Economic growth drives record investments into Iberian real estate
Bill Clinton’s slogan for his successful 1992 presidential campaign was ‘It’s the economy, stupid’. The same famous slogan can be used to explain the remarkable success that Spain and Portugal have achieved in the last few years, attracting record levels of investment in real estate. The two countries’ economic growth and far-ranging reforms have provided the foundations for a faster than expected recovery in the property market, delegates heard at the Iberian Real Estate Summit, organised by PropertyEU and Iberian Property, which was held in London this week.
‘Recovery, even in the medium term, seemed impossible after the crisis, but economic growth has picked up significantly,’ said Brian Coulton, chief economist, Fitch Ratings. ‘Spain and Portugal’s turnaround in the last five years has been truly impressive and a real achievement. In the clearest signal of the progress made, Portugal was upgraded to investment grade at the end of 2017, while Spain is back to A- grade.’
The numbers tell the story. Against a background of higher than Eurozone average GDP growth and structural improvements in the macro-economic context, investments into Iberia have soared. Last year a record €13.8 bn were invested into commercial real estate, a 20% increase over the previous year and 5% of the total volume of capital deployed in Europe. 2018 has started on a high and the expectation is that a new investment record will be set this year.
‘Spain and Portugal’s impressive record on reforms has changed the level of acceptability of these countries on a global scale,’ said David Hutchings, international partner, head of investment strategy EMEA capital markets, Cushman & Wakefield. ‘Interest used to be driven by European investors but now it is broader, with US and Asian capital pouring in. There is a strong belief that the structural changes will deliver growth over a long period of time.’
The fundamentals of supply and demand and the sheer number and variety of investment opportunities will continue to be compelling factors drawing investment into the region, experts agreed.
‘It is still time to buy, there are a lot of opportunities in a whole range of sectors and we will continue to invest and expand for as long as the banks keep lending,’ said Brian Betel, managing partner, ASG Iberia Advisors. ‘The good thing is that we are not in a late cycle stage here, we are well below the hill looking up, rather than over the hill looking down.’
Real estate investors everywhere worry about the cycle. The running joke in the UK is that we are ten years into a 7-year cycle, but ‘for Spain 2013 was the trough in the market so we are only five years into the cycle, which makes the market more attractive for investors’, said Tom Leahy, senior director, EMEA Analytics, Real Capital Analytics.
‘Spain has now caught up with the rest of Europe and Portugal is well on the way,’ said Leahy. ‘The markets are increasingly mature and dominated by institutions. In Spain US institutions are number 1, followed by Spanish, UK, German, French, Israeli and Chinese capital. In Portugal there is an absence of domestic activity, probably due to the lack of REITs, so the market is driven by overseas institutions.’
Investors’ perception of the Iberian markets has changed significantly, driven by a belief in a sustained improvement in the macroeconomic environment and demonstrable success in the field, said Andrew Angeli, head of research Europe, CBRE GI: ‘These markets look attractive and have become an easier sell to investors. We have taken a Korean institution to Barcelona, defying political concerns, with positive results. The Colombo shopping centre in Lisbon is the second largest asset we own in our European portfolio and its performance has been extremely strong. We see good growth ahead.’
Iberia is the third most important region in Europe for CBRE after the UK and the Netherlands because of the growth opportunities in different sectors, Angeli said, so what used to be a retail-focused strategy now has expanded to residential and alternatives.
The recovery in Iberia has solid foundations, but there are economic challenges ahead. The main one is the end of the European Central Bank’s quantitative easing programme and the prospect of interest rate rises, experts agreed.
‘There is a concern that the ECB has helped out an awful lot, last year it bought €80 bn of Spanish debt and €7 bn of Portuguese debt, but you cannot rely on that help going forward,’ said Coulton. ‘The question is can Spain sustain these rates of growth in a less favourable macro context? On the positive side, Iberia has improved its market share so that gives some degree of insulation.’
Interest rate rises will create more of a problem for real estate in general, not just Spain and Portugal, than many in the sector are factoring in at the moment, he said.
‘The interest rate equation is more important for Iberia than anywhere else and the two countries will have to prove themselves in terms of growth,’ said Hutchings. ‘Now there is every reason to invest, but it is important that the momentum for growth is sustained, otherwise investors could change their minds in a year or two.’
REITs in Portugal
Another danger is reform fatigue setting in: politicians in the two countries must continue to deliver further reforms to send the right signal to investors. Portugal will lead the way, said Paulo Núncio, consultant, Morais Leitao, Galvao Teles, Soares da Silva & Associados, former Secretary of State for Tax Affairs, Government of Portugal: ‘It has been a struggle so far, but I am confident that REITs will be introduced in the near future.’
Spain’s experience with SOCIMIs has shown the positive impact that a REIT regime can have on the property sector and the economy, he said.
‘There is no doubt that REITs have been a real driver of investments in Spain and have helped create today’s positive situation,’ said Miguel Ferre, vice-president of Global Corporation Center de IE & Fundaciòn EY, senior advisor EY and former Secretary of State for Finance, Government of Spain, known as the ‘father’ of the REIT regime.