Spain: A cautious comeback

Spanish banks have returned to the commercial property lending market, but they are playing it safe, writes Daniel Cunningham.

Following a period of paralysis, Spain’s banks are back lending to the country’s commercial real estate sector. Domestic banks which remained on the side-lines during the early market recovery are keen to benefit as the sector has stabilised.

Santander and Bankinter are cited as two active lenders, with Barcelona’s La Caixa and fellow Catalonian bank Sabadell also writing loans. However, domestic banks remain conservative. Few will single-handedly finance large-ticket investments and most remain focussed on investment rather than development finance.

Typical deal flow is in the €30-50 million size range, which plays into domestic banks’ lending appetite, while leverage tends to remain within 50 and 65 percent loan-to-value.

ING Real Estate Finance’s Spanish unit has closed some significant deals recently. Despite being a division of a Dutch bank, ING REF’s Madrid operation uses Spanish funding and a local team and is regarded by some as being among the domestic lenders.

Wouter Mijnen, head of ING REF Spain and Portugal, says that the bank remained active in Spain throughout the crisis, but really ramped business back up during 2014. “During 2013, the market was dominated by opportunistic money, but it became much more institutional during 2014,” he explains. “Our focus is on senior debt for core, income producing assets.”

“The core market started slowly and then picked up. It was good for us, as we like larger transactions which were are able to syndicate,” adds Mijnen.

One such deal was its €280 million underwriting in February of the 60,142 square metre Torre Espacio in the ‘Cuatro Torres’ – ‘four towers’ – prime business area of Madrid. The tower was bought by the Philippines-based investor Andrew Chan last November from Grupo Villa Mir for €558 million. The seven-year loan was understood to have been priced between 150 and 200 basis points.

Rapid recovery

During the early stages of Spain’s real estate recovery, the market was targeted by opportunistic buyers, and their finance was typically sourced from outside Spain.

“In September 2013 we all came back from holiday and the world had completely changed,” remembers Michael Madigan, Madrid-based director with CBRE Capital Advisors. “Investors who we wouldn’t have thought would come here began to set up offices. Lenders started to see Spain as a market which could provide interesting margins.”

One deal which illustrated the market at that time was Goldman Sachs’ loan to Orion Capital Managers to back its Puerto Venecia shopping centre in Zaragoza in December 2013. Goldman Sachs reportedly wrote a circa €170 million loan at above 400 bps.

During that period, investment banks such as Deutsche Bank followed clients into the Spanish market. Insurers such as AXA Real Estate also made loans in the country. As Spain’s banks began to deleverage, investment banks including JP Morgan provided loan-on-loan finance to private equity buyers of non-performing loan portfolios. During all this, domestic lenders remained quiet.

“Spanish banks were hardly active at the time. They were still dealing with legacy issues and real estate had become something of a dirty word for them,” says Madigan.

In an indication of the shifting profile of investors in Spain, Puerto Venecia traded again in December 2014. Rather than an opportunistic player, the mall was bought by UK shopping centre owner Intu for €451 million. However, it was HSBC, rather than a Spanish bank, which provided the finance.

Today, Spain’s market is attracting a mixed profile of buyers. Core investors are targeting prime shopping centres, the best high street retail and offices in central Madrid and Barcelona.

Large, core deals remain relatively rare. As long-term institutional investors, family offices and SOCIMIs (real estate investment trusts) increase their market share, prime assets are less frequently traded. Large assets reportedly for sale at the moment include Northwood’s Diagonal Mar shopping centre, which it bought in 2014 and is aiming to sell for €500 million. Lone Star is also aiming to sell its 120,800 square metre Adequa business park, which it acquired through a debt deal.

Prime margins remain higher than some other European jurisdictions, although they have come in considerably in the last three years. “Prime margins leveraged to around 60 percent LTV in Madrid would be in the region of 170-200 bps,” suggests Francesca Galante, partner with pan-European debt advisory First Growth Real Estate, “Compare that to prime Paris at in the region of 120-150 bps.”

Value-add investors are also providing lenders with financing opportunities. Foreign funds as well as some of the SOCIMIs such as Axiare Patrimonio are investing in peripheral property with a view to converting it to institutional-grade status.

The logistics market is also increasingly active. GreenOak Real Estate, which focusses on repositioning well-located properties through its Spain and Italy real estate fund, recently sourced a €72.5 million five-year loan from ING REF to refinance a portfolio of seven logistics properties.

Foreign lenders

Aside from ING REF, other foreign lenders are providing real estate finance in Spain, albeit selectively. French bank Natixis is active, while German banks such as Aareal are prepared to finance Spanish real estate.

Last October, Aareal provided a €163 million loan to retail asset manager Pradera to refinance seven shopping centres in Spain and one in Italy from its Pradera European Retail Fund. Last February, German insurer Allianz Real Estate financed Merlin Properties’ acquisition of the Marineda shopping centre in La Coruña with a €133.6 million loan. The 10-year facility had a fixed-rate margin of 2.66 percent and reflected an LTV of close to 50 percent.

Debt funds have also attempted to deploy capital in Spain, although many struggle to find the right deals with which to generate the 300 bps-plus margins their return profiles require. Cornerstone Real Estate Advisers, a subsidiary of US insurer MassMutual, has set up a Spanish operation and is attempting to deploy capital.

On the whole, real estate finance in the Spanish market is much more liquid than it was two or three years ago. However, as is the case across many European markets, a general slowdown in real estate investment activity means that there have been fewer financing opportunities this year.

“The reasons are the same as the other main European markets,” says ING’s Mijnen. “Brexit, the oil price, China and low Euribor rates are all having an effect. There are also elections in nearly all countries. Spain doesn’t have a government at the moment.”

Spain is facing another general election on 26 June after various parties failed to form a working coalition government after last year’s election. A leftist alliance was formed in May including the increasingly popular Podemos party, ahead of the elections. Among its recent pronouncements, Podemos has made clear its desire to target the tax arrangements of SOCIMIs.

NPL market remains active

Spain accounted for half of all European real estate loan and real estate-owned portfolio transactions during Q1, according to Cushman & Wakefield. However, Spanish volumes actually dropped 40 percent from the previous quarter, in the context of a 91 percent fall in volumes across Europe.

“During the first quarter of 2016, we saw portfolios coming to the market involving NPL development loans, mortgages, and SME corporate loans,” explains Fernando Acuna Ruiz of advisory firm Aura Real Estate.

Spain’s largest loan sale in Q1 was Bankia’s sale of the €645 million face-value Project Babieca CRE loan portfolio to Deutsche Bank. At the end of Q1, Cushman noted ongoing loan sales including Bankia’s €800 million Project Wind II residential book. La Caixa is planning to sell the €1 billion Project Sun REO portfolio of 144 hotels

“Pricing is shifting,” explains Carlos Quiroga, senior vice president in Hatfield Philips’ Spanish NPL advisory team. “Portfolio purchases 18-24 months ago were essentially a bet on Spain’s macro-economics. Now rents, income and values are not rising as fast. The market will clearly continue to recover, but there is a question as to how quickly values will increase. The general feeling is that NPL sellers are not adjusting their pricing expectations in line with what buyers are prepared to pay.”

Looking forward, there is still plenty of potential supply. The Bank of Spain’s financial stability report in May revealed that Spain’s banks own foreclosed real estate assets worth €84 billion. SAREB, Spain’s bad bank, has reduced the number of assets it owns by just 6.1 percent since it was launched at the start of 2013. It now has 12 years left to sell off €43 billion of assets.

SAREB recently altered its strategy to focus more on individual asset sales rather than large portfolios, although some in the market are keen to see the bad bank stick to selling loans in bulk in order to maintain investor demand. “If it wants to achieve its objectives it will need to change its portfolio approach,” says Aura’s Acuna.