Spain is back in business

The debt tap to finance Spanish real estate is on. New players have entered the fray and competition to fund the right assets is growing stronger.

Little more than six years ago, Spain was forced to ask for a European bail-out package to save its banks, which were suffering snowballing losses on real estate loans written during the fiesta of the country’s pre-2008 housing bubble.

The nationalisation of Bankia in May 2012 was the catalyst of the Spanish banking crisis. The bank required a €19 billion cash injection, but the Spanish government was unable to foot the bill. A month later, Brussels handed over €41.3 billion to recapitalise the country’s ailing banking sector. The rescue of the country’s failed financial system had started.

Today, Spanish banks are back in the property lending game, after improving their balance sheets and offloading billions of euros of toxic assets. Lenders have growing appetites to finance a diverse range of property asset classes in Spain, although playing it safe is paramount, sources canvassed by Real Estate Capital stress.

“At the end of 2013, the Spanish real estate market began a new expansionary cycle,” explains Michael Madigan, director of debt and structured finance with CBRE Capital Advisors. “Since then, investment has been strong, and lenders, particularly local banks and European banks with a longstanding local presence, have been very active,” he adds.

Bankia, just over six years since its near-collapse, is among lenders rejoining the property lending fray. The nationalised bank resumed its residential development business this year, after restrictions to finance real estate imposed by the European Commission expired in December 2017. In the first seven months of the year, Bankia signed 10 financing deals worth €180 million.

“We will target the biggest schemes launched by major developers, and in the regions with high activity such as Madrid, Barcelona, Valencia, Andalusia, the Balearic and Canary Islands,” says Bankia’s property development manager, Alberto Manrique. “For this year, we expect to provide €400 million in new loans and we want to keep growing,” he adds.

Bankia’s plan is to back residential schemes during the continued upward swing of Spain’s property cycle. The bank expects growth for at least three to four years, with 150,000 new homes forecast to be built annually, Manrique says. Last year, the licences granted for new-build residential units totalled 80,786, up by 26.1 percent, data from Spain’s Ministry of Public Works show.


The revival of the Spanish residential sector has been underpinned by a boost in overall property investment in the country – residential schemes attracted the largest investment increase in commercial real estate during the first nine months of the year, with a total volume of €1.9 billion, up from the €142.4 million of capital invested during the same period a year ago, according to CBRE.

Industry players insist domestic banks are selectively backing Spain’s new residential developments, only financing schemes with proven pre-sales levels of 50 to 60 percent and loan-to-cost levels of around 70 percent – far from the leverage levels of 100 to 110 percent seen during the last housing bubble.

“Banks have learnt from the past, and they are nowadays very prudent, especially when their risk department analyses projects, companies or developers,” says Jordi Argemí, chief finance officer at Neinor Homes, adding that pricing for residential developments typically ranges from 250 basis points to 300bps. Local banks are reticent to finance residential land or speculative schemes. “We only lend to projects with planning permission, with a certain pre-sale level and when the developer provides a relevant percentage of equity to the project,” Bankia’s Manrique says.

With no access to bank finance to fund their land purchases, developers are using other sources such as equity or alternative lenders’ debt. Developers opting for debt funds are paying between 8 percent and 12 percent in interest for deals with LTCs ranging between 50 percent and 100 percent, Argemí notes.

A growing alternative, non-bank lending industry has emerged in Spain as a result, with new players such as Ibero Capital, Incus Capital and Avenue Capital reported to be active. Mikel Echavarren, chief executive officer of Colliers International Spain, who manages a €200 million debt mandate from Marathon Asset Management to fund the acquisition of land for Spanish residential developments, notes he seeks bridge financing opportunities priced at an opening fee of 2 percent and annual interest of 10 to 13 percent. “If we deploy €100 million by the end of this year, we’ll launch another fund to finance residential land,” he adds.

While banks remain nervous about much of the residential market, some are willing to back segments such as the build-to-rent sector. “Margins for this type of product are lower than other commercial real estate sectors, since it has very low risk,” explains Julián Bravo, head of the Iberian division at ING Real Estate Finance. An illustrative deal, Bravo highlights, is the €130 million bilateral loan provided by ING in May to finance future acquisitions of Spanish multi-family housing firm Testa Residencial. The loan, with a seven-year bullet maturity, had an interest cost of approximately 1.6 percent.


Traditional lenders have a healthy appetite to provide finance – usually with conservative loan structures – for core commercial assets in prime locations, industry sources agree. Fierce competition, however, has driven down margins in that part of the market over the past year. Lending against prime offices, for instance, has seen pricing levels fall to between 120bps and 150bps, down from 150bps to 170bps reported a year ago.

“Margins are down for core offices because there is more competition and a lack of available product in the market; new lenders determined to lend in the commercial space are entering the Spanish market and are driving loans’ pricing down to secure deals,” ING’s Bravo argues.

The strength of the Spanish economy – with Q1 2018 GDP up by 0.7 percent from Q4 2017 – in contrast to the slowdown in major eurozone countries, is triggering greater interest to finance Spanish assets by foreign senior lenders. Last year, for instance, conservative German bank Deutsche Hypo re-entered Spain, a market it pulled back from in 2013, while Allianz Real Estate signed its first Spanish office financing deal with a €155 million loan in February 2017.

International property investors, including private equity managers such as Henderson Park, have also looked to Spain. The firm debuted in the country in 2017 with the acquisition of Los Cubos, an iconic Madrid office building in need of asset management, which was financed by Deutsche Bank. More recently, the company headed by Nick Weber, former boss of Mount Kellett’s European business, bought Gran Via 43, a prime retail and office property in the centre of Madrid. Henderson Park secured €39 million of senior acquisition financing from La Caixa for the transaction.


The retail property sector – which attracted €3 billion of investment capital in the first nine months of the year, representing an increase of 9.9 percent – also presents opportunities, although sources say investors are growing cautious, as consumers increasingly favour online shopping.

In 2017, Spain’s ecommerce turnover grew to €23.9 billion, up by 25.2 percent year-on-year, and this year’s turnover is expected to reach €28 billion according to a report from Ecommerce Foundation. The Spanish ecommerce market, however, is small in comparison to heavyweights such as Germany and the UK – in Spain, just 4.1 percent of retail sales are made online, research from JPMorgan shows. “There’s no question that many international investors are more careful now when buying shopping centres, especially those which are not located in Madrid or Barcelona or are not the dominant asset in their region,” CBRE’s Madigan says. “Even though the impact of ecommerce in Spain remains low compared with other countries, investors coming from the US or the UK have trouble getting approval to buy.”

Lenders have appetite for retail assets on a selective basis and conservative terms, as the recent financing of Palmas Altas, a shopping centre in Seville, demonstrates. In a type of deal not seen since 2007, a club of domestic banks – Banco Santander, Banc Sabadell, Liberbank and Unicaja Banco – provided a €98.5 million development facility to SOCIMI Lar España in July. The seven-year loan, with an interest rate of 2.25 percent over Euribor for the first two years and of 2 percent over Euribor for the following five years, will finance the construction of a scheme which is due to open in spring 2019. The project is 63 percent pre-let, with 90 percent occupancy targeted by year-end.

“Palmas Altas is a unique deal in that a lot of pre-letting has already been done. So, in addition to having a great sponsor and a great location, a lot of the risk has already been taken out of the transaction from a lender point of view.” CBRE’s Madigan notes.

Meanwhile, investor interest in the Spanish logistics sector is high, sources note. Although investment volumes fell 26.9 percent in Q3 year-on-year, the decrease reflects a lack of opportunities in key hubs such as Madrid or Barcelona, they add.

“The logistics sector has been very active since 2014. Investors and lenders have strong appetite, but there are very few transactions to finance as many core investors are equity players,” ING’s Bravo says. “Investors are developing new projects because of the mismatch between supply and demand, with some banks financing these developments.” Most senior banks such as ING, however, stay away from speculative projects, opting to finance core logistics investments with margins that range between 160bps and 185bps.

It is evident that the Spanish real estate market has experienced a robust recovery across the residential and commercial space since the last banking crisis. The days when Spain was an opportunistic play, with investors betting on high-risk assets in search of big returns, have gone. Today, the market is led by institutional investors seeking safer investments. Competition, however, is fiercer than ever due to the scarcity of core assets in prime locations. Lenders face the challenge of sourcing the right deals while maintaining conservative financing structures.

Spain’s real estate recovery has attracted a broad range of lenders, including international banks and alternative lenders, to provide financial liquidity. Many argue the market for real estate debt in Spain is more robust today than in the last cycle. However, while the country’s banks are clearly keen to benefit from Spain’s property market performance, their exposure to an asset class which caused such catastrophic problems in the last cycle, will remain under scrutiny.


Spain’s NPL sales thrive

The Spanish non-core loan sales market dominated European activity in 2017, accounting for €50.8 billion of the €104 billion of real estate loan and real estate-owned (REO) transactions that closed last year, according to investment banking firm Evercore.

Two ‘mega-deals’ – Santander’s sale of a €30 billion portfolio of loans and properties inherited through its acquisition of Banco Popular to Blackstone in

August 2017 and BBVA’s sale of a majority stake in its €13 billion Spanish real estate book to Cerberus Capital Management in November last year – boosted 2017’s sales volumes in Spain, which has encouraged other Spanish vendors including CaixaBank and Sabadell to follow suit in 2018.

In Q2 this year, CaixaBank sold a €12.8 billion REO portfolio to Lone Star, while in Q3 Banco Sabadell sold €10 billion of REOs and NPLs to Cerberus. The deals have contributed to bringing the Spanish closed loan sales volume to circa €33.3 billion during the first nine months of 2018, which represents 43 percent of the European total.

Meanwhile, ‘bad bank’ SAREB sold in August a €155 million portfolio of residential loans to Bain Capital Credit. At the time of publication, the agency expects to sell another residential loan portfolio worth €360 million.

Local media reported Spain’s bad bank hired Goldman Sachs in April to sell a €30 billion portfolio of non-performing loans. The portfolio was expected to be up for sale by the end of June, but the most important operation in SAREB’s history is reported to be on standby.

“We are open to any type of transaction, we analyse all of them. Strategically, however, we have more time than banks to close deals,” says Ignacio Meylán, head of institutional sales at SAREB.

“We know there’s a window of liquidity now, but we believe in the evolution of the cycle, which continues to be bullish. The market is recovering, and we want to make the most of higher values,” he adds.

According to Evercore, Spain’s live and planned real estate sales stood at €14.2 billion at the end of Q3, with BBVA’s €2.5 billion NPL portfolio dubbed Project Anfora being one of the most notable live transactions.