Discounts not yet succulent enough for many investors

Big investment funds are now looking seriously at Spain for the first time since the crisis began, but many are still unconvinced by the discounts on offer.

The attitude of international investors towards Spain has clearly improved in recent months, helped along by investments like Goldman Sachs’s €201m purchase of a rental portfolio in Madrid, and the €113.5m Bill Gates paid for 6pc of FCC, a Spanish construction company. When the big beasts start investing, it’s usually a good sign.

There is plenty of interest, according to industry insiders. “If in the past the question was how to get money out of Spain, now the topic of debate is how to invest here,” said Nuno Espíritu Santo Silva, founder and head of Finsolutia, a property and credit servicing company, recently quoted in the Spanish press. He said they now get enquiries from three to four investment funds a day, predominantly from the US.

But not everyone is impressed by the discounts on offer in Spain, Silva pointed out. “It’s still difficult to invest here, price is still the problem. Discounts of distressed assets need to be high, around 70pc,” he said.

This is a point I’ve also heard in conversations with professional investors looking at Spain. Given the severity of the real estate bust and economic crisis, rental yields around 5pc are simply not impressive enough for some investors.

There is also a problem with the quality of assets. “There is not much quality product for sale. The banks are selling their bad assets, only the Sareb is selling the good ones,” said Silva.

That means that investor expectations have to be managed carefully. “There are opportunities here, but we need to manage the expectations of investors looking for bargains and expecting to double their investment,” says another Finsolutia man, Gonzalo Jiménez. “There are not yet many committed investors, between eight and fifteen, but we are talking about a market that is just getting going, and in the next few years we will see lots of deals.”

The sooner prices fall enough to attract big foreign investors in a big way, the better. That will help get the assets out of the hands of Spanish banks, and into the hands of people who know what they are doing. Sales will follow, and we can all move on. It can’t happen soon enough.

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3 thoughts on “Discounts not yet succulent enough for many investors”

  1. Peter Forbes

    I wonder if the investment banks were asked to stump up 13% in purchase taxes / charges the way anyone else wanting to buy a place in Catalunya is. Taking a hit like that means that you have to take a very long term view on buying a place: prices are unlikely to rise by 13% for many years and as so many educated young people emigrate (i.e. those who would normally be getting on the bottom of the property ladder), will prices ever rise 13%? So if you just compare what you would spend in rent over a few years vs. purchase tax on a place in Barcelona – well for a few years renting is the cheap option. Most new places around here are so badly built that they also require large maintenance (comunidad) charges so renting is even more attractive. Add widespread job insecurity into the equation too – lose your current job and you may be a year looking for another in which time you may have lost your home, your investment and 13% tax payment. Even if you work / live abroad and just want to ‘invest’ in a holiday home….in which case look at the purchase and community charges on the property – it is way cheaper / more flexible / more varied to rent apartments on each visit. I think the only thing really on offer is offering residency to nationalities that who would not normally get it.

    The approach to reviving the property market here resembles someone trying to revive a gasping animal by grabbing it tightly around the throat and dragging it around telling everyone that it is getting better….and then when it becomes even more limp, squeezing even tighter (referring to the recent raise in property transfer tax).

    1. Will needham

      Hi Peter,

      “I wonder if the investment banks were asked to stump up 13% in purchase taxes / charges the way anyone else wanting to buy a place in Catalunya is.”

      Yes they are, ITP applies to the banks acquiring

      In fact the costs associated are even more expenisve for a bank to acquire a property via the courts than it is for a nomral purchase.

  2. Anthony Bird

    Furthermore, if you decide to rent the property out, licenses for short-term holiday lets are very hard to obtain, especially on older properties, and long-term lets are heavily taxed. The Inland Revenue deems that the owner of the property is receiving an annual income equal to 2% of its value and a 25% tax is applied on this amount.

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