Comment
Francisco Pascual
Updated Sunday, February 18, 2024-02:01
From above,
Mikel Echavarren
(Bilbao, 1962) observes what the Government does. Just below the headquarters of
Colliers,
the international consulting firm that runs for Spain and Portugal from the Cuzco IV building, the
Ministry of Economy
has rented luxurious offices for European funds. It's supposed to unclog them.
Echavarren is an atypical executive. His 37 years of real estate experience make him one of the country's great technical experts, although he analyzes reality without losing social and political sensitivity. Between marathons (he has run 22, including the Big Six), he has worked for the Real Estate division of
Arthur Andersen,
created his own company, Irea, together with some partners and, after selling it to Colliers, he has remained as president and CEO. He is part of all the prestigious forums in the sector with an independent and transgressive voice. He is also a patron of the
Ana Bella Foundation
to help abused women for 16 years. He mentions in his biography that he was a lieutenant in the Air Force. "Just a few days in 1986, after serving in the University Militias for 15 months," he recalls, "the amount of time I dedicated is staggering." He talks a lot about the resources that the State drains from young people. And nothing is cut.
On the way to the interview, Bloomberg has launched an alert about the collapse in office prices in Germany and its possible contagion to banking. The United States suffers from similar problems. Is there a new crisis? The value of assets is correlated with the profitability of risk-free bonds. With the brutal rise in inflation in 2022 and sovereign bonds, which in Germany have gone from being negative to reaching 400 points, the market has preferred to invest in national debt than in real estate. This has sunk the valuation of real estate and has raised the returns you ask for, the famous yields. Markets that had very compressed yields, such as Germany, are suffering a lot.
In the US there are banks that are on the verge of bankruptcy for this reason. In the United States there are a large number of empty buildings, especially those of technology companies. It has become a structural fact. Here, in Spain, it is only structural in a part of the market, which is concentrated on the outskirts of some cities. Before there were needs for offices, which are now 15 or 20% lower. Are you aware that there is some type of contagion to Spanish banks? Here the assets are also worth less, but it is not dramatic. Furthermore, in Spain, due to the indexation of contracts to the CPI, the entire rise in inflation has been transmitted to tenants. It is a very small market compared to Germany, which has five cities with large investment in offices. Spain is Madrid, and Barcelona, which is half that of Madrid. Is the office segment the only critical segment? No. In the office sector, the assets are worth 15 or 20% less, but family offices have entered and bought at a somewhat discount. They have acquired trophy assets that would not have been available to them. The most worrying thing is that, in a country that needs two million rental homes, from a financial point of view it is safer to make housing for sale. The numbers don't come out. Investment is plummeting in Europe, but you are reasonably optimistic for Spain and Portugal. Spain has a segment that has been emerging for three years: the vacation hotel sector. This year 4,240 million have been invested and it has become the second hotel investment market in the world. In Germany they usually invest an average of 5,000 million a year and the accumulated amount for the third quarter of last year was 700.
Why? Because all the hotels there are business hotels and are operated on a lease basis. That is, where they give you 5% today, next year they will give you 5 or 5.5%. In Spain, almost all contracts have a fixed plus a variable. In a market where growth prospects are brutal and it is already the main destination in the world after surpassing France with 85 million visitors, the investor wants to play the variable. The average price per room exceeds 2019 levels and it is expected that in seven years there will be 100 million tourists. It is a sector in which profitability does not increase due to inflation, but rather due to much more. The money-making machine is in the Canary Islands and the Balearic Islands. The Canary Islands are crazy, with a tourist season that lasts 12 months. Is the hotel sector enough to support the market? In addition to that, the Spanish market has resisted investment in housing for sale quite well. Although investment in general has dropped by 39%, others have dropped by 70%. By 2024, we think that the ECB's lowering will place rates in 12 or 18 months at 2.5%. As bond yields are compressed by 100 points, yields will fall between 50 and 75 basis points. This means that assets in Spain should increase this year between 15 and 20% in value. We believe that the investment market will anticipate that. Is climate change challenging real estate investment in southern Europe? It is not discounted at present. In the long term, banks will incorporate it into their analyzes to reflect the carbon footprint of their loans. The entire bank is x-raying to find out what the risks are related to the impact of the climate. What is the real estate investor who arrives in Spain like? There is a growing type and another that entered in 2012 and oscillates. The latter is the institutional investor, made up of fund managers with diverse pools of money, which they can use for opportunistic issues, such as debt purchases, failed debt, distress or core assets. They are two thirds of the market. The other third, which is the growing one, is the family office. They are entrepreneurs who have sold their business, they are usually second or third generation industrialists or first generation entrepreneurs in sustainable energy, medicine or medical research. They have between 200 and 1,000 million euros. There are more than people think. We have them x-rayed. Whenever we talk about investment, we talk about legal certainty. This Government has been criticized for this matter. How do you value it? There are some aspects of great legal security that are unassailable by any Government in Spain. Here they seem normal to us, but in other countries they are not: notaries and registries. In Spain you are the owner of a property and a bulldozer can now pass over it and it is still yours. That in other countries is not so clear.Where does legal uncertainty affect? Well, especially to the development of land, from developable land to urban land. It is so much so that no funds go in there. You can't gauge what deadline you have. In politically sensitive issues, such as rental housing, it has been seen that the Government's illegitimate interference in a private business has a great impact. There are factors of a fiscal nature, Social Security, increasing the burden on SOCIMIs... but you can live with them. What we cannot live with is an insecurity typical of the Middle Ages in the development of the land. And all those messages to investors, calling them vultures, also do harm, although it is more difficult to gauge. When you meet with institutional investors, do you ask them about legal certainty? Yes, of course. For example: there are practically no institutional investors for rental housing in Catalonia. Where the funds go is to Madrid and somewhere else, like Malaga or Valencia. But in Barcelona, which is the place where there are the most squatters per square meter, where the Housing Law has been the laboratory, no one invests.
Do you think that all the price adjustment has already occurred in the market? In general, the worst of the price drop has already occurred. Another thing is whether more or fewer operations materialize. Using a mountain simile, you may go up to a peak and begin to descend, or a plateau may begin at 4,000 meters. Does accessibility to housing for young people in Spain have a solution? Yes, but not before 15 years. There is, on the one hand, a structural problem, which is productivity. It is below minimums. The nominal salary for the first job is more or less what it was 25 years ago, but with more personal income tax withholdings and more social security costs. In addition to purchasing power, there is a problem with the large retainers, which are Social Security and the State. It is a giant hypocrisy in that the average salary in Spain is around 22,000 euros, the net salary is around 16,000 and the salary cost for the company is 32,000. The State takes away their salaries from young people and then says that they cannot access housing. What other measures do you see? Use your imagination. The State says that it guarantees 15% for young people to access housing and adds 10% VAT. Well, don't charge them VAT or they will pay the VAT in 20 years. We have to dispassionate the problem, see where we want to be in 20 years and what needs to be done. I have my doubts about making more soil. The more land there is, the more land the developers will have. But in Madrid there are millions in offices and the use can be recycled. But, above all, the issue of productivity is the most serious. In a country where you have a deficit of 80,000 million a year, you are draining resources from the most productive economic activity to finance the State. And on the supply side? Make it easy for private initiative to develop housing on public land, on private land that don't make sense. We must seek the most flexible urban planning. The objective of the Housing Law is to make renting and purchasing cheaper, but the price rises. The main objective of the Housing Law is not to make the market cheaper, but to attract votes. The PSOE knew that the measures were counterproductive. I have been with a general director evaluating these measures, which Podemos proposed at the time, and we agreed that they would be counterproductive. It is wise. When you limit the free market, you trigger the black market. If you make it impossible to kick out a family that is defined as vulnerable by law, then the landlord does not rent to that vulnerable family. The market reacts logically. It had been rehearsed in Barcelona. The Housing Law plays with enormous citizen frustration. He has insisted that the construction market for rental housing is in flux. Why? Funds that invest in rental housing do not have the ability to run promotion risk.The natural way to do their business was to go with a developer who would buy the land and establish a turnkey contract. In this market, between gross and net profitability you lose approximately one point. Now the net returns required are 5.5%. The numbers don't come out. It eats up all the margin the promoter had. And, furthermore, it is not known how to finance it due to the uncertainty in rates. Those who had already bought land make a horizontal division and sell it as a home. They use Catalonia as a bad example. Is there anyone who does it well? In Madrid, the Vive plan has turned out well because the stars have come together. It is the way. To charge less for rentals than the market, it has to cost you less to make them. What makes it cheaper? That you don't pay the ground. It is a surface right for 75 years. At that time, it was also well financed with La Caixa at cheap rates. Now it couldn't be done. But there is a critical point with the big cities. Lisbon has been left without housing for average incomes by attracting large fortunes. Madrid sells 200 homes a year between the Salamanca and Chamberí neighborhoods for an average of three million. It is a 600 million business. But that has its niche. Thinking that the price of the Salamanca neighborhood increases because the rich enter is not objective. Lisbon has worse urban planning and worse taxation. Is luxury housing still booming? It is a Madrid market due to the connection in Latin America and the restoration of leisure in recent years. Also for the offer of private education in business schools. What is the next jump? Marbella. There is more diversification of nationalities.Is luxury housing still booming? It is a Madrid market due to the connection in Latin America and the restoration of leisure in recent years. Also for the offer of private education in business schools. What is the next jump? Marbella. There is more diversification of nationalities.Is luxury housing still booming? It is a Madrid market due to the connection in Latin America and the restoration of leisure in recent years. Also for the offer of private education in business schools. What is the next jump? Marbella. There is more diversification of nationalities.
A sector in which there is more demand than supply is data centers. But there is a regulatory jam. We are the number one advisor in data centers in Spain. It is a very complex market. Madrid is the ideal center because it is where the submarine cables that connect the Iberian Peninsula with America and Africa meet, and it has an insufficient supply. It could assume billions of euros of investment, but it has collided with reality: the deadlines for obtaining power and the uncertainty in obtaining power. What does it affect? The determination of the power that is assigned to an area geographical is through five-year plans. Right now, power was being granted for the last five-year plan and response letters were being anticipated from the electricity companies for the next one. In December, the Government nailed a decree about other things that assigned powers to any place except Madrid. It is contested by the autonomous community. This creates enormous uncertainty and a situation almost similar to that of the Barcelona hotel moratorium. That is to say, he who has power is worth a lot and he who does not have it is worth nothing. Even so, there is great interest in buying land with real power, data centers and existing operators. The interest is in Madrid, the south of Lisbon and the surroundings of the city of Barcelona. But we could be shooting ourselves in the foot by not making the ability to attract digital business a priority. What motivation is there to leave Madrid out of that royal decree? We believe it is a political motivation. The so-called investments Are alternatives, such as student residences, real niches or just a matter of headlines? There is a lot of literature. In student residences there were transactions last year for 175 million, which do not reach two hotel operations. But it has appeal. Spain has a capacity that is not covered for foreign students. The main Erasmus destination in Europe is Valencia. Residences are a business that is becoming more and more consolidated, a kind of specialized hotel or aparthotel. Everything is influenced by demographics. Of course. I don't know if offices will be needed in the future, but hospitals... It is a turnkey business for 15 or 20 years. Hospital operators do not want to spend 70 million on each property and prefer to expand in Spain with ten or twelve. We will see it this year. Demographics are a safer factor today than many others. In nursing homes there are returns of 6 or 6.5% plus the CPI and solvency depends on the insurer that manages it... And coliving? Money looks for profitable investments. It's like water, when it hits a wall, it goes the other way. Anyone who invests in coliving puts it this way: "As I get the calculations for making rental housing because the land is very expensive and it is better for the developer to sell them,Well, I'm going to the tertiary sector, where the land was used for offices, and I make medium and long-term apartments of 30 square meters and where I can charge instead of 11 and 12 euros per square meter and month, then 30". Is the market big? No. It is accessory, although it may have a second push in Madrid, because the Community can allow offices and ground floors to be reclassified as rental housing as long as you rent at VPO prices.