Catalexit threatens real estate stability

The tug of war between Madrid and Barcelona over Catalonia’s quest for independence continues unabated and, as its intensification spells growing uncertainty, the office sector is likely to be hardest hit of the region’s real estate segments.

At the time of writing, Mariano Rajoy, Spain’s prime minister, was pressing for direct rule in Catalonia, while speculation was mounting that the regional president, Carles Puigdemont, planned to press ahead with a unilateral declaration of independence.

As the Catalan crisis escalates, the potential to foster long-term uncertainty grows, with some fearing damage to the region’s real estate market just as several property equity and debt investors have turned their attention back to Spain.

Starwood Capital has already expressed its concern about the situation in Catalonia, where the US firm is now present through a €46 million loan backing a new hotel in Barcelona.

The firm said in its latest quarterly investment update that it will now “prioritise opportunities that are relatively insulated from the ongoing uncertainty” over the Catalan crisis.

For his part, Carsten Czarnetzki, head of Spain at AEW Europe, notes the property asset manager had stopped all the projects it has in Barcelona.

“We are mainly investing German money at present; people are very concerned and want us to stop looking at opportunities in Barcelona,” Czarnetzki says.

“For retail, it’s different, because Barcelona will always be Barcelona and people will always want to spend their money there. On the office side, obviously, there is a big risk and it is going to have a short-term impact on new take-up in Barcelona – so this will favour Madrid because it will benefit from the uncertainty,” he adds.

The persistence of political tensions is likely to have most impact on the Catalan office market, while the residential, logistics, and retail segments “should prove more resilient”, as they depend more on consumer spending than corporate sentiment, according to S&P Global Ratings.

“In the short term, prolonged political tension between Catalonia and the Spanish central government may turn investor sentiment negative and affect new leasing transactions. This is particularly the case for office properties, as international but also national tenants may become more reluctant to expand or establish their head offices in Barcelona,” the rating agency says.

Following the disputed referendum on independence on 1 October, around 900 companies have already moved their headquarters outside Catalonia, according to local media. The list is reported to include banks Sabadell and CaixaBank, and Spanish REITS Colonial and Renta Corporacion.

Although the changes of headquarters have only legal implications for the moment, S&P believes that office landlords with exposure to Barcelona may see their occupancy rates and asset valuations come under pressure in the near future, if political tensions between Catalonia and the Spanish central government persist or escalate.

The Spanish Association of Real Estate Consultants, which includes the most important real estate consulting firms in Spain, recognises that the latest developments “seriously affect the normal functioning of investment activity”. The industry body, however, does not want to go further in quantifying the possible impact of the political tensions.

“Investors are watchful, and some have slowed down their decision-making to invest in Barcelona. However, I don’t see them intending to call off purchases: I see investors still thinking that common sense will prevail,” says Juan Velayos, CEO of Spanish developer Neinor Homes.

A real estate advisor operating in Spain agrees that transactions already under way will continue, but he notes that investors remain “nervous” until deals are closed, noting that some transactions are now on hold. “If the crisis extends for much longer without clarification, this will really harm the real estate market of Barcelona,” he says.

Borja Goday, managing director in Spain at Patrizia, adds: “We see fewer transactions in Barcelona at the moment. Investors and owners are waiting for stablility.”

Goday notes it is too early to know how the Catalan crisis will affect real estate investments in the region.

“Like Brexit, this situation involves another geopolitical risk but, ultimately, when it comes to investing, the focus is on real estate fundamentals.”

Barcelona’s property market performed well during the first half of 2017, with vacancy rates declining in the first six months of the year, particularly for central business district and grade A office space, according to Moody’s.

“Although cooling somewhat, rental growth remains positive in Barcelona’s CBD office market, with year-on-year growth of around 5 percent, versus 8 percent in 2016,” the rating agency says.
Additionally, prime yields in the office market of Barcelona averaged 3.85 percent in H1 2017, compared with Madrid’s yields of 3.75 percent, CBRE’s data show.

Positive fundamentals have supported office investments in Barcelona, which registered €663 million through Q3, up by 123 percent from the same time a year ago, according to CBRE.

“Barcelona, with its diversified tenant base, has been historically a more stable market than Madrid. Its long-term real estate fundamentals will hopefully last more than short-term political movements,” says Roland Fuchs, Allianz’s head of European debt.

Property debt provider Ali Imraan, of LaSalle Investment Management, adds: “The fundamental drivers of real estate demand may continue to be strong as long as there is no change in the region’s trading relationship with the rest of Europe.”

Catalan crisis timeline 

1 October: Catalans line up to vote in the independence referendum, despite it being declared illegal by the Spanish central government. The vote is disrupted by Spanish police.

3 October: Up to 700,000 people demonstrate in the Catalan capital. In a televised address, Spain’s king Felipe VI accuses Catalan leaders threatening Spain’s stability.

4 October: Puigdemont says his government is preparing to proclaim independence, perhaps at “the end of the week”. The Madrid stock market tumbles, dragging down European indices.

6 October: The central government passes a decree to help companies leave Catalonia. Spain’s third-largest lender CaixaBank announces its move to Valencia.

8 October: More than 350,000 people, according to local police, march in Barcelona to defend a united Spain while organisers put turnout at between 930,000 and 950,000.

10 October: Puigdemont says Catalonia has won right to independence as 90% of the 2.26 million Catalans who voted backed independence but suspends declaration

16 October: Puigdemont fails to provide clear answer on independence declaration and asks Spanish PM to end “repression of the Catalan people”. Madrid sets final deadline for him to “rectify” on 19 October

21 October: Rajoy reveals plans to suspend Catalonia’s autonomy and impose direct rule

26 October: Puigdemont rules out snap election to allow regional government to discuss its next move

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