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The borrower view: Pere Viñolas of Inmobiliaria Colonial

The chief executive of the Spanish real estate investment company discusses raising capital in the bond markets.

Pere Viñolas
Pere Viñolas: “I believe we have better financing conditions through bond markets than banks”

Inmobiliaria Colonial has a straightforward strategy. The SOCIMI, the Spanish equivalent to a real estate investment trust, focuses only on offices in the prime markets of Spain and France. The company has €12 billion of assets under management. Inmobiliaria Colonial sources debt capital primarily through the bond market, and has issued €2 billion of notes since 2015. Real Estate Capital caught up with its chief executive, Pere Viñolas, to find out more about the company’s debt strategy.

What role does debt play for your business?

Currently, we have moderate levels of indebtedness, close to 35 percent loan-to-value. We mostly operate in the bond market, issuing investment grade notes, with a current rating of BBB-plus. Bank debt, on the other hand, plays a marginal role in our portfolio.

Why do you source debt through capital markets rather than from real estate lenders?

First, bond capital markets allow us to source debt in a shorter time period. We operate in an investment grade environment, which is fast-moving. The banking sector, on the other hand, has its limitations when it comes to financing the real estate sector, due to current regulations. Second, we are a listed company and therefore focused on capital markets on the equity side, which makes it easier to enter the bond markets, as we are in constant contact with investors.

Is it more competitive for you to issue bonds rather than source bank credit?

I believe we have better financing conditions through bond markets than banks. Our cost of debt is currently at around 1.75 percent, but it is not just about the cost of debt. You need to think about the collateral that you offer to the lender or the restrictions of bank loans. Considering a mix of flexibility, guarantees and cost of debt, bond markets offer better and cheaper debt.

How are low interest rates affecting the real estate bond market?

Low interest rates have created a trend of bond refinancing deals in which property companies issue new debt to replace more expensive old debt. Another trend is that investors feel increasingly comfortable with longer debt terms. Bonds have typical terms of three to five years, sometimes seven, but now it is not unusual to see companies issuing notes of 15 years.

Do these trends also apply to your bond issuances?

Yes. We had our first investment grade rating in 2015, when we entered the bond market. Since then we have issued new bonds partially to repurchase previously issued bonds. Meanwhile, new issues offer longer terms and lower interest rates.

Have you seen new bond buyers in the market in recent months?

We have noticed a lot of investment appetite as all our bond issues are oversubscribed, but we have not seen a big change in the investor base. Our buyers are institutional investors with a well-known track record and long-term investment nature.

When do you source bank debt?

We have financed some assets with bank debt, but it could account for less than 10 percent of our total debt. Typically, we source revolving credit facilities from local banks and French banks. These facilities have a double purpose. They allow further protection – from the point of view of risk, it is good to have undrawn lines of credit in case we need to meet other debt obligations. They also offer flexibility to deploy cash immediately in special cases such as a relevant investment or a corporate operation.

One of the issues highlighted by lenders operating in Spain is the lack of deals involving core assets. Where can lenders find opportunities to finance offices in the country?

Lenders can find a small niche in the intermediate areas between prime and secondary locations in offices with an interesting cashflow and a tenant base. Another area that I understand is gaining importance is the residential rental market, which is taking off now and can be a potential opportunity for lenders such as debt funds.

How is debt liquidity in the Spanish office sector?

The Spanish office market benefits from strong debt liquidity. Unlike in the years following the financial crisis, I do not see a lack of debt to finance this segment.