Spanish property sector rebirth – funding is the key

After a lost decade in which many of the big firms went under, the Spanish housing market is back, and run very differently.

The economic crisis put an end to many heavily indebted Spanish real estate companies, owners of large portfolios of devalued land and, in some cases, with a history of unprofessionalism and lack of transparency. But at the same time, the crisis has also given birth to a new property sector which is more institutionalised, and which claims to have learned from past mistakes.

In this new industry one can find familiar names, such as Realia, Quabit, Amenabar, Pryconsa, Ferrocarril, or ACR, among others. During the crisis, some of them continued with their activities in the real estate market, others have just resumed it (after being restructured). But, there is no doubt that the market is now dominated by new firms. They are the developers of the “new generation”, or rather, they are real estate giants such as Neinor Homes, Vía Célere, Aelca, Aedas Homes or Kronos created to ride the new wave of residential business. Ahead of them there are important challenges such as facilitating access to housing for young people, cutting costs, the industrialisation of the sector, putting the client’s interest at the centre of their corporate policies to avoid past abuses, and improving the image of the sector by being intolerant of all forms of corruption.

At the helm of these giants are foreign investments funds that have opted for the Spanish residential market currently in full bullish cycle – the number of permits granted for new constructions closed in 2016 with a rise of 29%. They are investing billions of Euros in the purchase of large land portfolios (which continue to sell at low prices) located in strategic enclaves and benefiting from tight construction costs (at least for now).

The new generation developers are responsible for setting up the future industry benchmarks with the implementation of ambitious investment plans. Their goal, they say, is to build thousands of homes in the coming years, aiming to reach a cruising speed of between 3,000 and 4,000 houses per year within the next three years. This is only possible because these new industry players are strong companies, with solid balance sheets and with the capacity to manage high volumes of production. But, this figure is low if we take into account that different institutional organisations, such as the PACE and the CEOE, have indicated that Spain needs 150,000 new homes a year to have a healthy residential market.

Here lies the reason why the international investments funds are interested in doing business in this sector which, despite its contraction (the number of building permits has not yet reached even 10% of the 2007 level) continues to have a significant weight at 15% of the National GDP.

Foreign capital

Since 2013, attracted by the drop in house prices resulting from the burst of the property bubble, and encouraged by news of the recovery expectations of the Spanish economy, investment funds have been present in the Spanish real estate sector looking for opportunities. They are found mainly in the tertiary sector (offices and commercial assets). But with the increase in demand, they have encountered an increase in prices, making this sector less attractive and pushing them to explore new markets, such as residential, from which, they expect capital returns of around 15% yoy.

The entry of foreign funds, such as Värde Partners, Lone Star or Castlelake has been a breath of fresh air. With their decision to invest during the downward cycle, they have provided a strategic vision, identified unique opportunities and given, when nobody else was doing so, credibility to a sector that was and is attractive to invest in. International funds have been supplying liquidity either through the capitalisation of companies or through lending to specific projects (at a time when the banks were not lending).

Heading this trend is Metrovacesa Suelo y Promoción, the part of the old Metrovacesa that did not merge with Merlin Properties. They have recovered their position as market leaders thanks to the substantial portfolio of land owned by its shareholders – Banco Santander, BBVA and Popular. Last July, they jointly contributed to the company with a portfolio of six million square meters (1,108 million euros worth of land) where they plan to build around 40,000 new homes. Other market players, such as Neinor Homes and Aedas Homes were created last February by American funds, Castlelake and Lone Star respectively.

These giants have found the solution to the issue of where to find financing, the hot potato for the developers active in the old real estate sector. In the past decade, the bulk of all developers’ financing came from banks, supplemented with a small portion of their own capital. Nowadays, the bulk comes from the international investment funds via shareholders’ contributions.

Own resources

The new market players are buying land almost exclusively using their own financial means. They, although keen to obtain returns in their investments, are not so conditioned by market demands as those using third party funding. For the latter, breaching pre-agreed repayment deadlines can be very costly. In short, the current market favours the big operators and, with banks still shy to the idea of investing money in this market, surely this situation will remain that way in the near future.

But these new generation developers need the collaboration of some of some of the surviving players. “The companies that up to now have survived trading under their pre-crises name have done so because they have been able to adapt to the market changes and have managed to come out stronger,” says the president of CBRE Spain. In the current market there are “medium-sized companies, some associated with foreign funds, and small local developers that tend to be family owned but whom have been able to emerge from the crisis with a new capital injection” explains Paloma Puente, commercial director and business development of BBVA Real Estate Financing. Unlike, what happens in other European countries, the Spanish sector is still very fragmented. “Even aggregating all big operators, we do not even reach more than 10% of the market,” says David Martínez. Although, “is it converging more and more towards the standards of other European countries, where listed companies account for between 30% and 50% of the market”, comments the president of the APCE.

Their strong balance sheet is the other trump card from which the big developers are benefiting from as buyers are reassured that the construction project will be completed and that the homes will be delivered or any advance paid refunded. Furthermore, the todays’ developers insist that their company policies focus mainly in meeting their client’s needs so their products are designed using the latest advances. The efficient use of each square meter is a must and they pay attention to other issues such as acoustics or lighting, where the use of new technology is essential. The market players today also say they offer better customer service, pay more attention to the type of products which are in demand, to sustainability, digitalisation and make a point of consulting a range of experts which understand the market future trends.

Accessibility to new affordable housing is however still the most difficult challenge, especially for the millennials who are keen to become independent but for whom acquisition power is well below that required.

What will happen in the medium term when these funds manage to recover the investments made? “To the extent that the Spanish real estate market consolidates its recovery, investing interest will be reduced and [they will] even undo their portfolios in the Spanish real estate market,” believes Amaro, of ESADE.

Clara Wilson, LarquiaUK. Email cwilson@larquia.com