IPO Indicates Bottom of Spanish Property Market

Merlin Properties, a Spanish real estate investment trust (REIT) has today announced plans for a €1.5bn flotation, set to become Europe’s...

Merlin Properties, a Spanish real estate investment trust (REIT) has today announced plans for a €1.5bn flotation, set to become Europe's largest ever property initial public offering (IPO).

The timing of the IPO indicates that Merlin is capitalising on the heavily discounted property market to attract interest from investors looking to profit from the expected price correction as the sector shows continued signs of recovery.

Merlin have already gained committed funds of €600m and has confirmed plans to acquire 880 branches of Spanish bank BBVA with a host of other investment opportunities expected in the short, medium and longer term. The timing is right for the REIT to appeal to the many investors looking at relatively cheap entry points into the long-term Spanish real estate sector.

REITS are very popular pension-fund investments due to their relatively high yields together with potential capital gains in the longer term. Spanish property remains cheap compared with the UK and Ireland where property prices have pushed ahead dramatically over the last two years.

Investor appetite increasing as Spanish economy slowly recovers

Despite a distinct investor appetite for Merlin's REIT, the Spanish economy is only expected to grow by 1% during 2014. Factoring in an unemployment rate of more than 25% and public debt levels spiralling out of control, some could consider the Spanish property market to be weakened by poor fundamentals.

However, although the economic situation has a stranglehold on many Spanish nationals due to tightened lending criteria and falling income levels, for foreign investors seeking a long term commitment for their capital, the timing has never been quite as good.

Short and medium-investors are showing more caution with regard to Spanish property although long-term investors are buying up assets secure in the knowledge that their foresight will pay handsome returns.

Armed with a balance of €1.5bn, Merlin Properties will be very well-placed to take advantage of long-term potential across many areas of the Spanish property market.

With increasing investor interest in the construction sector and the green shoots of recovery beginning to show in the property market, Spanish banks left with billions of euros worth of unwanted assets as customers reneged on mortgages should start to see their inventories diminish. Once released into the market and purchased, a major rebound is expected in Spanish property prices.

Spanish banks still to shift property inventories

After the worst housing crisis in the country's history, homes sales jumped by 48% to more than 81,000 in the first quarter of the year, according to data compiled by the Ministry of Public Works and Housing. Mortgage approvals rose in March for the first time since 2010 as the property market starts to stabilise six years after its collapse triggered the most severe recession in 50 years.

Analyst Daragh Quinn of Nomura International (Madrid) said the property market has "stopped declining and has started to increase again but it's coming off a very low base."

Spanish banks' lending standards remain very tight with loans going only to the most creditworthy purchasers. In contrast, during the peak of the housing boom in 2006 and 2007, Spaniards were buying 900,000 homes per year. 45 savings banks competing for market share gave out 45-year mortgages with loan-to-value ratios of 100% or more to people who probably should not have been eligible for credit.

The rental market has shown significant growth over the last year in response to the tightened lending criteria for mortgages and it is anticipated that large international investors will become dominant in this sector, buying up large blocks of residential accommodation to professionalise the rental market. 'Build to Rent' is also expected to become a growth market in Spain.

David Caraballo, head of sales at Alquiler Seguro said: "The crisis has made Spaniards change their mentality when it comes to renting versus owning a home. The fallout of developers and mortgage markets is going to provide a further boost for the rental market, which has gone from something like 7% in 2007 to 20% now but is still lagging behind the European average of 36%."

Rental market identified by larger investors as growth area

Some of the world's largest private equity funds are paving the way for the professional renting sector with the likes of Blackstone Group and Goldman Sachs purchasing blocks of homes to rent ahead of the anticipated demand.

Caraballo added: "We are seeing investors looking for large blocks of consolidated housing in the largest cities. The problem is that now there aren't enough blocks of product on the market, so they are now looking to build."

New York-based Blackstone purchased 18 apartment blocks in Madrid in July 2013 for €125.5m and Goldman Sachs, also based in New York paid around 20% over the asking price for 32 social housing developments sold by the capital's regional government.

Sareb, Spain's 'bad bank' created in 2012 to absorb €50bn of real estate assets from lenders, last week sold land worth €80m to Castlelake LP, another American investment firm.

The activities of major international investment consortiums are always regarded as pointing towards growth areas and the signs clearly indicate that Spanish property prices are hovering at the bottom end making this an opportune time for long-term investors to secure capital growth and valuable rental yields if they wish to exploit the rented sector.

- Monday 16 June 2014


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