The gain in Spain

The recovery of the Spanish economy, and the country’s real estate market, is leading to a wider range of opportunities for lenders to deploy capital.

The growing momentum behind Spain’s recovery is translating into lending opportunities in the country’s real estate market.

It doesn’t seem long since investing in Spain was considered an opportunistic play, and the high-priced debt capital available to sponsors reflected that. Today, the improved fundamentals underpinning the Spanish property market make it fertile ground for a range of investment, and therefore, lending strategies.

Spain’s distressed real estate story is not yet over, but there are clear signs that those picking up legacy assets such as non-performing loans are buying into a recovering market. Blackstone’s recent JV deal with Santander to revive the fortunes of Banco Popular’s €30 billion legacy property holdings is the most prominent example.

At the same time, strong fundamentals are triggering increased interest for other assets; from stabilised, income-producing properties to a new wave of residential developments. The expansion phase of the Spanish economic cycle – with GDP growth projected to hit 3.1 percent in 2017 – has supported the CRE market. Investment volumes in Spain reached almost €25 billion between 2014 and 2016 – more than one-and-a-half times the total volume invested between 2009 and 2013, according to JLL.

Spain direct CRE investment. Source: JLL

Recent news illustrates the level of opportunity. US investment bank JPMorgan backed the recovery of the residential market with a €150 million bridge loan to accelerate Neinor Homes’ purchase of land for its new housing development. A pick-up in demand for new-build residential has led to domestic developers – including Neinor, Via Celere and Metrovacesa – bringing forward ambitious housing plans. JPMorgan’s bridging loan commanded all-in pricing of below 450 basis points.

Meanwhile, the prime end of the commercial market is attracting attention from senior lenders. For instance, conservative German bank Deutsche Hypo recently announced its intention to re-enter Spain while Allianz Real Estate wrote its first Spanish office loan in February. Market sources note increasingly aggressive competition among lenders on the back of sustained tenant demand and steady rental growth, plus a lack of availability for core assets.

Pricing at the core end of the market has come in to reflect this. Cushman & Wakefield research shows that margins in Spain were upwards of 225bps in Q1 2015. CBRE recently put current senior margins at around 200bps, while sources report core Madrid pricing in the order of 150bps to 170bps. Competition has brought margins down, but a premium to more established markets remains.

Spain prime capital city office investment. Source: CBRE

Available prime property is relatively scarce, but those assets that do come to market are likely to appeal to long-term institutional investors with lower risk profiles. They are the sort of sponsors that banks returning to Spain might want to back. Core investor Swiss Life is linked with a €500 million deal to buy domestic SOCIMI Hispania’s office portfolio. In addition, SAREB’s trophy asset, the Parque Corredor shopping centre in Madrid, is expected to be sold in H2 2017.

It is worth noting that lenders are becoming increasingly comfortable with alternative asset classes in Spain, such as student housing. LaSalle Investment Management’s first loan in the Spanish market, to finance the purchase of a student housing portfolio for GSA, is a good example.

International lenders with a renewed focus on Spain will face competition from domestic banks, which have also returned to the property sector, as well as European banks with a strong local presence. However, for the international lending community, a more diverse range of lending opportunities stands as a strong reason to look at this southern European market again regardless.

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