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Is Spanish property the last pocket of value in Europe?

by: Dan Jones
  • 22/07/2014
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With banks offloading assets and the Spanish stock market on the up over the past 18 months, some see now as a good time to invest in one of the biggest losers of the eurozone crisis.

At the height of the boom, Spanish real estate and construction accounted for some 18% of Spanish GDP, but the sector has fallen a long way since: a 2007 market cap of over €30bn has shrunk to just a tenth of that level post-crisis.

This year, however, there have been some solid signs of interest finally returning, not least the five Spanish real estate investment trust (REIT) listings seen since January.

The largest, the Merlin Properties REIT raised $1.7bn last month. But demand from even the largest investors is not yet fully entrenched – the company had originally planned to raise $2bn.

Nonetheless, high profile investors are starting to get involved: George Soros and John Paulson were among those to have backed some of the 2014 offerings, while some retail fund managers have been active for longer periods.

SW Mitchell founder Stuart Mitchell, manager of the SWMC European fund, made his first investments with exposure to Spanish property in 2012, but still sees further upside for the likes of construction firm Sacyr Vallehermoso.

“This company has a development property business, but analysts ignored the quality of its book, tarring it with some of the disastrous developments seen on the Spanish costas,” Mitchell said.

“It was also clear analysts had written off Sacyr’s landbank […]while we have made 100%-150% since initiating the position, we still see 50-100% of further upside to reflect a return to normality.”

Mitchell also has positions in Spanish banks such as Santander and Banco Popular as part of his play on the Spanish recovery.

For others, the country’s banks represent a different kind of opportunity: one arising from their move to finally divest property assets from their balance sheets.

“We are at an interesting juncture as real estate in Spain has reached a trough since the crisis; rent prices are historically low and there is an abundance of low-cost property on sale,” said Dean Tenerelli, European portfolio manager at T. Rowe Price.

“Banks are now shifting these assets from their balance sheets at bargain prices to meet tougher capital reserve requirements. Consequently, REITs are being established to capitalise on this, ahead of Spain’s eventual property upswing.”

Though companies like Sacyr have seen share prices soar amid the recovery in European markets more generally, the recovery in the sector itself remains at the early stages at best: prices in key regions such as Madrid are still falling (down 1.9% in the first quarter of 2014).

Perhaps with that in mind, Tenerelli acknowledges the recovery is in the very early stages. He is positive on the sector, but – perhaps implies investors should not get carried away.

“We recently took a position in Colonial, a leading Spanish property group, which has a strong office rental presence in the prime areas of Madrid, Barcelona and Paris,” he said.

“At this early stage, it is important to identify high-quality companies that can sustainably grow and deliver high return on capital as Spain’s rental market matures.”

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