid. In other sectors, from logistics to the residential sector, there is also a shortage of high-quality products in the most desirable areas and, therefore, we will continue to see assets being renovated to bring them into line with current legislation and a greater number of new developments
«Asset Management has the potential to update assets that have become out-dated»
Asset Management has the potential to update assets that have become out-dated
This trend, which we announced last year, will continue to be consolidated. The most innovative companies demand spaces that are in line with their corporate identity and that help them retain talent with new ways of working and healthier work environments in environmentally-friendly buildings. Owners are aware of this fact, as shown by the growing number of buildings that have obtained or aspire to obtain sustainability certificates. And in fact sustainable buildings are leased earlier, obtain higher rents and have longer contracts. With regard to offices, various trends are gaining strength, such as co-working, a solution for building owners that have difficulty finding tenants tied down to traditional contracts. With regard to retail, e-commerce is driving retailers towards “omnichannel retailing”. Shopping centre management will therefore have a parallel adaptation process. On one hand, management will have to adjust the commercial mix and configuration of the centre for e-commerce purposes (the trend indicates that retailers will have fewer but larger stores). The idea of “click and collect” will also change the patterns of inflow to the centre and may even have an impact on calculating rent and contractual clauses. On the other hand, the position itself of the centres will entail greater management since they will also have to communicate with the public through multiple channels. The availability of big data will offer the possibility of carrying out a much more in-depth analysis of customers’ behaviour, which should also be taken advantage of by Asset Management.
Increasing financing and access to debt markets.
In 2015 we saw greater availability of debt in order to finance commercial Real Estate. Given the fierce competition between a wide variety of lenders, borrowing conditions in the Spanish market are improving each quarter. Spanish banks have exceeded foreign lenders in terms of activity, as a result of specialising in smaller transactions. Accordingly, foreign lenders continue to dominate larger transactions. With a view to 2016, greater activity is expected from international insurance companies as well as CMBS transactions (commercial mortgage-backed securities), since this type of transaction has not yet been carried out in Spain, despite the fact that several investment bank lenders with their headquarters in London are actively seeking out transactions of this type.
«At the end of 2015, yields were very close to record-low levels and, therefore, since there is still significant rental growth potential, the Spanish market is expected to continue to be very attractive to international investors in 2016.»
In conclusion, it is safe to say that our forecasts for 2015 were on the right track. In 2017 we will therefore once again take a look back at the trends we identified to see if we were right, and we hope we are, not out of pride for having been right, but because this will mean that we have entered a period of normalisation, finally leaving behind the word “recovery”.
With GDP growing at around 3.2%, double the euro zone average, the volume of Real Estate investment in Spain once again exceeded the already record-high figures of 2014.
The shortage of high-quality supply in all sectors, after almost a decade with barely any speculative development, and growing demand is an ideal breeding ground for once again starting new developments in 2016.
ENTRY OF FOREIGN CAPITAL
At the end of 2015, yields were very close to record-low levels and, therefore, since there is still significant rental growth potential, the Spanish market is expected to continue to be very attractive to international investors in 2016.