Investment. insight. Spain. January September A Cushman & Wakefield publication

Transcription

1 Investment insight Spain January September 2017 A Cushman & Wakefield publication

2 Executive Summary The capital markets cycle has remained in tune throughout 2017, with a high degree of liquidity and a constant flow of investment towards real estate at a continental level. Until September of 2017 Spain remained a preferred destination for both private and institutional funds, with a high volume of direct investment in assets. The profile of incoming capital remains predominantly international and with capital costs which are relatively low thanks to the climate regarding interest rates. These will remain low for the coming two or three years given that any changes which may be anticipated will not be major. Yields will enter a phase of stability following almost three years of continuous compression. Investment decisions are taken following indepth evaluation and advice, at all times based on the fundamentals. In many sub-markets these will have a profile of rent growth and falls in vacancy rates, thus driving forward a new development cycle. 1

3 The economic cycle has favoured Value Added and Core+ investor strategies Investment Volume Spain ( million) Forecast 2017 Excludes M&A Includes M&A Nevertheless, the context of low interest and capital costs will sustain the demand for core properties. Opportunistic acquisitions will find a place within residential portfolios Forecast * *Q3 2

4 Economic Climate A finely-tuned instrument Palau de la Música Concert hall, Barcelona

5 A Cushman & Wakefield publication Within a context of increased uncertainty, Spain is overcoming its challenges and macro indicators are forecast to grow in This includes inflation, which will close at around 2%. This incentivises investment in property assets, as the alternatives perform at a lower level (debt) or are more volatile (equities). This backdrop will prevail at least until the beginning of 2018, when the tapering off of debt purchase rates declines, and will continue until 2019 or 2020 when the mass acquisition of assets comes to an end and benchmark interest rates begin a gentle rise. The capital markets remain liquid and Spain continues to be a significant destination for real estate investment. In addition to growing 3.1% in 2017, Spanish GDP will close at levels exceeding those of the previous cycle: 113 trillion Euro in 2017 vs. 112 trillion Euro in 2008 (at 2010 prices). Output per-capita will also rise by some 1%. The challenges posed by the crisis persist in the labour market, where the overall unemployment rate stands at 17% while the figure for Madrid and Barcelona is hovering around 13%. At these still high levels, salary increases remain absent and continue to sap inflationary pressures. Nevertheless, inflation has upward pressures as a result of healthy domestic demand. Investment in both productive capital and real estate are still strong and investors and business people are betting on higher returns in 2017 based on strengthening fundamentals. The monetary expansion policy of the ECB, focused on sovereign debt securities and corporate bonds, will continue to inject some 60 billion Euro per month into the Eurozone. SPAIN - FORECASTS (%) Year GDP (Change) Consumer spending (Change) 6% 4% 2% 0% -2% -4% -6% Inflation Unemployment rate Source: Oxford Economics Quarterly trend in GDP in Spain (annual change) Forecast Source: BdE and OEF 4

6 Investment Volumes Fundamentals resonating well Teatro Real - Teatro de la ópera, Madrid Between January and September 2017 the property investment scale increased and acquisitions have amounted to 10,300 billion Euro, some 74% above the figure recorded in the same period of one year ago Investors continue to commit to traditional assets, however other options are awakening significant interest. The search for yield on assets such as student accommodation, car parks and petrol stations will coexist with the acquisition of office, retail and logistics assets. This latter segment will be accompanied by the drive of recent developer activity and a number of recently built units and platforms will be seen to change hands. The property cycle continues to evolve: opportunistic strategies (distressed asset and bank s repossession portfolios) have passed the baton on to Value Added and Core+ deals. These will continue to represent the predominant strategy over the coming three or four years. 5

7 Investors will seek to exploit the potential of underused, obsolete or vacant property through refurbishment, active management and reletting. The associated capital costs and risk profile of these strategies will lead to asset turnover within less than 5 years, seeking to reposition them as Core+ or even Core assets. Activity on the part of Core+ funds will continue to rise, focusing on those properties with the potential for increases in rents through investments in the property itself (CAPEX). The ideal setting for investment offered by Spain will enable a volume of 12 billion Euro in direct acquisitions to be reached by the end of Investment according to origin of capital ( million, incl. M&A) National Socimis Foreign * * Q

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9 A Cushman & Wakefield publication Offices Lack of harmony on the supply side Both in 2015 and 2016, total office investment in Madrid and Barcelona exceeded 3.5 billion Euro The share corresponding to Barcelona went from 9% in 2015 to 14% one year later, demonstrating reinforced confidence in property in Catalonia and the strong demand profile for floorspace, rents and construction in the city. The volume for Q1-Q multiplied by five the figure for the same period in Office investment in Madrid remains strong, with an increase on the previous year of 27% for the same period. The office investment volume until September 2017 amounts to 1,447 million Euro in Madrid and 816 million Euro in Barcelona. As per the case since 2014, international institutional funds and the Socimis will continue to be the leading players in the office segment, despite the fact that supply does not fully meet demand expectations. In other words, supply is lacking in various sub-markets will prove to be a good year in which investor activity will remain strong, backed up by the availability of liquidity on the part of groups and the strength of the occupier market. Nevertheless, it is important to acknowledge that a significant number of office buildings have recently changed hands and the supply through this route may become constricted. The future performance of office investment will remain strong, buttressed by the take-up of floorspace and the reduction of vacancy rates in the occupier market. It is important to point out that the market in each of the cities behaves differently. On the one hand, Barcelona's market reacts to lower levels of supply with an increase in rents across all business districts. Rents in the current cycle are clearly trending upwards throughout the city due to the low vacancy rates. 8

10 A Cushman & Wakefield publication Main Investment Deals 2017 Madrid and Barcelona TRANSACTIONS Q1-Q Office Retail Logistics On the other, an increase in the pace of take-up in Madrid is anticipated, pushing up prime rents. Strong economic performance is supporting demand and new development activity. Madrid is, however, home to disparate sub-markets with high vacancy rates, lack of a quality offering and flatling rents. Investor appetite is centred on the CBD and the Central zone, in terms of both performing offices and buildings for refurbishment. Forward funding and forward purchase transactions on land available for development will be seen in the decentralised zones. There will also be some turnover in the Decentralised zone of those newly constructed buildings boasting advantages due to location or access. From 2017 onwards, capital will be employed in three specific manners: investment deals, company transactions and refurbishment. The latter of these is bearing fruit and refurbished and updated buildings represent a clear target for investors. Taking into account letting and preletting deals for refurbished buildings over recent years, the evidence demonstrates the high degree of liquidity of these types of assets in the Barcelona and Madrid markets. 9

11 A Cushman & Wakefield publication Investment Volume Spain - Offices Q1-Q ,517 Million At the end of September 2015 prime yields stood at 3.5%. The fall recorded to date amounts to 300 basis points. Give the market conditions until September, there remains some margin for lower yields in properties located in decentralised zones with good tenants and high occupancy. The levels reached to date in the remaining zones point towards stability. The margin for an increase in total returns should come about due to an increase in rents, occupancy and inflation, rather than to an increase in capital values. 8 10

12 Retail Fine acoustics in terms of buyer intent Investment Volume in Retail Spain Q1-Q % 4% 21% 14% 55% Shopping Centre High Street Retail Park Factory Outlet Other Retail The first three quarters of 2017 closed with record investment in the retail sector, reaching 3.1 billion Euro (30% of total investment). 11

13 A Cushman & Wakefield publication Acquisitions of investment property are being supported by the increase in retail sales, consumer confidence and the current strength of tourism. For the close of 2017, it is anticipated that volumes will reach levels close to those of 2015, when acquisitions amounting to 4.15 billion Euro were made. Shopping centres continue to attract the majority of capital in retail (75%), whereas the high street represents 15% of investment volume. For their part, outlet centres and supermarkets exceeded a 10% share of volume. Looking towards 2018, retail assets meeting the rates of return sought by institutional funds will be those with the need for CAPEX outlay and the adaptation of their tenant mix to the area of influence. High street premises close to prime zones will enjoy strong demand as a result of a certain degree of market saturation in these areas. Core investors, for whom the scarcity of product is slowing down acquisitions, will move into a management and portfolio performance optimisation phase. Yields for shopping centres have undergone compression since 2008, reaching 4.25% in September These are expected to remain stable up to the close of year. There is still some room for growth in capital values for retail parks and changes in the prime yields (currently at 5%) of these types of assets are anticipated over the coming months. With regard to high street retail, the lack of quality product could hinder the closure of deals. Institutional funds will continue to seek Core+ product and commit to assets located in provincial capitals. The lack of product entails making commitments to secondary locations, refurbishment and the fight for the creation of extensive spaces on the main thoroughfares through the merger of smaller premises. As in the case of other sectors, added value profiles are seeking other types of premises. In general, these are vacant and have potential for refurbishment and a possible (and necessary) change of use. Family Offices (private investors) seeking trophy assets valued at up to 10 million Euro will continue to enjoy their traditional share and it is anticipated that Socimis specialised in the acquisition of assets of this type will be created. The largest ever deal in this sector was closed during the first three months of This consisted of the sale of the Madrid Xanadú shopping centre for a total of 530 million, half of the value of which has already been passed over with the sale of 50% of the centre to the TH real estate fund. 12

14 A Cushman & Wakefield publication Through the demand for floorspace, logistics is one of the sectors which has benefited most from the strong performance of the economy. The good figures for space take-up and the scarcity of quality assets are driving land development, both in terms of pre-let deals and speculative operations. New build amounting to close to 500,000 m² is anticipated in both Barcelona and Madrid Logistics Development joins the chorus 13

15 Although these figures may appear high, the ratio of new build/occupancy is low, despite the scarcity of pre-lettings. This is a sign that developer activity is in line with market needs, avoiding the possibility of oversupply. New land developments are concentrating on the outskirts in response to the healthy levels of take-up recorded for both cities. The impact of e-commerce on the logistics market is embodied by the type of new product coming onto the market and the willingness of developers to undertake bespoke/turnkey projects with crossdocking close to the city. This is in order to satisfy the last mile distribution demands of online businesses. The recovery in logistics investment has proved rather more delayed (some two years) in comparison with other sectors. The main architects of the new cycle have been the Socimis, playing the lead role in investment in these types of assets by increasing their acquisitions some 85% between 2014 (when they burst onto the market) and 2016 and setting a record over the last 10 years. In spite of this, the Socimis have reduced their share in 2017, ceding ground to international funds which have headed up the acquisition of large portfolios. At 1.0 billion, 2017 will close with figures for logistics investment exceeding those of previous years. The increase in prime rents in Barcelona, together with the limited availability of quality product, will force prime yields to contract. Due to the greater protagonism of pre-letting deals in Madrid, it is anticipated that the Socimi and leading logistics funds will invest in large-scale pre-let projects there. This scenario will deliver a phase of professionalisation to the sector, due to the fact that the risk of the development is delegated to the developers and that of management taken on by the investors, thus leading to a more modern model of the property cycle. Prime yields in both Madrid and Barcelona stand at between 6% and 8% according to the asset and its location. A slight fall is anticipated prior to the close of year due to the lack of immediate availability in the most sought-after areas. Although prime rents remain stable, average rents will continue to head upwards as evidenced throughout the entire first half of

16 Conclusions Harmonious volumes and returns The real estate sector is becoming attractive as a safe haven from the volatility of the stock market and bond yields. At an European level. over the coming months it is anticipated that there will continue to be sufficient liquidity in the market. Moreover, and in contrast to the period between 2009 and 2016, this viewpoint is backed up by funding During the coming 18 months, investor preferences will continue to focus on traditional assets in the main cities (offices, shopping centres, retail parks and high street), though those of secondary cities will also become a target. Interest in logistics will also grow and good quality units in large and medium-sized centres of consumer demand will feed investor appetite. Some investor profiles remain open to accepting risk with alternative assets, notably including hotels, housing (for seniors and students) and residential. In the case of hotels, both international and domestic tourism are evenly boosting performance throughout the country. The basis of the best performing hotels will be both the level of occupancy and prices. Within this context, both RevPar and ADR point towards growth over the coming two years, thus laying the ground for investor demand. The residential sector remains challenging in many regions, however the main urban areas offer opportunities to bring together portfolios of interest to institutional investors. 15

17 The new real estate development cycle will lead to a greater number of forward funding and forward purchase transactions. With these formulas, investors participate in the initial phases of the development, paying in instalments or through a single payment, though always prior to the commencement of works, thus redistributing the developer risk and bank financing. The Socimi are entering into asset turnover zones. Bearing in mind their tax status, the three years of binding continuity in a portfolio are being met throughout this year and the next. Within this context, a number of assets will come onto the market, these being assets which are considered nonstrategic and those with added values which make sale worthwhile. The specialisation of the Socimi will also bring to market those assets that are beyond their field of expertise. The high degree of activity in recent years will entail lower levels of supply, thus incentivising new acquisition formulas such as indirect acquisitions through company deals and joint ventures. of works, thus redistributing the developer risk and bank financing By means of this strategy, the investor takes advantage of the opportunity represented by the scarcity of modern product and acquires a property ready for letting and occupancy without assuming the risk of development. Management strategies in the immediate future will be key, on the one hand in terms of companies willing to find the best locations in order to attract and retain talent and, on the other, for funds to maintain the best tenants in their assets. The new real estate development cycle will lead to a greater number of forward funding and forward purchase transactions. With these formulas, investors participate in the initial phases of the development, paying in instalments or through a single payment, though always prior to the commencement 16

18 View our report in a different way Interactive Dashboard Ramiro J. Rodríguez, PhD Head of Research & Insight, Spain ramiro.rodriguez@cushwake.com Marta Esclapés Senior Research Analyst marta.esclapes@cushwake.com María Jesús Álvarez Research Analyst mariajesus.alvarezcoello@cushwake.com Pablo Gerez Research Analyst pablo.gerez@cushwake.com Cushman & Wakefield José Ortega y Gasset, 29-6º Planta Madrid Paseo de Gracia 56 7ª Planta Barcelona Cushman & Wakefield is a global leader in real estate services, helping clients transform the way people work, shop, and live. The firm s 43,000 employees in more than 60 countries provide deep local and global insights that create significant value for occupiers and investors around the world. This report contains information available to the public and has been relied upon by Cushman & Wakefield on the basis that it is accurate and complete. Cushman & Wakefield accepts no responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals Cushman & Wakefield, Inc. All rights reserved.