With Spanish assets hard to find, overseas players are backing IPOs, writes Alex Catalano
Spain’s real estate market has gone from cold to smoking in a short 12 months. “Spain has definitely turned the corner; it’s getting to be crowded, with a lot of people in the market place,” says Aref Lahham, a founder of Orion Capital Partners, which was an early entrant into Spain.
International capital has flooded in: US hedge funds, opportunity players, sovereign wealth funds, pension funds and George Soros are there. Spanish banks are lending again and Europe’s largest ever REIT initial public offering is on the runway. Latest market entrant Merlin aims to
raise a hefty €1.5bn. Run by Deutsche Bank and RREEF veterans Ismael Clemente and David Brush, it is being spun off from Magic, one of Spain’s largest real estate managers.
Two other new real estate companies have made their stockmarket debuts this year and more are set for take-off. All are planning to capitalise on Spain’s real estate recovery, buying cannily from cash-strapped sellers and using their money and skills to improve, reposition or restructure assets.
“The Spanish market is thought to have touched bottom, or be nearly there, in the principal cities,” says Mikel Echavarren, CEO of financial adviser IREA. The economy has started to grow again. CBD offices in Madrid and Barcelona are 50% down on their 2007 peak values, but
yields are falling and prime Madrid rents have stabilised; house prices in the two cities have started to nudge upwards.
Hispania and Lar España, the companies that floated in March, feature local player-managers and heavyweight US capital: George Soros’s and John Paulson’s funds, PIMCO and Cohen & Steers all signed up to the equity. Hispania will be run by independent fund manager Azora, while
Grupo Lar, a private family real estate group, is behind Lar España.
“There’s been an influx of opportunity funds with seemingly unlimited money, but there’s a lack of real estate assets to buy,” says Echavarren. “Some funds are investing indirectly via these companies because they can’t find enough opportunities to invest directly. Everybody wants Madrid and Barcelona hotels and offices, and shopping centres, but almost nothing is for sale.”
Both Hispania and Lar España are cashbox IPOs with no assets in their flotations, so investors are backing the managements’ skill. Merlin, in contrast, brings 880 bank branches and five office buildings leased to Banco Bilbao Vizcaya Argentaria as its dowry. These are valued at €739.5m, with an entry yield of 5.61%.
Both Lar España and Merlin have chosen to be REITs. Spanish SOCIMIs, as they are called, involve the usual trade-off of big tax benefits in exchange for conforming to a corporate structure requiring them to focus on investment property, distribute the bulk of rent as dividends and limit their leverage. Hispania, on the other hand, isn’t a SOCIMI at the group level.
“We want to have full flexibility to buy minority positions and to buy debt,” says Cristina Garcia-Peri, managing director of business development at Hispania’s manager, Azora. “Debt is very important for us. We see a particularly attractive opportunity in Spain to invest in good assets through the debt. That differentiates our strategy and it will give us a competitive advantage in many situations.”
Lar España is Pereda family’s latest addition
Grupo Lar, the Spanish real estate company behind Lar España, is a family firm with a 40-year track record. The Pereda family controls 83% and Grupo Lar’s €1bn portfolio is mainly residential. However, it is also active in the commercial field, notably developing and managing
shopping malls and offices; its joint ventures included partners such as AXA, Grosvenor, Goldman Sachs and MetLife. The firm put an initial €10m of equity into Lar España and will manage it, with Miguel Pereda as CEO.
Priced at €10 a share, Lar España’s initial public offering raised €400m and it expects to offer shareholders 12% returns. It is targeting
mainly retail and offices, the latter in Madrid and Barcelona. Residential might make up to 20% of the portfolio, but first homes only.
So far the company has spent €39m on two shopping centres, Txingudi Parque Comercial in Irún, and Centro Comercial Las Huertas in Palencia, and is bidding on a third, El Boulevard in Vitoria-Gasteiz.
US heavyweight investors add muscle to Hispania
Hispania made its stockmarket debut in Madrid in March, backed by an A-team of US investors: George Soros, John Paulson et al. The €10-a-share initial public offering raised €550m. It could have booked several times more, says Cristina Garcia-Peri, managing director of business development at Hispania’s external manager, Azora.
“We wanted to raise the amount we felt comfortable we could invest in 12, or in the worst case 18, months. If things go as planned, we hope to raise additional equity.” Interestingly, Hispania chose not to list as a REIT, since it wants the flexibility to buy debt or minority stakes. “Being able to invest through debt is something other Spanish competitors cannot do,” says Garcia-Peri “We think that is the best way to access assets.“
Debt facilitated its debut purchase: the Guadalmina golf resort and hotel in Marbella, bought for €21.5m. The vendor, a family group, was heavily leveraged at group level. “We bought the debt on the asset from the bank at a significant discount,” says Garcia-Peri. That allowed Hispania to outbid a rival buyer, yet pay a lower overall price.
Guadalmina needs investment and the hotel is operated independently on a contract expiring in March 2015. Hispania is eyeing new operators. Azora knows this sector; its Carey Value Added fund has 10 hotels in cities such as New York, Berlin and London. International brands have found it difficult to break into Spain’s hotel market because much of the industry is in the hands of local operators who also own the properties.
“Structurally that has to change and the fact that many local groups are highly leveraged makes it a good time to buy,” says Garcia-Peri. “You have an economy that is improving, tourism is coming back – some areas, like Barcelona, are already performing much better.” The plan is to invest in housing, offices and hotels. Though Hispania is not a REIT, it has set up a REIT subsidiary, which has already spent €63.8m on an apartment complex in Barcelona’s Diagonal Mar. Again, the plan is to spend money and move it further upscale.
Though Hispania’s basic strategy is to invest over the next three years, then sell up, in year three a review will decide whether the company should be kept going. This could involve keeping all or part of the portfolio, or spinning off parts of it. Says Garcia-Peri: “For example, we could spin off a hotel business and keep the residential and commercial assets. Shareholders will vote on whatever recommendation we make.” If it is decided that Hispania should carry on, says Garcia-Peri, “we will also commit to internalise the management by year six”.